Business notes are created when a business owner sells a business and "carries back paper". This is more commonly referred to as seller financing. The note is secured by the business and its assets.
Approximately 80% of all small business sales in this country involve this type of financing. More often than not, the seller would prefer to have the cash up front instead of monthly payments over the course of several years.
There are, however, options for those who need or desire cash for any reason. Business noteholders can sell all or just a portion of their note for a lump sum of cash. The value of the note depends on a variety of factors, including the rate, terms, payment history and the experience of the business and the payor. For a note to be saleable, it should have 20-30% down, it must be in the first position and generally needs 2-3 months of seasoning. Once the pertinent information is supplied to the underwriter, an offer can be presented in as little as 24-48 hours.
It is important to clarify that the note holder is not taking a loan. Instead, they are selling the note at a discount to obtain cash in hand now. As we all know through the lesson of the timevalue of money, cash today is worth more than payments received in the future. To be upfront, the discounts, in some cases can be deep, but the risk is proportionate (in general, funding companies look for a yield of 20% or more). A well informed business person should realize that there are now multiple options available to them that present more favorable financial outcomes.
Contrary to past theories, the entire note does NOT have to be sold. In fact, by liquidating just a calculated number of payments, the noteholder can receive exactly the amount of cash they need now and still retain future income from the payments not assigned. Plus, they have the option to repeat the program again if the need arises. By selling a just a portion of the payments, a noteholder can actually receive MORE than the current balance of the note!
The owner of a dry cleaning business sells it for $100,000. The buyer puts $30,000 down and the owner carries a $70,000 note @ 9% for 60 months or $1,453 per month.
After 3 months at home, he is driving his wife crazy and she insists he buy another business. He finds one, but needs to put down 50k. He has 30k from the previous sale, but needs an additional 20k.
Subject to all due diligence, the secondary market value for 16 monthly payments is approximately $20,000. The seller retains the payments not touched at this time (41). The seller of the note receives:
Cash down from the buyer: $30,000 First 3 monthly payments: $ 4,359 Cash from the "partial" sale of the note: $20,000 Future Cash Retained (41 payments): $59,573
Total Income from the sale: $113,932
By utilizing this customizable program, the note holder puts himself into an excellent financial position. Some might argue that he is losing out on the interest he would accrue over time. The same argument can be turned around: If the note was to be paid in full, he would not charge the buyer for future interest.
There are a few points to keep in mind: The first is for business brokers and sellers; by offering a buyer seller financing, you will increase the amount of interest in your listing and close the deal in less time. The second is for current noteholders who need CASH now; investigate your options so you do not leave money on the table.
Peter Siegel, MBA is the founder and President of BizBen.com - Businesses For Sale In California. A nationally recognized author (3 books and a syndicated small business blog) and expert consultant (national SBA small business specialist) on selling and buying businesses, he provides professional assistance to business brokers, agents, and business owners in getting maximum response in their advertising & marketing efforts in regards to selling small to mid-sized businesses. If you are selling a business and need professional assistance utilizing high performance advertising, marketing, and highly effective strategies, or individual customization with your BizBen Power Search options in buying a California business, you can reach him at 925-785-3118.
|Helpful Resources To Assist In Selling And Buying California Businesses|
|Shalonda Chappel: Escrow & Bulk Sale Services - Southern California
Escrow services to brokers/agents, sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services. 951-808-3972.
|Helen Yoo, New Century Escrow - Escrow Services In Southern California
New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.
|Diane Boudreau-Tschetter: Escrow & Bulk Sale Services - CA
California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.
|William F. Ziprick, Attorney: Legal Services For Buyers And Sellers
Through creative problem solving, attention to detail, accessibility, & understanding that unnecessary delay is often a deal killer, I work closely with my clients and other professionals to consistently achieve a high rate of closings. Office: 909-255-8353, Cell: 509-951-7230.
|Ryan Clark, Business Broker: Southern California
The Veld Group provides a refreshing approach to Business Brokerage, Mergers & Acquisitions and Business Consulting and Valuations. From Your Street to Wall Street, we cater to Main Street Businesses as well as more complex Strategic Firms and Start-Ups. Phone Ryan, Business Broker at 310-652-8353.
|Ralph Santos, Business Broker Specialist: Home Health, Hospice, Health Care
Using my MBA and my perseverance I will make things happen! I provide business brokerage niche services specializing in the hospice and home health care agency industry in the Los Angeles County or Ventura County areas. For either buying or selling assistance please phone or email me today.
|Peter Siegel, MBA: Business Purchase Financing Solutions
Niche business purchase financing advisory and loan placement services with SBA and Non-SBA Financing, Retirement Fund Rollover Solutions, Combo Financing Packages. To get professionally pre-qualified or more information on the ProBuy/ProSell Programs: 925-785-3118.
|Joanne Weber, Broker: Preschool Specialist, Southern California
The Ryan Craig Company is in its 46th year as the recognized expert in Southern California, dealing exclusively in the sale of preschools, Montessori schools, day care centers, and private schools. Our extensive list of references speaks for itself. Phone Joanne at 818-760-3684 for more info.
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