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Pro Tips: Selling Your Note For Top Dollar After Selling Your Business

It definitely helps to sell your business if you carry a note for the buyer.  In articles below I've previously discussed how to secure your business note.

What about selling your note after the close of escrow? Do you want to effectively "cash out" of the sale? There are Companies and Investors who specialize in purchasing Business Notes (of course at a discount). You can sell all or part of your note. Most of the Companies/Investors will offer to buy year to year of the note. In other words buy the first two or three years of payments. After collecting for the agreed upon amount of time, the note and its payments would revert back to the seller of the business. Of course the seller can sell the entire note too (and most end up doing that).

The note buyers will purchase the note at a discounted amount of the face value. Discounts vary according to several factors. Interest rate, length of note amortization, buyer's down payment, buyer's strength both financially and experience wise, type of business, note position (1st, 2nd) and note seasoning. Below are a few of the most important guide lines.

Down Payment: The higher the down payment on the business sale the lower the discount of your note will be. Down payments should be at least 30% of the purchase price. Bringing the down payment up to 40-50% of the purchase price will greatly help reduce your note discount.

Note Positioning: The note should be in the 1st position as a lien on the business. 2nd's are harder to sell and if you do find a buyer for a 2nd it will get heavily discounted.

Rate and Term: Interest rate should be 7% or higher and the term shouldn't be beyond 60 months in order to maximize your buy out.

Seasoning: Note buyers like to see that the business buyer has made a few payments before they buy the note. I used to sell these straight out of escrow, but today note buyers like the note "seasoned" for a minimum of 2 months. The longer the seasoning, the less your note will get discounted.

Discounting:  Discounts usually range from 10% to 30% of the face value of the note. All of the factors discussed above will come into play in determining the discount rate.

Categories: BizBen Blog Contributor, Business Purchase Financing, Deal And Escrow Issues, How To Sell A Business, Selling A Business, Small Business Financing

Contributor:

Peter Siegel, MBA
Areas Served: Nationwide - All Areas
Phone:  925-785-3118 Cell, 925-785-3118 Text
Peter Siegel, MBA - Founder Of BizBen.com (since 1994), I am the Lead Advisor for the ProSell, ProBuy, & ProIntermediary Programs. I advise/coach buyers, sellers, and brokers daily about buying & selling small to mid-sized businesses throughout the Nation. I can be reached direct at 925-785-3118.

Blog Comments

Posted By: Timothy Cunha JD, Business Broker: San Francisco Bay Area

If the seller has even the slightest thought the he might want to sell the Note, he should definitely hire an experienced transactional attorney to draft the Note, incorporating all of Peter's points and those added by Mark Chatow. Often the Seller Carry-Back Note is drafted by the escrow agent or the seller himself using some stationery store form or online service; while this may suffice (although I don't recommend it) for the seller keeping the Note to maturity, it's a huge mistake if the seller eventually wants to discount the Note in advance of maturity. Sound, timely legal advice doesn't cost, it pays off considerably in the long run.


Posted By: Transactional Attorney

I agree with Christina that while most sellers would prefer to be secured by property it's more realistic to take the business assets as collateral. Most buyers don't want to encumber their homes to that degree because they'd either be unable to sell their home or would have to pay off the note in full if they did (assuming that the seller has a due-on-sale clause, which they should).

Selling a note or a portion of it can be a good solution if the seller prefers to be liquid more quickly and eliminate the risk.

If you're planning to sell a note, structuring the note and all of the accompanying documentation properly in the first place is crucial. Having a separate, well-drafted promissory note, security agreement and guaranties (both personal and corporate) makes it much easier to sell when you need to.

Note buyers also put substantial weight on the background/credit check of the buyer who is making payments on the note.

In addition to the points Peter mentions it's also helpful if you make sure the buyer has a strong credit history before you enter into the note and that you have the right to obtain the buyer (and guarantors') updated credit and financial statements on a regular basis, as well as the right to obtain regular reporting on the business operations.

Note that it's important to be careful when obtaining credit information as both state and Federal laws can potentially apply.


Posted By: Christina Lazuric: Business Broker - CA, TX

Peter, Good information regarding a note. In my experience, some sellers feel uneasy about taking a note and look for more security. Their argument is that if the buyer ruins the business there might not be anything to take back. For these buyers that can't be assured, I propose changing the security agreement to property. Of course you can't have both the business and the property but for some sellers they prefer to be in the second position position (behind the bank) on a piece of property from the buyer as collateral, rather than have the business. There are pro's and con's choosing this approach. Although it might seem more secure the legalities of executing the security agreement are more legally complicated. My personal opinion is to take the business as business collateral, let the note minimally season and then sell it at a discount.



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