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


Selling Your Business Note

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.

About This Contributor: Peter Siegel, MBA is an expert on Business Purchase Financing. If you have a note you would like to cash out or have a question about his pool of investors who buy seller carry-back notes please phone him direct at 925-785-3118.


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


Comments Regarding This Blog Post


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.

Contributor: 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.


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.


  Helpful Resources To Assist In Selling And Buying California Businesses
Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence Services - California

Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 805-428-2063.

Janet Carrera: Escrow & Bulk Sale Services - San Francisco Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.

Shalonda Chappel-Pilgram: 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 And Bulk Sale Services - California

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.

Joe Sandbank, Esq: Legal Services For Buyers, Sellers, Brokers - Throughout California

I have provided legal counsel to business buyers, sellers and brokers for over 17 years. With prior experience as a business broker and SBA loan officer, Joe brings both a practical and legal approach to all aspects of the business acquisition process. Please phone 916-672-8018 for more info.

Elizabeth McGovern: Escrow Services - San Francisco Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

Brad Steinberg, Broker - Laundromat Specialists

PWS is the leading laundromat broker in California. Since 1968 PWS has brokered over 2,500 laundromat sales. With over 90 employees dedicated to the coin laundry industry, PWS has 18 licensed agents, a 3 person in-house finance department, 10 service technicians and a 20 person parts department.


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