When buying or selling a company, the total value of the deal depends on the total number of shares being traded. The higher the share count, the greater the potential profit for both parties involved. A common problem occurs when the purchaser cannot find a lender willing to lend him the funds needed to close the deal. In these situations, an alternative method must be used. One such method is known as “buyout” financing. Here, the owners of the company agree to sell their stock to the new investor. They do this because they realize that if they continue working for the company, they will eventually receive a portion of the profits. However, they also know that if they were to leave the company before receiving payment, they would lose out on those earnings. Therefore, they decide to take a cut of the profits instead of waiting until they retire.
Selling a promissory notes for a small amount of money can be a good way to get some cash quickly. However, there are several things to consider before doing so.
Buying a commercial loan for a large corporation may not yield as much as buying a residential mortgage, but we can usually get better rates on corporate loans due to the fact that they’re less competitive. And if we’re dealing with real property, we can often be more aggressive with our quotes because there isn’t the same level of risk associated with a residential mortgage.
MYTH: Business Note Buyers Are Very Restrictive REALITY: While this statement may be true for some buyers, the parameters are reasonable and not an obstacle for most buyers. If the note is a first lient, then the following criteria must be met:
- the company has been and continues to remain profitable, and there is proof of positive operating cash flows.
- A buyer with good (or better) than average financial standing will usually have a FICO score of 626 or above.
- The buyer puts down at least $25 of their own money to ensure they’re really serious about buying the property.
- the principals have personally guaranteed the loan.
- the seller has had his product for at least two months (so he knows it works well), but hasn’t yet sold it.
- the note should be worth at least $20,00
Remember that when buying notes from sellers, if they don’t want to sell the whole thing at once, we can buy some of their notes and then assign them back to the original owner after receiving the rest of the payment.
When we say “PARTIAL” here, we mean that the contract has been partially executed. It includes some specifics but not others.
Regardless of your role in the sale, you must be familiar with this alternative to bank financing if you want to maximize the value of your client’s company. As banks become increasingly strict with loan applications, the demand for private equity funding is expected to rise. If you don’t know about this alternative source of financing, you may miss out on an excellent deal.
Feel free to contact us if you know of opportunities in this field or if you have any questions. We’d be happy to talk with you and answer any questions you might have.