The amount of cash traded hands in a transaction is a major factor in any purchase or sale of a business. The seller wants to move on to better opportunities and is willing to pay as little as possible. The saga continues even after the price is agreed to. Most often, the buyer will not be able borrow enough money from the bank to fully pay the purchase price. The situation may dictate that the bank won’t lend any money. Owner financing is the most common answer.
The seller can choose to keep the promissory notes or sell them to one of the real estate note buyers in the country that purchase mortgage notes for their businesses. You may also deal with a broker who sells real estate notes, although the process difference is negligible.
There are some things you might be concerned about when selling a promissory note for a business. Let’s look at a few of these:
MYTH: Business notes buyers charge ridiculously high yields for purchase notes
REALITY: Although business notes yields are higher than mortgage notes (due in part to the collateral difference), the yields have been significantly reduced by increased competition in recent years. We can also be more aggressive when quoting real estate if it is involved.
MYTH: Business note buyers use very restrictive parameters
REALITY: This one is a little truthful, but the requirements are reasonable and should not be a problem for most notes. If the note is a first lien, the following requirements apply:
The business is profitable and continues to be so. It also has positive operating cash flow.
Buyer has good credit. This usually means that they have a minimum FICO score 625
The buyer must pay at least 25% in cash. This ensures that the buyer is committed and capable of weathering down cycles.
The principal owners have given a personal guarantee for the note
The note has been “seasoned”, at least for two months, to show that the buyer is satisfied with the purchase.
The note should have a face worth of at least $20,000
Remember that note sellers don’t necessarily have to sell all of the note to buyers when selling notes. We can buy only a portion of any balloon payments or a set number of payments if the seller has $200,000 in notes. Once we have received the payments, the note will be assigned to the seller for collection of all outstanding payments and any balloon payments.
This is a PARTIAL. We use it in specific situations to satisfy the investor’s requirements or meet seller’s needs. The legal agreement between the two parties outlines exactly what is being bought and the price.
No matter your role, it is important to understand the option to sell business note. The volume of business notes will rise as banks tighten lending requirements and raise interest rates. You can increase your chances of selling your business by making sure your clients are aware that you have the option of selling business notes. This will help maximize the sale price.
We are happy to help you if you have any questions or are aware of potential opportunities in this field. We are always available to help you succeed.
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