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Selling Business Notes for Quicker Cash

In about 85 percent of all business sales, sellers accept a cash

down payment and a promissory note to pay the balance in

installments. The note is personally guaranteed by the buyer,

and it is secured by the business and its assets in case the

buyer defaults. Providing owner financing allows sellers to

cater to a broader pool of potential buyers.

However, many sellers don't want to be in the lending business

and would prefer not to hold business notes. The good news is:

they don't have to. If you created a business note to unload

your company, you can sell the note to someone else. This way

you can get instant cash out of the business, instead of waiting

to receive periodic payments in the future. You can use the cash

for a variety of purposes, including: capitalizing on other

investment opportunities, paying off debts, funding college

tuition and making major purchases.

How Selling Business Notes Works

Business notes are purchased at a discount--like all notes sold

on the secondary market--to make them attractive to potential

buyers. Without a discount, there is no incentive for investors

to incur the risk of waiting three to five years or even longer

to recoup their money. Historically, more than 90 percent of new

business owners fail within the first five years. Therefore,

there's considerable risk attached to the purchase of any

business note.

You may receive less than the full balance of your note when you

sell it. However, the total cash you receive from the down

payment and the sale of the note will usually be about the same

as you would have received from an all-cash sale of your

business. That's because all-cash buyers can insist on a much

lower selling price.

The amount of money you'll actually receive for your note

depends on a number of factors. But as a general rule, for a

full purchase, you can expect to be paid 50 to 80 percent of the

balance of the note. More specifically, the amount of cash your

note can be sold for will be determined by three general

components: the current economic environment, the terms of the

note (payment amount, interest rate, length of payback, etc.)

and the degree of risk or probability that the note holder will

lose his/her money.

Criteria for Purchasing Notes

Certain guidelines must be met in order for a business note to

be purchased. Naturally, first-position liens are eligible. Here

are some other elements investors like to see:

* The business is in a profitable position, with evidence of

operating cash flow.

* The buyer has good credit, which generally means a FICO score

of at least 625.

* The buyer put down at least 30 percent of the purchase price

in cash, which signifies that he/she is truly committed and able

to weather down cycles.

* The principal owners have made a personal guarantee on the

note.

* The note has been "seasoned," meaning the buyer has made

payments for at least two months. This shows that the buyer is

happy with the purchase.

* The note should have a minimum face value of $15,000.00.

Structuring the Sale

There are a number of ways to structure the sale of your

business note. You can sell the entire note, or only part of it.

The most common way to sell a note is through a "partial

purchase," which involves selling only a certain number of the

remaining payments on your note.

Note buyers can purchase any number of the remaining payments in

a variety of ways. For example, let's say you have a note with a

balance of $80,000 payable in 240 monthly installments. If you

need just $20,000 now, for whatever reason, the note buyer would

calculate how many payments would need to be purchased to

provide you with that specific amount of cash. Exactly which

payments would be purchased would depend on your personal

financial situation. You could sell:

* A certain number of the beginning payments on the note. (The

note buyer might purchase the first 60 payments, and then you

would receive the final 180 payments.)

* A certain number of the final payments on the note. (The buyer

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could purchase the final 180 payments, passing the first 60

payments through to you.)

* A certain percentage of each of the remaining 240 payments on

the note. Perhaps 50 percent of each of the 240 installment

payments could be purchased. (You would receive one half of each

of the 240 payments.)

So which option in the above example would be best for you? It

would depend on your current financial needs and future

concerns. All of the alternatives would provide you with an

immediate $20,000 cash payment. However, you might choose the

first option if you need $20,000 today and require a future

monthly cash flow beginning in five years. You might choose the

second scenario if you needed $20,000 now and a monthly payment

for the next five years until you start receiving your

retirement benefits. Or you might choose the third option if you

need $20,000 today and also want/need the monthly 50 percent

payment for the next 20 years.

The Purchase Process

To purchase a business note, buyers will need to take an

assignment of the security instrument (UCC-1 Financing

Statement) and receive an endorsement of the promissory note.)

But before getting to that stage, they will do the necessary due

diligence and closely examine all aspects of the sales

transaction of your business. The note buyers will handle all

the paperwork for the purchase, from verifying all aspects of

the deal and preparing/having recorded all of the necessary

documents to make the change.

The note purchasing process takes an average four weeks to

complete. If the sale of your business and the creation of the

note was "typical," then you should have your money within four

weeks.

About the author:

David Springer is a consultant for Sovereign Funding Group

(http://www.sovereignfunding.com). Sovereign Funding Group is an

experienced, reputable company that offers convenient, no-risk

services to help you with the selling of your deferred payments

and business financing.