Selling Your Business Note: Sell for Maximum Value & Get Cash Quickly

A business note, known more specifically as a seller carryback business note, is created when the seller of the business “carries” the financing for the buyer and a note is created. Frequently, banks and similar lending institutions are hesitant to loan money to new business owners who have minimal track records and where hard assets make up a small percentage of the total purchase price.

Maximize Value: Sell Your Business Promissory Notes

Selling a business promissory note can provide financial flexibility for business owners who previously offered owner financing. Whether you’re looking to free up cash for new opportunities, reduce financial risk, or streamline your finances, selling a business note is a practical option. Understanding the process, eligibility criteria, and the potential benefits of selling your note can help you achieve your financial goals.

If  the seller of the business uses owner financing, he or she can later sell the note to one of the several promissory note buyers in the country.  These investors, like private mortgage buyers who are in the business of buying mortgage notes, are looking for a good rate of return with minimal risk.

As the number of small businesses in the U.S. increases and some owners decide to retire, it has naturally followed that a higher number of businesses are will be sold.  Although specific market research on business notes is hard to come by, surveys of business brokers have shown that 75% of small to medium-size business sales require the creation of a business note (seller financing).  It had been estimated that up to $75 billion in business notes are newly created each year (as of the date of this writing).  When you figure that there are 2-3 times that amount already existing at any one point, you can consider the market size of business notes to be valued at 200-300 billion dollars.  Depending on the economic policies and interest movements that influence the tightening of credit by banks, the business note market could easily increase even more dramatically in the coming year or two.

Criteria for Selling Business Notes

To sell a business promissory note successfully, specific criteria must be met. Investors typically prefer notes with the following characteristics:

  • First Position Lien: The note must hold a senior priority lien with no SBA loans or other loans in front of it.
  • Profitable Business: The business should demonstrate ongoing profitability and positive cash flow, preferably over a number of years.
  • Buyer Creditworthiness: Be sure that the buyer personally guarantees the note rather than just buying in the name of an LLC or corporation.  A FICO score of 625 or higher is generally preferred.
  • Substantial Down Payment: The buyer should have contributed at least 20% of the purchase price upfront.
  • Personal Guarantee: The principal owners must provide a personal guarantee.
  • Seasoning Period: The note should have a payment history of at least two months.
  • Minimum Value: The note should have a face value of at least $30,000.

The strength of these factors determines whether the note can be sold and the potential yield for the investor.

The strength and mix of these factors determine whether the note can be purchased at the yield required by the investor.   One option if the seller does not want to sell the entire note or if the note buyer cannot purchase all of it is to do a “partial”.  As implied by the name, a partial is the purchase of some of the payments rather of the full note.

Understanding Partial Note Sales

A partial note sale allows the seller to sell only a portion of the note rather than the entire asset. Here’s an example:

  • Scenario: A business is sold for $250,000, with the buyer putting down $100,000. The remaining $150,000 is seller-financed.
  • Partial Sale: The seller needs $50,000 immediately. An investor purchases the right to collect the first two years of payments in exchange for $50,000 that is given to the note holder. After this two year period has ended, the note returns to the seller. This flexible arrangement is documented through a detailed legal agreement. Selling business promissory notes in part or full gives sellers control over their financial needs and access to cash on their terms.

How to Sell Business Notes

Selling a business note can provide the former business owner with the cash needed for new ventures, debt repayment, or other investments. To sell a business promissory note:

  • Ensure the note meets the criteria outlined above.
  • Work with a professional note buyer or broker to assess its value.  Seascape Capital has been involved with the purchase of business notes for over 20 years.
  • Decide whether to sell the entire note or a partial note.

Whether you are looking to sell business notes for liquidity, to pursue other investments, or to settle financial obligations, this financing tool offers flexibility and opportunity. Understanding the market, eligibility criteria and options like partial sales can help you maximize the value of your business promissory note.

Ready to sell your business note? Contact us today to learn more about your options and get started on the path to liquidity. 

Alan-pic

Written by Alan Noblitt

Alan Noblitt is the President of Seascape Capital, LLC, and works as both a real estate note buyer and a business note broker. Alan has an MBA from Arizona State University, a B.S. from the University of Wyoming, and is licensed as a California Real Estate Note Buyer.
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