Every year thousands of business notes, which is a promissory note, are created when a seller of a business takes back some of the financing of the business sale. Another name for this is ‘Seller Financing’ of a business sale. The majority of business notes are associated with the sale of a small business (i. e. A business whose annual revenues are less than $1M and usually have less than 10 employees).
A business owner who is selling their business usually would like to walk completely away from the business they have owned/managed for a number of years. However, when a buyer is having a problem with arranging financing of the business purchase through a combination of cash down and bank financing, the business owner/seller is faced with taking on some of financing themselves to complete the business sale.
Since the business owner/seller did not seek to create financing of the business sale themselves, they do not like to face having to receive a large number of payments of principal and interest over an extended period of time (i. e. 5 to 10 yrs. ) until the principal amount of the loan is repaid. The business note that is created can be sold in the open market, but it must be structured in such a manner that an investor would choose to purchase it.
In order to structure your business note to make it attractive to an investor to purchase, follow these guidelines:
1. Do not create a business note whose repayment period is longer than 60 months. If the cash flow cannot support a repayment of principal and interest over 60 months, a balloon payment must be created to complete the payoff of the business note.
2. Always identify the interest rate in the note and do not change the rate over the length of the business note.
3. Always have the business note personally guaranteed by the buyer of the business. If a corporation is the buyer, then the majority stockholders need to personally guarantee the repayment of the seller financed amount if corporate assets are not sufficient to act as collateral.
4. ‘Due on Sale’ clause needs to be stated in the business note. This means that if the business is sold in the future, the payor on the business note must pay off the business note prior to the ownership change.
Incorporating the aforementioned areas into your business note will enhance its ability to be sold to an interested buyer.
Ron Nelson is founder and current President/CEO of GNF Group, LLC. GNF Group offers consulting to business owners on how to structure a business note for sale. Also, there are parameters to review outside of the structure of a business note that will influence whether a buyer will make an offer to purchase the business note. Contact GNF Group for more information. GNF Group will also facilitate the sale of a business note by promoting it to interested buyers.
Interested parties may contact Mr. Nelson at 1-866-531-8096 or at http://www.gnfgroup.com