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Make Your Business Note Profitable

Business Sign From A Bakery And Coffee Bar

Have you sold a business and agreed to take payments for the sales price? The promissory note written to close the sale of your business is an asset that can be sold for cash.

While it is common for the sale of a business to require seller financing, often the owner has no desire to do so. After you sell your business this way, you may find that the time it will take to receive your money, as well as the risk of not receiving all your payments, is a burden you would prefer to pass on.

Even if seller financing appeals to you, you may reach a point where your immediate need for capital exceeds the monthly payments. Selling your entire note or part of it may be the ideal solution for you.

If you have good familiarity with the note business, request a quote, and let me get to work for you. Reading the remainder of this page will help you better understand this process and how we can work together to best meet your needs.

Points To Consider When Creating Or Selling A Business Note

As a note broker I have flexibilty and options to offer you, that a direct note buyer does not. Whether you are creating a business note or selling one, Underwriting Criteria are something you will be advised to pay attention to.

What this means is that investors who purchase business notes use criteria to evaluate each potential investment. There are similarities between investors, and differences as well, that will make a difference to you when you attempt to sell a business note.

Some criteria stay the same for years. Others vary back and forth based on market conditons. By dealing with a direct note buyer you face the restrictions of one buyer's underwriting approach. They meet your needs, as long as it fits their underwriting criteria.

Because this is important for you to understand, I will outline this topic below. But what happens first that's most important to you? You sell a business.

So websites like mine will discuss underwriting criteria to help you structure a note, while providing seller financing in a way that makes the note more attractive to a note buyer. That's helpful advice, but only if you sell the business.

The way you structure a note to sell your business, may not be ideal in the eyes of a particular note buyer. However, using a combination of certain underwriting criteria, should lead to offering seller financing in a way that will produce a win-win for both business seller and buyer.

It follows that one of the most important criteria, is that the business buyer will have sufficient cash flow to make the monthly note payments. To make this happen, the terms of the note need to be reasonable. Let's consider the following range of underwriting criteria:

  • The better the payor's credit, the better results should be in the long run for all parties concerned. This goes without saying, but it's something to strive for. Some note buyers require a minimum FICO score of 625. Others do not specifiy one. Recent credit problems will make it unlikely to sell a note. Older issues may be overlooked.
  • For a business note to be sellable, the cash down payment should be 20% or more, from the business buyer's own funds. Most note buyers prefer that the down payment be at least 30%, from the buyer's own funds. More down is viewed as better and could help reduce the monthly payments.
  • The note interest rate should be set at least 3% above the prime rate. Higher interest rates will help note buyers purchase your note at a lower discount. Interest only monthly payments are discouraged.
  • The promissory note must be personally guaranteed, or if only a corporate guarantee, the financial strength must be excellent. It helps to know what else is going on in the business buyer's life, that will effect the ability to make the monthly payments
  • A buyer with prior experience in the type of business purchased is preferred. The goal is to make it more likely that the new business owner will run a profitable business. At least one note buyer looks for businesses that are easy to run.
  • The longer the business has been operating at the same location, the better. But if the location has changed in recent years, this could be better for the business. So if you are trying to sell this note, explain the benefits of the change in location.
  • A history of timely business note payments is desired. Specific time frames vary among note buyers. One buyer wants 3 months of on time payments, another 6 months, a third a range of 3 to 6 months. Another buyer wants at least one monthly payment made to see how the business is going.
  • First liens are preferred and second liens often will not be considered. But a second lien might be purchased if the combined loan to value ratio is acceptable, and the cash flow is sufficient.
  • Business notes are often written for a term of five to seven years, but may be amortized for longer periods. As explained below, keep in mind that partial sales of business notes are common.
  • The value of each note stands on its own. If the note you own has characteristics that make it less desirable to a note buyer, there may be mitigating circumstances that improve your note in some way(s). It wll be beneficial to you to share any information with me, that supports the value of your note.

The high risk of small business failure is well documented. Utilizing the criteria note buyers use to evaluate business notes, should be helpful in a couple big ways.

First, to make wise choices as you look for someone to buy your business. Second, to help you construct a seller financed note that you can sell for a good price. It's up to you to decide how important the second factor is in accomplishing the first.

When you consider both together, the related concern is for the new business owner to keep paying the bills. Keep in mind that as a note broker, I have options to purchase your note that are not restricted to one set of underwriting criteria.

What's most important is that the agreement you make with your business buyer, increases the likelihood of ongoing business success and desirable cash flow.

Partial Sales Are Recommended

All notes are sold at a discount. The yield an investor requires to purchase a note is based on the characteristics of a particular note, as well as the competing uses of the investor's funds. Business notes as a category, are perceived to have a higher than average risk among other notes.

A true business note does not have real estate as part of the collateral, ie. the security for the note. The real value in most businesses is in the good will or net operating income. Since good will can not be foreclosed on, business notes are considered high risk notes and require a higher yield to be sold.

The more payments an investor buys, the less valuable will be the payments further into the future. The result is that any note requiring a high yield to be purchased, that has an extensive number of payments remaining, will be more substantially discounted.

For these reasons, it's better for most sellers of business notes to avoid a full liquidation. Partial sales are the answer to this set of circumstances.

Partial sales include a variety of ways to sell a note other than selling the entire note. This way the discount is smaller, and besides receiving cash now, you retain income in the future.

Another benefit is that partials allow you to spread out your tax exposure over time. For business notes one example of a partial sale is to sell the next two years or 24 payments, or some other number that produces the amount of cash that you need now.

Whatever number is agreed upon, the remaining payments revert back to the note seller. Plus you can sell the remaining payments at a future date. You can think of it as a line of credit

Other examples of partial sales are:

  • Split Payment - A percentage of each payment made by the business buyer (the payor), is sold for an upfront payment of cash to the note seller. The seller still receives the remaining percentage of each payment from the payor.
  • Balloon Purchase - If the note includes a balloon payment, the entire balloon or a percentage of it may be sold. This method can be used together with the other options listed. However, business notes with balloon payments are viewed negatively by note buyers. The concern is that it will be too difficult to obtain a bank loan to refinance when the balloon is due. A better approach to use a balloon would be as part of a separate note used to sell the real estate.
  • Reverse Partial - Future payments, beginning at a specified date, are sold for cash at closing. Until the date specified, payments continue to be made to the note seller.
  • Multi-Stage Payout - The note seller is paid a lump sum of cash at closing, and a guaranteed future payment at a specified date.

Keep in mind that these options are possibilities, and may or may not be offered to you. Characteristics vary from one note to another. Based on your situation, you may need to liquidate your entire note. What's important is that we work togther to meet your needs.


As I mentioned above, a true business note does not include real estate as collateral for the note. Often when a business is sold, one or more buildings are sold at the same time. Ideally from a note buyer's perspective, the business and the real estate are sold separately, each using their own note. Each note describes the terms by which the buyer has promised to pay for those assets.

Hybrids are notes that include both the business and real estate. The point to keep in mind is that note buyers are not fond of hybrids. So I write this section to give you a heads-up, not to scare you away.

Hopefully you are reading this before you sell your business. That way you know if you ever want to sell your business note in the future, you are better off using a separate promissory note for the sale of the real estate, and a another note for the sale of the business.

If you have sold both your business and real estate using one master note, there is still a market to purchase your note. What you are faced with is the basis for note purchasing overall. The money to purchase any note has to come from somewhere, and the sources of funds give some direction to the way this market operates, as does the experience of note buyers over the years.

Note buyers use guidelines to reduce their risk and make their purchase profitable. They may face restrictions on how they use borrowed funds to purchase notes. The result of this process is that when buying a hybrid note, the buyer may either price the value of the note based on only the real estate or only the business. This will give the note seller less money for the same terms than if two separate notes were used.

As I explained before, different note buyers use varying guidelines. So a hybrid note may actually be viewed as a positive opportunity. It still comes down to evaluating all the factors of a particular note.

A partial sale based on the present appraised value of only the real estate, might be the best offer you get. The partial sale also gives the note buyer time to get more comfortable with the progress being made by the new business owner. The better the history of the note payments, and the more profitable the business, the better the offer you will receive if you decide to sell more payments in the future.

To get started, please submit a business note worksheet, and I will start working to produce a deal for you. If your note is a hybrid, use the same worksheet. In that case I will also need some information about the real estate involved. In the comments section include a description of the property, age, construction, square footage, lot size, the appraised value of the building(s) and the date that was determined.

Frequently Asked Questions

What is a note when buying a business?

A business note is a group of documents used to formalize the sale of a business, when the seller receives some of the purchase price in installments.

The business note refers to the promissory note, which is the promise to pay the seller of the business, according to the terms agreed to by the seller and the buyer.

As you read other frequently asked questions about business notes, watch out for answers about banknotes and school notes which can also be sold, just like business notes can be sold, but are unrelated.

What is another name for seller carry back note?

Owner hold is another name for a seller carry back note. The owner is holding the note, also referred to as holding paper. This terminology is part of the practice of seller financing also known as owner financing.

The seller is agreeing to receive a down payment from the buyer at closing, and the remainder of the purchase price in installments directly from the buyer. For tax purposes the IRS refers to this process as an installment sale.

Why would a seller carry a note?

Most small business are sold using seller financing, also known as owner financing. Part of the reason is the difficulty to obtain bank financing to purchase a business.

Since seller financing provides more flexibilty to structure the sale of a business, this helps owners sell their business faster. An installment sale also offers tax benefits to the business seller.

How much can I sell my notes for?

The sale of each business note stands on its own, as do mortgage notes and other secured promissory notes. The common thread is that all notes of this nature are sold at a discount.

The actual price you receive for the sale of a business note is based on the note buyer's cost of capital and especially the buyer's perceived risk of purchasing a particular note.

Factors including the terms of the note, the collateral and the note payor's credit history are all evaluated. The long-term viability of the business itself is important.

What is the interest rate on a seller's note?

The term "seller's note" can be used in different ways. In this discussion the reference is to secured promissory notes, and in particular, business notes.

It is recommeded that the interest rate on a business note be at least 3 percent above the prime rate. Of course this is negotiable and it needs to be affordable for the business buyer.

This interest rate takes into account that the perceived risk for business notes is higher than for some other notes. This is so because in the event of default, the note buyer may have little collateral to foreclose on.

Real estate is usually not part of the business note. And much of the value of a business is in the goodwill, which can not be foreclosed on.

What happens when you sell a note?

When you sell a note you receive a lump sum of cash for selling the future payments of your note. In a full sale, you receive cash in exchange for all the remaining payments.

Partial sales of a note are common, and often preferred. Partial sales can be structured in differnt ways, and the cash you receive will vary according to the specific partial sale that you agree to.

For the payor of the note, that is the person who you sold your business to, the terms of the note remain the same. The only thing that changes is where they send their future payments.

Further Reading

Seller Finance Your Business

Do You Plan To Sell Your Business To Buy Another Business?

What Is A Business Note

Do You Have A Seller Financed Business For Sale? - Part 1

Do You Have A Seller Financed Business For Sale? - Part 2

Valuing Your Business For Resale And To Sell Your Business Note


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