How to Sell Business Notes: A Guide to Quicker Cash Flow

Introduction

Selling a business note can be a strategic move for business owners looking to liquidate their future cash flow into immediate capital. In the complex world of business transactions, business notes offer an alternative to all-cash sales by allowing sellers to receive a promissory note that secures payments over time. However, not all business owners want to wait for years to receive full payment. Instead, selling a business note provides a quicker cash option, allowing for immediate reinvestment, debt repayment, or other financial needs. This article explores the process of selling business notes, the criteria for buyers, and how to maximize returns while mitigating risks.

Understanding Business Notes and Their Sale

In about 85 percent of all business sales, sellers accept a cash down payment along with a Business Note to cover the remaining balance through installments. The note is typically guaranteed by the buyer and secured by the business assets in case of default. This method allows sellers to reach a wider range of potential buyers who may not have the full amount upfront.

However, holding onto a Business Note might not be ideal for all sellers. Many prefer not to engage in the lending aspect and would rather get their cash up front. This is where selling the note comes in. If you’ve created a business note during the sale of your company, you can sell that note to a third party, a Business Note Buyer, to obtain immediate cash instead of waiting for payments to trickle in over the years. This option can be beneficial for funding new investment opportunities, paying off existing debts, or making substantial purchases.

How Selling Business Notes Works

When selling a Business Note, it’s important to understand that these notes are sold at a discount on the secondary market. This discount is crucial to attract buyers who are willing to take on the risk of waiting years for their money. Typically, you may receive between 50 to 80 percent of the note's remaining balance, depending on several factors. These factors include the economic environment, the terms of the note (such as payment amount, interest rate, and duration), and the perceived risk of the buyer defaulting.

While selling your note might mean accepting less than its full face value, the total cash you receive from the down payment plus the sale of the note often approximates the amount you would have received from an all-cash sale. This is because all-cash buyers often negotiate a lower selling price to minimize their risk.

Criteria for Purchasing Business Notes

Certain criteria must be met for a Business Note Buyer to be interested in purchasing a note. Here are some common criteria that are usually required:

• Profitability of the Business: The business must be in a profitable position with solid evidence of operating cash flow.
• Creditworthiness of the Buyer: Buyers should have a good credit score, generally a FICO score of at least 625.
• Initial Cash Investment: The buyer should have made a substantial down payment, usually at least 30 percent of the purchase price, which indicates commitment.
• Personal Guarantee: The principal owners must provide a personal guarantee on the note.
• Seasoning of the Note: The note must be “seasoned,” meaning the buyer has made payments for at least two months. This demonstrates buyer satisfaction and commitment.
• Minimum Note Value: The note should have a minimum face value of $15,000.

Structuring the Sale of Business Notes

There are various ways to structure the sale of your Business Notes. You can opt to sell the entire note or just a portion of it, depending on your immediate financial needs and long-term goals. The most common approach is a "partial purchase," where you sell a specific number of the remaining payments.

For instance, if your note has a balance of $80,000 payable in 240 monthly installments, and you need $20,000 now, a note buyer might buy a certain number of those payments to give you the cash you need. There are several options here:

• Sell the first set of payments, receiving the final payments later.
• Sell the last set of payments, receiving the initial payments yourself.
• Sell a percentage of each remaining payment, allowing for a blend of immediate cash and ongoing income.

Choosing the right option depends on your financial strategy and future needs.

The Business Note Purchase Process

The purchase of a Business Note involves several steps, including assigning the security instrument (UCC-1 Financing Statement) and endorsing the promissory note. Before reaching this stage, a Business Note Buyer conducts thorough due diligence to evaluate the transaction's risks. This includes examining the business's financials, verifying the note's terms, and ensuring all documentation is in order.

The entire process of selling a Business Note typically takes about four weeks. If your business sale and note creation are straightforward, you can expect to receive your funds within this period.

Benefits of Selling Business Notes

Selling Business Note Payments can provide several benefits. For one, it offers liquidity, which can be used to explore new business opportunities or manage existing financial obligations. It also eliminates the risk of the buyer defaulting on future payments, providing peace of mind and financial security.

Additionally, having a lump sum of cash rather than periodic payments allows for more strategic financial planning and the potential for higher returns in other investments.

Conclusion

Selling a business note can be a wise financial decision for business owners looking to convert future cash flows into immediate capital. By understanding how the sale process works, knowing the criteria for a successful sale, and carefully choosing the structure of the sale, sellers can maximize their returns while minimizing risks. If you're considering selling your business note, consult with a reputable Business Note Buyer and explore the best options that align with your financial goals.

For more insights into managing your business finances and strategies for maximizing business value, check out our comprehensive guide on Business Strategies and Financial Management.