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Article:
How To Create A Business Note That Is More Attractive To A Note Investor by: Afra AmirSanjari You are selling your small business (business value under $1 million for this article). You would like the buyer of your business to come in with an all-cash offer, or be able to qualify for an SBA guaranteed loan. However, in many cases the owner of the business ends up taking back the financing because the buyer is not able to make an all-cash offer or does not qualify for an SBA guaranteed loan. So you create a 'business note' and you now become the 'bank'. At first that may seem okay, but after a couple of years of receiving payments you may decide you want to get back into business and you need the cash that is tied up in your business note on which you are receiving payments. So now you want to sell your business note to raise cash for your next business venture. What is it worth? That will depend a lot on how you structured the note. The objective of this article is to help you structure the note so that it is more attractive to a prospective business note buyer. Assumption: This article discusses the structure of a note that includes only the business assets of a business. If a business also includes real estate that is being sold at the same time as the business, that real estate should be sold in a transaction that is financed separately from the business assets. This allows each to be valued and financed in the most optimum manner. For example, it may be possible to finance the real estate with a lower down payment, for a longer term, with a lower interest rate, and without a personal guarantee. The objective of a business note buyer or investor when buying future business note payments is to minimize the risk of a default on the note. Therefore, they look for specific things when evaluating the purchase of future payments from your business note. Those include the following. buyer's down payment number of payments made on the note (also known as 'seasoning') buyer's credit history personal guarantee of the buyer total amount of payments being sold cash flow of the business and past profitability length of term of the note payment amount offsets lien position of the note amortization of the note experience of the buyer with the type of business purchased interest rate on the business note documentation of the business sale Unlike the purchase of a piece of real estate, the tangible assets of a small business may not be adequate to cover the amount due on the business note if the buyer of the business defaults. Therefore, the business note buyer is looking for ways to lessen the likelihood of a default. If there is a default on the note, the business note buyer will require that the business buyer follow through on their personal guarantee which secures the business note. A cash down payment of at least 33 percent should be made by the business buyer. This down payment should not come from borrowed funds. The reason for requiring such a large down payment is to make it less attractive for the buyer to 'walk away' from the business if they encounter problems. If they have a significant amount of their own money invested in the business, they may think twice about walking away from the business when things get tough. If the down payment was less than 33 percent, then the business note buyer will require that the difference be made up by additional payments on the business note. The business note buyer wants to see that the new owner of the business has at least a one-third equity investment in the business between the combination of cash down payment and payments made on the business note while operating the business. Business note buyers want to see that at least two monthly payments have been made on the note by the new owner of the business. For new owners of professional practices such as doctors or dentists, a larger number of paid monthly payments will be required. This serves a couple of purposes. It should show that the new owner is generating cash flow from the business. It also allows the new owner to see if the business is meeting their expectations. As part of the 'due diligence' performed by the business note buyer, they will interview the new owner to see if any problems exist that might lead to future problems making payments on the business note. They will want to know if the new owner was 'mislead' by the seller of the business. The buyer of the business should have a credit score of at least 600. A higher score is required by the business note buyer when the value of future business note payments being purchased reaches a certain level. Any 'clouds' on the business buyer's credit history should not be current. These should have been resolved before purchase of the business. The business note must be personally guaranteed by the buyer. It cannot be guaranteed by the company buying your business. Specifically, it cannot be guaranteed by a person signing on behalf of the company. If there is a default, the business note buyer will be coming after the personal assets of the individual(s) making the personal guarantee. A personal financial statement for the buyer should be obtained to verify that they have the necessary assets should it be necessary to fulfill the personal guarantee. The maximum amount a business note buyer will buy in a single transaction is between $'300
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