Seller financed business notes generally represent higher risk investments and tend to be discounted significantly because of the historical high failure rate of small businesses. When sold, most businesses are valued on cash flow and intangible goodwill rather than hard assets This means the sales price of the business is based significantly on its ability to generate income rather than assets that could be foreclosed upon. Because they are generally viewed as unattractive from a collateral standpoint by most banks, sales of small businesses usually involve owner financing and carry-back promissory paper of some kind.
When buying a business note, a personal guaranty of principal and interest is essential. What is most important is the creditworthiness of the payor and/or guarantor. Equity in the note is also important with most buyers wanting to see a minimum of a 25% down payment. Corporate guarantees are sometimes acceptable but most buyers will still want some form of personal guarantee.
The most attractive business notes to institutional buyers are those where the business owns an abundance of equipment which is free and clear (not secured by a UCC-1 Financing Statement) and which can easily be liquidated through auction or similar means
Marketing for Business Notes
Business Notes offer in-the-know Cash Flow brokers a significant opportunity since this is not a highly practiced area. If you decide to direct some focus on business notes, make certain you first have a solid institutional buyer for such paper and find out the institution’s buying parameters. Almost all will want notes which are heavily collateralized by equipment such as:
- auto repair facilities
- convenience stores
- car washes
- print shops
- small manufacturers
- sign shops
Marketing for business notes can be easily rolled into your marketing for factoring clients (if you are participating in that area) since the holders of business notes are often current business entrepreneurs that are still holding paper from the sale of a previous business. Another significant source of seller financed business note holders is obviously retirees so any club, group, church, or similar organization with an active membership containing retirees presents an opportunity for networking and the distribution of business cards.