Creating a saleable BUSINESS note
The majority of sales of small and medium size businesses involve some type
of owner financing. Although this web site is primarily concerned with real
estate and real estate mortgages, we have included some guidelines below.
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Owner Operator.
Sell the business to someone experienced in this type
of business and who
will operate it themselves.
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Credit worthy buyer
Sell the business to a buyer whose average credit score is
at least 675.
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Third party, non-related buyer.
Sell the business to a buyer you don't know and isn't
related to you.
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Asset sale.
Sell the business as an 'Asset Sale' instead of a Corp
Stock or Equity sale if possible.
This will be preferred by most buyers as they are
often wary of taking on possible unknown liabilities.
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Use professional advisors
Always use professionals (business attorney,
escrow, Title company, etc.) to construct and execute
the sale and documents.
File and record a UCC-1 following the close of sale.
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Cash down payment.
Obtain at least 30% cash down payment from your buyer.
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Can the business make the payments?
Can the business support (pay) the
note payments from its future cash flow. You will be
relying on the business to perform on the note. And
will the business still have enough cash flow to
provide an income to its new owners? (If not, how will
they eat?)
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First position note only.
Carry-back only a first position promissory
note.
- Separate note for any real estate.
If
real estate is involved in the sale, create two
separate notes. One on the business and one on the real
estate. (A business note is more valuable without
real estate, likewise, you may e able to sell the real
estate note but not the business note).
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Personal Guarantees.
Receive a Personal Guarantee from the buyer. If
the buyer is a corporation then insist on a personal
guarantee from the owners and directors of the
corporation. It is even better if the
Personal Guarantee is secured with defined, tangible
collateral outside the business (such as the buyers
home), better still if these outside assets are equal to the
amount of the note. Even if you only get a second
mortgage on their home, it still goes to show that the
buyers are seriously committed.
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Secure the note
Receive a Security Agreement on the assets of the
business.
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Bank the down payment.
Ensure you keep proof of exactly the cash down payment
received by you.
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Bill of Sale.
Make sure you have a signed Bill of Sale that
specifies exactly what the buyer is getting.
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Terms of the note.
The note terms should include:
- A realistic Interest Rate, perhaps 1% over Prime
Rate;
- Balance Amortized equally and
monthly for no longer than 72 monthly payments;
- Significant and
detailed late and default payment stipulations
including reversion of the business and assets to you
in the event of a default;
- Non-assignment clause;
- Full Balance payoff at time of
and in case of business subsequent sale.
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Keep records.
Keep detailed records on the business sale
transaction; keep your last two years of signed
business tax returns; write into your agreement
(and ensure you receive) that the buyer, provide you
with periodic (preferably quarterly) Profit
and Loss business statements;
keep detailed note payment records with a photocopy of
their monthly check and your deposit book showing the
date it was deposited by you.
[Introduction] [Improving saleability] [Creating a safe mortgage] [Market your home] [Advertising your home] [A prospect phones] [Hold an Open House] [Real estate contract] [Creating a saleable mortgage note] [Create saleable business note] [Buyers credit] [Committment to pay] [Which is the better deal?] [Mortgage credit ratings] [Owner occupied] [Non owner occupied] [Commercial] [Calculate the payment] [Second mortgages] [Borrowers with bad credit] [Documents to use] [Create your documents] [Minimum documents needed] [Steps before closing] [Seller financing imputed interest] [Unusual mortgage clauses when selling a home] [Wrap around mortgages] [Escrow real estate taxes hazard insurance] [Real estate installment sales] [Mortgage unusual clauses you should have] [IRS publication 523 2003 selling your home]
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