Financing carried back by the seller to facilitate the sale of a business often occurs because:
- Buyer or business couldn’t qualify for conventional or SBA financing.
- Buyer and/or seller did not want to take the time required for SBA financing.
- Buyer was unable or unwilling to pay all cash.
- Buyer wanted to conserve cash for working capital.
A seller may want to liquidate his/her carry-back note because:
- Seller would have preferred all cash at the sale.
- Seller has large debts to pay.
- Seller wants to make another investment.
A good business note will have the following:
- Minimum equity of 30% – combination of cash down and principal reduction on the note
- Good payor credit – particularly after the business purchase
- Fully amortized note with no balloon
- 72 month maximum term – five years or less preferred
- 1st lien against all assets
- Minimum two months seasoning – six months seasoning provides even better pricing for the note
- Evidence of operating cash flow from seller or buyer operating info
- Personal guarantee of payor – can be waived with CPA audited financial statement or current tax returns
- showing substantial capital/cash flow
- Business note only – will look at a business and real estate combination, called a “hybrid”
- Two notes for hybrids – one for the business and one for the real estate
Some general observations about pricing:
- Stronger notes will command a higher purchase price and lower discount.
- Green, unseasoned notes will have to be discounted more.
- The shorter the term remaining, the lower the discount necessary.
- A partial, only buying part of the payments, often provides the seller with the cash needed and reserves the remaining payments for future income.
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