Shopping And Trade

Hows and Do’nts of Structuring a Business Note for Sale

Business case studies are an integral part of any course which focuses on management techniques. These cases are used to stimulate the student’s thinking and are used throughout many industries. The objective behind making discussion and analysis of business situations an essential part of the management studies curriculum is the fact that it teaches and prepares the student to face similar situations in the corporate world.

What Is a BusinessStudyNotes?

Such studies are designed to encourage management students to come up with their own solutions for a problem situation faced by a company. Typically such
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


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.

Leave a Reply

Your email address will not be published. Required fields are marked *