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Cash for Seller-Financed Business Notes

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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