Selling Business Notes Cash FlowSelling Business Notes - Quick and Easy!Selling business notes...As you lean back in your easy chair, a slight smile rolls across your face as you think back on the business you sold six months earlier. At that time you, you made a promise to yourself that after so many years of building and running a successful business you would slow down and enjoy life. Well …that was six months ago! Now, your outlook has changed. You have come upon a deal with your name written all over it. It’s just too good to pass up. The only problem is you need money to make it happen…and you are just not “liquid”. All of your funds are tied up in other investments. Then, you remember the small business note you took back on the sale of your business. The payor has been faithful in sending note payments on time. However, you need much more money than the monthly note payments to take advantage of this good deal. Somehow, you need the cash out this small business note for a lump sum of cash. Youe realize that you need a crash course in selling business notes. So, you need to sell a note. But, just how do you go about doing this? Do you have to sell the entire note, or can you just sell a portion of it? How can you find out how much it is worth? How much money can you get for small business notes? How soon can you get your money? Soooooo many questions! And the answer to them all is: it depends!
How Do You Go About Selling Your Business Note?Because you read learn-about-cash-flow.com’s informative How To Create Saleable Business Notes advice, you thoroughly understood the process of selling business notes, and structured your small business note for easy sale. You followed the advice by ensuring the following factors were met: - You ensured the small business note buyer provided at least a 30% down payment - You ensured the business note buyer had a good credit history and FICO Score of at least 650 - The payor’s payment history showed no recent “slow pays” or “no pays” - You obtained a written, personal guarantee from the cash note buyer - You structured the business note’s length of term at 60 months - The business note was in the 1st lien position - The business note’s interest rate was at least 11%. - The small business note was completely amortized - You have waited to ensure the small business note was fully “seasoned” for six months - You have decided upon the total amount of payments being sold (…all or partial) - The business cash flow reflects a month-to-month profit status - The business has had an uninterrupted string of profit - The business was making more than enough to cover the note payment, business expenses, and a reasonable profit for the payor. - You ensured that there were no “offsets” in the original sales agreement - You ensured the payor had experience in operating this type of business - Finally, you were careful to ensure that all business sales documents were in order Finally and perhaps, most importantly, you contacted a business notes broker and discussed all pertinent factors concerning selling business notes. This helped you in creating the most saleable small business note possible. You did this to ensure that just in case you wanted to sell the note, you could do so as easily as possible.
So, What is The Process For Selling A Business Note?Based upon the good work you did in creating your small business note, selling this cash flow note should be a very simple and straightforward process. One of the most important factors is that you consulted with a business note broker to learn all you could about selling business notes. By doing so, in addition to creating a great, saleable business note, the business notes broker also provided you a ready source for selling your business note. For those business sellers who did not consult with a business note broker prior to or as they were creating their business note, they need not despair. The process of selling business notes is the same, whether you have consulted a notes professional or not prior to creating the note. Selling business notes is a relatively simple process. For those business note holders with on-going business relationships with business note brokers, the process could not be simpler. The note holder would approach the notes broker and request a promissory note quote. If the business note for sale has been properly created and is rather straightforward, the business note broker may provide a fast cash quote in as little as a few hours. However, when selling business notes, before this occurs, the note holder may be asked if he or she wants to sell the entire note or somewhat less than all payments (… this is called a “partial”). Based upon the answer to this question, the notes broker will provide the appropriate pormissory note quote. Normally, in cases where the business note holder does not have a previous relationship with a business note broker, the note holder may well be approached by a notes finder. Typically, business notes finders are individuals who seek out business note holders who are ready, willing and able to sell sell a note. These business note finders will normally have established business relationships with one or more business note brokers. In exchange for having found a business note holder ready to sell a note, the notes broker will pay the note finder a small finder’s fee. At this point, the note selling process is the same as that for note holders with established relationships with note brokers, as described above. The most important part of selling business notes is the quote itself. The amount of the promissory note quote is the single most prevalent reason why many cash flow notes are not successfully sold for a lump sum. The most important aspect of this process for note holders is: the amount of money business note brokers quote to note holders for their buiness note is nowhere near the face value of the small business note. For example, if a small business note has a face value of $200,000, based upon all of its underwriting factors, the notes broker may provide the note holder a promissory note quote of 150,000 dollars (… again, all figures are for example purposes only). Many note holders would be taken aback at such a seemingly low cash quote as this. Many, if not most, would have expected a fast cash quote somewhere close to the note’s face value of $200,000. However, that expectation would simply be unrealistic. Again, the most problematic aspect of selling business notes is the quote. Invariably, to the novice note holder, most investors’ business note quotes will seem drastically low. Again, many business note sellers expect cash quotes at or near the small business note’s face value. By doing so, they miss important points: first, they do not take into account the time value of money; and, second, they do not consider the risk small business brokers take over time. Perhaps, the most misunderstood concept in the entire cash flow industry is the concept of time value of money. The concept goes something like this: money today is more valuable than the same amount of money in the future. This concept underlies the fact that goods and services in the future will require more money to purchase than those same goods and services can command today. Take for example the price of a movie ticket. 20 years ago, the average movie ticket cost $5.00. Today, that same movie ticket costs $20.00. In other words, $5.00, 20 years ago, commanded the same value as $20.00 does today. So, it is easy to see from this example that each dollar becomes cheaper as the years go by. What $1.00 commands today will take $5.00 to buy 20 years from now. To further illustrate this point, take the following quiz: which would you rather have, $50.00 today or $100 five years from today? Based upon the time value of money, most people would opt to receive $50.00 today rather than wait five years to receive $100, even though $100 is double $50.00. The reason most people would opt to receive the $50.00 today rather than wait for it to double in five years is the time value of money. Again, money today is worth more than money in the future. Business note buyers and business note brokers understand this principle well. It is at the heart of the promissory note quote. They deeply “discount” the sum of money they are willing to pay for a business note today. That way, they gain some value for having to wait the months and years it will take them to recoup their investment (…with some added interest, of course). Therefore, it is now easier to understand why a business notes brokers would only offer $150,000 for a $200,000 face value small business note on which he has to wait 5, 6, 10 or 20 years to mature. By the time the note broker recoups his investment, he knows he will be paid back in cheaper dollars. So, the discount provides him a means of making up for the cheap dollars he will receive for years to come as the small business note matures. The second main reason for the discount involves the risks that business notes brokers incur each time they purchase a small business note. Risk is an actual part of any transaction in selling business notes. Expect to pay handsomely to offset the risk in exchange for a lump sum of cash now. To continue the example above: for the $200,000 face value note, the note holder accepts the notes broker's quote of $150,000. This particular note will mature in 60 payments or five years. Within that five year period of time, any number of adverse situations could occur to or with the payor. For example, the business could suffer a financial setback due to a decrease in patrons, to no fault of the payor. An example of this is the recent swine flu scare in 2009. Many small businesses relying upon the sale of pork and pork products suffered tremendously due to conditions outside of their owners’ control. For those business owners paying monthly note payments to a business notes broker, that downturn in revenue caused many to miss payments and, in fact, a number of businesses went under. Again, this situation was not created by the payor. Nevertheless, it did adversely affect the business’ ability to remain profitable. The notes broker must take into account this type of possibility when he provides a promissory note quote. In addition to economic factors which adversely affect the note’s underlying business, the note broker must also consider the fact that, according to the Small Business Administration, on average, 56% of all small businesses fail within four years of startup. Many, if not most, of these businesses do not possess hard, tangible assets which the notes broker can foreclose on to recoup his or her money. Therefore, the business note broker will protect his financial position by discounting the note. Added to the possibility of economic upheaval and the almost natural failure of small businesses, notes brokers also discount their promissory note quote to protect their financial position against payors who simply “walk away” from their small businesses. There exist as many reasons as there are payors for the number of persons who - for whatever reason - decide that they no longer want to run their businesses each year. These persons simply forego their interest (i.e. their down payment, all the hard work they’ve placed in growing their business, etc) in their business and simply abandon them. Whether they are going through a personal crisis, medical issues, a contentious divorce, or they are simply tired of running the business, abandonment occur with relatively great regularity. Again, the note broker must protect his interest against this possibility by discounting his promissory note quote during the selling business notes process. So, what is the bottom line of the selling business notes process? If there is a bottom line, it may be this: a note seller must be prepared to have his or her note discount anywhere from 20 to 50%. This is not an exact science, and each note and each note buying/selling experience is different. So, how much of a discount can a note seller expect? The short answer is: it depends on too many factors to list here. However 20 to 50% is likely.
Sell Part of The Note or All of It?In the selling business notes process, most reputable notes brokers will attempt to offer the note seller several purchase options (… again, everything will depend upon the individual note). Chief among these is whether to buy the entire note or just some of the note (also called a “partial purchase” or, simply, a “partial”). Each option, full or partial, has its advantage. When providing a promissory note quote for the purchase of the entire note, the business note broker will likely take a greater discount. This is due to inherent risk; the longer the note is in force, the greater the risk of payor default. Additionally, remember the time value of money which states that the longer the time a note buyer needs to recoup his investment, the greater the discount. On the other hand, in many instances, selling a partial (or just a part of the note) may prove more advantageous to the note seller. In this scenario, the business note buyer limits his financial exposure and, therefore, his risk. It is in these selling business notes process situations that you, the note seller, may find your greatest advantage. Take a 60-month note for example: (depending upon the note’s underlying factors) a note buyer purchasing only 24 months’ worth of payments, instead of the entire 60 months, will probably take a lower discount. This would occur for two reasons: first, the investor can recoup his investment (plus some profit through interest payments) in only two years (24 months), as opposed to 60 months had he bought the entire note; and second, his exposure to financial risk is greatly reduced (24 months vice 60 months). Another scenario in which selling a partial may be more advantageous to the note seller is when a balloon payment is involved. The following example illustrates this point: recently, a note holder owner to sell a note that was 72 months of monthly payments with a huge balloon payment (approximately $320,000) at the end. The payor had already paid 12 months on the note and had an excellent payment record. The note holder wanted a quote on the entire note (the remaining 60 months plus the balloon payment). Upon reviewing the notes underlying fundamentals, the note broker decided to quote only for the next 60 payments, at which point, the note will revert back to the note holder for the balloon payment. It is a rare circumstance where the note buyer will purchase a balloon payment. However, in many selling business notes circumstances there is a way around this. In such circumstances where a balloon payment exists, the note holder can restructure the balloon payment into regular monthly payments and resubmit the revised note for a quote.
The Quote Has Been Accepted, Now What?What can you expect once you accept the promissory note quote? Again, all selling business notes experiences are different. Additionally each note broker is different. Having said this, there are great similarities to what they do in order to properly and professionally purchase a note. At this point in the selling business notes process, the note buyer will perform his or her “due diligence”. By this, I mean that all paperwork associated with creating the small business note and filing that cash note will be thoroughly examined. Additionally, all numbers associated with operating the business will also be examined. For a more thorough indication of the selling business notes due diligence process, please review our Business Note Quote Request Form. Once the notes broker has performed his or her due diligence, here she will arrange to have all transaction paperwork signed, the note transferred to his or her possession, and the agreed-upon lump sum payment transferred to the note seller. Normally, barring any unforeseen circumstance, you should get your lump sum payment within 10 to 14 business days. From this point forward until the end of the agreed upon terms (for a partial purchase) or to the end of the note term (for a total purchase), the payor will send his monthly payments to the new note buyer, instead of the old note seller. Other than this redirection of payment, the payor should experience no other changes because the note he originally signed will not have changed. If the sale was a partial sale, after the agreed upon monthly payments have been made, the note buyer will return the original note to the note seller. The payor will be notified to resume payments to the original note holder. In a nutshell, selling your note is just as simple. It truly is a rather simple process. If you need guidance, Advice or general direction in selling your business note, please do not hesitate to contact me at ”businessnotes AT learn-about-cash-flow DOT com” or you can Contact Us below.
Points To RememberIn closing, here are some important points to remember: - Seek advice from a business note professional prior to creating your business note. He will show you how to structure your note to the greatest amount of cash should you decide to sell it in the future. - Ensure you adhere as closely as possible to the factors outline in the Creating A Business Note section of this website. Though all note buyers and note investors are different, there are some home and factor’s they all look for in a note. The Creating A Business Note section does a great job in outlining these factors. - Understand that do to the time value of money and the investor risk, your business note will be discounted by the potential note buyer. Do not take it personally. It is not a personal slight. This is simply the way the note buying business works. - To find out more about all things business notes, check it out here Here’s to wishing you and all the best. To your success!
Want to "Presell" Your Note?Need Your Note Reviewed?If you have an existing business note or you created a business note as part of your selling business notes process, and you are thinking about selling some or all of your future payments on that note, then we can help you create it and determine what an investor would be willing to pay for those payments. Please contact us today for a free, no obligation quote on the sale of your future business note payments. Below you will find the link to create business notes and more about the selling business notes process at a FREE, no obligation best of breed site:
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