What is a business note?

It is a promissory note that is created when an owner takes back financing when selling a business, Recent estimates have shown that over 80% of all small businesses ($40,000 to $3M) take back financing to close a sale.

Why are there business notes?

Most banks do not and will not finance the sale of a small business due to the high risk of failure.

A business note is secured usually by the FFE (fixtures, furniture and equipment), assets and goodwill. Land is not normally collateralized with the note. Therefore, if the new owners default, the noteholder most likely has no recourse to recapture the face value of the note. Requiring the new owners be directly responsible may provide some solace and remedy.

Goodwill is estimated to be of small significance when ownership is transferred. The next factor, the FFE represents, on the average, a mere 25% of the value of a business. Therefore, 75% of the value of the business would be revenue based. Closer examination of the profitabilty of the business does not usually reflect the asking price.

What make a good, marketable business note?

It should require a sizable 30% to 50% of cash out, not cash borrowed, by the borrower against the selling price of the business. Ideally, the terms would include a balloon payable in five to ten years with an interest rate from 7% to 10%.

Additionally, a savvy business owner would pull credit from the borrower(s), before any contract is signed and monies exchanged. A credit report would be part of the paperwork.

The new owners should have direct work experience relating to the business. The previous owners ought to have had at least a couple of years of strong financials reflecting business profitablity.

We are interested in business notes on:

• Restaurants
• Convenience Stores
• Florists
• Medical and Professional Practices
• Laundromats
• Drycleaners
• Printer

If you are a business note holder and need advance funds for a project or for an unforseen expense, and you would be interested in an evaluation of your business note, please complete our online form.

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