What Are Business Note Buyers?
Business note buyers are financial institutions or other companies that purchase your business promissory note for cash. In this scenario, you are effectively selling payments owed to you from your self-financed sale of your business.
The business note buyer pays you for the value of these payments — minus a fee. This difference is called the discount rate.
The discount rate varies from company to company and may depend on several factors such as the amount of the down payment made originally on the note, the number of payments you’ve received on your business note, and the profitability of the business.
What Are the Benefits of Selling a Business Note to an Independent Note Buyer?
There are several benefits of selling your business note to an independent note buyer. The reasons are typically shaped by your personal preferences and your financial situation.
These reasons vary from one individual to another.
Benefits of Selling Your Business Note
- You receive an immediate lump sum of cash.
- You no longer have to administer — or carry the risk of — your owner-financed loan.
- You may have a tax advantage in selling a portion of your note rather than the whole note.
How Much Would a Business Note Buyer Pay for Your Note?
There are several factors that determine how much a buyer will pay for your business note. One of the first to consider is the discount rate.
For example, if you had a balance of $500,000 on your business note, and the buyer’s discount rate for it was 20%, the buyer would offer you $400,000 for the note. The buyer would be looking at a potential $100,000 profit from the sale.
But there are other factors to take into account when selling a business note.
- Down Payment Amount
- The down payment you require for selling your business can affect the discount rate. Most buyers will require you to have received at least 20% of the sale price as down payment. If the down payment you accepted on your business sale was higher than 20%, that can make your business note more attractive to a buyer and they may offer you a lower discount rate.
- Nature of the Down Payment
- The down payment you accepted for your business needs to have been made in cash — not other assets or in-kind items. If it wasn’t fully in cash, it can increase your discount rate or turn away note buyers.
- Term of the Business Note
- The term — how long the buyer of your business has to pay off the note — also affects the price. If the term is more than five years, you’ll likely have to accept a higher discount rate.
- Note Balance
- The balance on your business note — how much the business buyer still owes — may also affect whether you can find a note buyer. Some companies will buy notes with as little as a $25,000 balance. Some may have a maximum limit on how much they will buy — $500,000 to $1 million for instance.
- Note Position
- Your business note should be the first lien against the business. Buyers are hesitant to buy a lien in the second position and you may have trouble finding a buyer.
- Payment History
- Most buyers require that the buyer of your business has made at least two monthly payments on your note. Typically, the longer the payment history, the lower your discount rate will be.
Factors Affecting Your Business Note’s Value
How Do I Sell My Business Note?
You typically have the option of selling the full business note — all the remaining payments on the note — or just some of the payments.
4 Steps To Sell Your Business Note
- Shop Around for Business Note Buyers
Your agents are responsible for your finances and health, including your end-of-life care. Do not choose an untrustworthy individual as your agent, even if they are family. You can choose a professional to oversee your DPOA if you feel none of your family members are up to the task.
- Compare Offers
Different buyers will offer different discount rates and other costs, so make sure you choose the best option.
- Choose Your Buyer
Be prepared to provide additional information like your payer’s contact information, proof of payments and additional financial and tax statements.
- Sign Necessary Assignment Documents
The buyer will send you assignment documents that you sign and return.
Once you’ve completed these steps, the buyer will wire your money to you for all or just the part of the note you sold.
The buyer then contacts the payer to switch over payments to the note buyer.
If you sold part of the note, the buyer may switch payments to the buyer for a certain period of time. Then they can be switched back to you — or you can choose to sell another portion of the note.
There can be tax advantages to deferring the sale of your note in this way. Always talk to a professional tax advisor to determine the implications on your taxes.
How Do You Choose the Best Business Note Broker?
You’ll need to compare business note brokers to find the best option for you. This means looking for potential buyers in the secondary note market.
Companies that buy business notes may also buy similar financial contracts such as mortgage notes, real estate notes, commercial notes and security agreements. These are the types of companies you want to compare.
Most brokers will require the note to meet certain criteria before they will buy it — things such as payment history and the balance of the note.
These can also affect the discount rate — and the amount of money the buyer will pay you for the note.
You will need to compare these rules, discount rates and the offers themselves to determine which buyer offers the best deal for your business note. Talking to a professional financial advisor can help you determine what may be the best deal for you in the short or long term.