How To Get the Most Cash for Your Business Note
You will usually get more cash for your business note if you sell portions of your note rather than the whole note all at once. There are several strategies to maximize the value of your business note. You can discuss these with different business note buyers to find the best return on your note.
- Written By Terry Turner
Senior Financial Writer and Financial Wellness Facilitator
Terry Turner is a senior financial writer for Annuity.org. He holds a financial wellness facilitator certificate from the Financial Wellness Foundation and the National Wellness Institute, and he is an active member of the Association for Financial Counseling & Planning Education (AFCPE®).Read More
- Edited BySavannah Hanson
Savannah Hanson is an accomplished writer, editor and content marketer. She joined Annuity.org as a financial editor in 2021 and uses her passion for educating readers on complex topics to guide visitors toward the path of financial literacy.Read More
- Financially Reviewed ByTimothy Li, MBA
Timothy Li, MBA
Business Finance Manager
Timothy Li, MBA, has dedicated his career to increasing profitability for his clients, including Fortune 500 companies. Timothy currently serves as a business finance manager where he researches ways to increase profitability within the supply chain, logistics and sales departments.Read More
- Updated: September 14, 2022
- This page features 2 Cited Research Articles
- Edited By
How Much Can You Expect To Receive When Selling Your Business Note?
The amount you can expect to receive if you sell your business note on the secondary market depends upon several factors. Business note buyers have to assess each note individually to decide how much, if anything, they will offer to buy it for.
Business note buyers buy the payments remaining on your note. You can sell them all remaining payments all at once or a portion of the payments.
If you sell the entirety of your business note at once, you typically get the least amount for it. Expect a business note buyer to offer 14% to 30% less than your note’s face value. This is also called the discount rate for your particular business note.
The exact discount rate typically has to do with the specifics of the sale of your business and how you originally structured the note at the time of sale — and how the business and its new owner continue to perform.
- The business buyer has a good credit score and a strong credit history.
- The business buyer made a large down payment for your business.
- The business buyer made a personal guarantee on the note.
- You can show proof of the business’s continuous post-sale cash flow.
- The business remains profitable to the present day.
- The face value on the note is at or above the note buyer’s minimum requirements.
- The term — time the business buyer has to pay off the note — is within the note buyer’s requirements.
- The note is seasoned, meaning the business buyer has made multiple, timely payments on the note already.
Tips for Getting the Most Money Out of Your Note
Sometimes, it is possible to receive more than the face value of your note. These cases typically involve selling only a portion of the note at a time or splitting the whole note into multiple, partial sales.
While partial sales may reduce your discount rate and allow you to continue to cash in on the monthly payments your business’s buyer makes, it’s important to ask your note buyer about your specific options when selling your business note to ensure that the move makes financial sense in your situation.
Below, we have compiled a list of example sale scenarios that can help you get the most for your business note.
- Full Sale with Split Funding
- This scenario involves selling half of the business note up front, then selling the rest of the note after the first set of payments are paid.
- Partial Sale By Selling Half of Each Monthly Payment
- Selling one-half of each monthly payment allows you to keep the other half each month.
- Partial Sale with Front-End Payments
- In this scenario, you sell the early note payments to the note buyer. Then you receive the majority of the payments later on.
Each of the above scenarios works to raise your return. This happens in part because you are assuming more of the risk that the business buyer pays off the note, but you are also reducing the risk the note buyer takes on.
Also, consider these best practices for maximizing the future value of your note while structuring the note itself.
- Charge the highest down payment you can — typically, 20% or more (some note buyers require at least 30% down) — when you structure the financing agreement with your borrower.
- Require that the down payment is paid in all cash. Don’t allow trades of in-kind services or products if you might sell your note in the future.
- Require that the business buyer has a good credit score at the time of the sale.
- Charge a high interest rate when you create your business note. It should be well above the Federal Reserve’s current prime rate.
- Set a relatively short term for repayment of the business note. Five or six years is typical, while anything over 10 years will increase the discount rate extended by most note buyers.
- Do not include balloon payments in your business note; structure steady monthly payments only.
- Include a personal guarantee from the person who buys your business in which they assume personal responsibility for the debt should they default on the note.
You can discuss different options with your business note buyer to maximize the money you get out of your business note.
Finding the Right Business Note Buyer
Business note buyers may be companies that specialize in business notes or they may be companies that buy other types of securities such as mortgage notes, chattel mortgages and real estate notes.
These companies buy business notes at prices that allow them to turn a profit.
Finding the right business note buyer for you involves getting quotes from different buyers and comparing the best offer for your business note. Asking about different full and partial sale options help can get you the most for your business note.
Does Selling Your Note Make Sense?
There are several situations in which selling your business note makes the most financial sense. The best time to plan to sell your business note is before you create it so that you structure it properly.
Some people plan to sell the note before they sell their business. By financing the business sale themselves, the owner can attract a larger pool of potential buyers — including those who can’t qualify for a conventional business loan through a bank.
Structuring the note so that selling it provides you with a desirable return on your sale — even along with a significant discount rate — is prudent.
Planning a partial sale strategy can also set you up to maximize the money you get for your business indirectly through the sale of the business note.
As always, talking to a professional financial advisor about your options can help you plan for a situation in which selling your business note can be a part of the strategy for selling your business through owner financing.
2 Cited Research Articles
Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.
- American Institute of Certified Public Accountants. (2014). Form 1040 Reporting of Owner Financing & Nontraditional Loans (Installment Sales 101). Retrieved from https://www.irs.gov/pub/irs-utl/22-Installment%20Sales%20101.pdf
- U.S. Securities and Exchange Commission. (n.d.). Promissory Notes. Retrieved from https://www.investor.gov/protect-your-investments/fraud/types-fraud/promissory-notes
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