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cash flow business notes owner financed property seller financing promissory buy sell Business Notes… What are business notes? The word “note” is an abbreviation for a promissory note – or any debt instrument that represents some kind of payment stream from a buyer to a seller. For example, a home owner, in an effort to sell his house, offers owner financing to a prospective buyer. They both sign a legal document outlining the financing terms (i.e., selling price, number of payments, monthly amount, interest rate, etc.) This is what professionals in the cash flow industry refer to as a “note” – or, in this case, a “private mortgage note”. In the case of “business notes”, the same principles apply – but they are specific to the sale of businesses. Oftentimes, an individual who wants to buy a business is unable to get financing from a bank, primarily because quite often much of the business’s value is based on current sales & customer goodwill – as opposed to physical assets. In order to sell his/her company, the business owner is often forced to accept a down payment & a note for the balance of the sale from the buyer in order to consummate the deal. This is all well & good if the seller is looking for a long term investment – but oftentimes, he/she is looking to buy another business, & needs the cash to accomplish it. Here is a small (& by no means conclusive) list of businesses which notes are commonly drafted for & transacted upon…
Business Note Example… Amy has owned & operated a small restaurant in the same location for ten years, but feels the need for a new business venture – so decides to sell the business. Six months passes – but at long last, she gets an offer from a prospective buyer. After several rounds of negotiations, Amy finally accepts an offer of $100,000. Unfortunately, the prospective buyer, Bill, is unable to secure a bank loan for the restaurant – but does have $20,000 in cash to offer as a down payment. Amy fears if she does not work out a deal, she will lose the sale - & therefore accepts Bill’s offer of $20,000 down, & a promissory note of $80,000, to be paid over the next 5 years at an interest rate of 12% - which amounts to monthly payments of $1,780. This is all well & good - at first. Three months have now passed, & Amy has collected $5,338.68 from Bill – which has reduced the balance on the note to $77,032. Soon after, Amy learns that the bakery that she buys her baked goods from is going on the market – the very business she has longed to buy. She quickly moves on it, & negotiates a deal to purchase it – but must produce a $30,000 down payment by the end of the month to seal the deal. The problem, as she tells the bakery owner, is that darned note on the restaurant she sold. The note that she’s collecting on still has a balance of over $75,000 – but she’s only allowed to collect $1,780 a month on it. The bakery owner tells Amy that he sold his last business, a sheet metal shop (don’t ask!) with the help of a cash flow broker, & suggests that Amy contact him to help her sell her restaurant note. Amy takes his advise, contacts the broker, & is pleasantly surprised to learn that she need not sell off the entire note – but just the first two years of payments in order to raise the necessary cash to make the down payment on the bakery. This allows Amy an opportunity to achieve her business goal – as well as maintain a future income stream on the sale of her restaurant. You might say Amy found a way to have her cake & eat it, too - and now she’s rolling in the dough! About 85% of all business sales involve seller financing. If you happen to be one of those sellers holding a business note (like Amy), & would like to convert it into a lump sum if cash, Marathon Funding can possibly help you. We work with a nationwide network of business note investors who will compete to purchase your note – or even a portion of that note to accommodate your immediate cash flow needs, enabling you to receive additional payments on that note in the future.
What other kinds of notes are there? The cash flow industry recognizes over sixty different kinds of notes. There are marine (boat) notes, recreational vehicle (RV) notes, exotic car notes, business notes, partnership interest notes, collectibles notes to name a few. Even annuities, structured settlements, & lottery winnings represent notes with an attached payment stream. These are some of the more commonly held notes sold regularly by note holders for immediate cash. Does the note holder receive full face value for the note? In a word, no. As the saying goes, “no margin, no mission” - & funding sources work on margin. But it is our responsibility to convey the necessary information on your note (except for your identity) to all qualified funding sources registered with the American Capital Exchange, & solicit the highest bid for your note. At that point, is the note holder committed to sell? Not at all. Once the note holder knows the highest current market value of that note, he or she can make an informed decision on whether to sell or not sell. Our responsibility is to evaluate the debt instrument for the prospective seller, & obtain the highest price for it if they choose to sell it. Why would a note holder take less than full face value for the note? Again, it comes down to the time/value of money. Inflation erodes the value of money over time - & cash in hand today is worth more than the same cash in hand over a period of time. The good news for the note holder is that this can be used to his or her advantage. Why is that? Because of the time/value of money, if the note holder takes that lump sum of cash from the sale of the note & invests it wisely, he or she can potentially grow that investment into a sum significantly larger than what the entire payment stream would produce. How much does a funding source take? As with accounts receivable funding, funding sources seek a secure & pre-determined yield. But the percentage amount will vary, depending on the terms of the note, current economic conditions, & prevailing interest rates. How does that benefit me? The fact that funding sources utilize the same criteria to determine a specified yield, & that several dozen funding sources may be bidding for your note is your assurance that you will be paid top dollar for your note when you are ready to sell it. Does a note holder have to sell the entire note? Absolutely not. This is one unique feature of note selling that is clearly a benefit to you. You have the option of selling the entire note, or just a designated number of payments to satisfy a particular financial need - then save the remaining payments for yourself to collect at some future date. How does that work? Let’s say an individual sold a business & agreed to finance the business for the new owner over a period of 15 years. Now the seller wants to purchase a new business, but the cash value of the entire note is more than he really needs. In fact, all he needs is the cash generated from the sale of 10 years of payments. Therefore, the note holder & the funding source strike an agreement to transact on only the first 10 years of payments - & the remaining 5 years of payments remain the property of the original note holder. Isn’t that complicated? Not at all. A legal document would be drawn up by the funding source that spells out the specifics of the transaction. The advantage of an arrangement like this is that the note holder can sell off only the number of payments needed to acquire a certain amount of cash now, & retain the balance of payments to resume at a designated future date. Why couldn’t I go to a bank & do the same thing? Banks don’t buy notes – they can only loan you money & place a lien on your note or other assets for collateral. And, of course, they will apply interest on the loan – which produces debt for the note holder; funding sources will purchase your note at a discount – which produces revenue for the holder of the note. Is there anything else about notes I should know? Only this - if you hold a note that produces a payment stream over time, you are in a position to make an informed choice. By calling Marathon Funding, you can find out how much that note is worth if you were to sell it today for top dollar, versus waiting for incremental payments over a designated period of time. Once equipped with that information, you (and only you) can determine the best course of action.
Contact us today for a free, no-obligation, & confidential evaluation! Call us at 413-245-6883; fax 413-245-9209; e-mail at info@m-funding.com certified cash flow consultants professional financial services confidential evaluations
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