Selling your business can be a difficult and frustrating experience. In many cases, it may be difficult or even impossible for a potential buyer to be able to finance the entire sales price through a bank or mortgage lender. Many lending institutions are hesitant to offer financing for what they may consider a risky expenditure. Often times, in order to achieve a successful sale, a business owner needs to offer some type of seller financing.

Of course, as a business owner, you may be reluctant to finance the sale yourself. That's completely understandable. However, if you're serious about selling your business, you may not have a choice. You may find it necessary to carry at least part of the purchase price in order to complete the sale. But, by following some simple guidelines, you can protect your investment and make this endeavor much safer.

1. Always insist that your note is guaranteed by an individual, not a corporation.
2. Obtain a credit report on all parties involved in the sale. Look for a credit rating of at least 640. Higher is better, but 640 should be the minimum you consider.
3. Carefully consider the financial strength of your buyer and the strength of his/her personal guarantee. Examine the net worth of your buyer and compare it to their debt load.
4. Consider the buyer's previous experience in this particular business field, as well as his/her previous management experience.
5. Insist on a large down-payment. Try to get at 40% of the purchase price in the down-payment. Do not consider less than 30%.
6. Document and verify the source of the down-payment. Down-payments which come directly from the buyer are preferred. Monies borrowed from friends or relatives to cover the down-payment are less attractive, but better than no down-payment.
7. Short payment terms are preferred over longer terms. Generally, terms of 30-60 months are offered. Ten years is the longest term recommended. The note should be fully amortized.
8. The interest rate on your note should be competitive. Prime lending rate + 2-3 % is a good guideline to use.
9. Your business should be fully evaluated before the sale, with the value firmly established and documented. All tangible assets, including both current and fixed assets, should be thoroughly documented and the value clearly indicated and confirmed, along with the method of valuation. Real estate, if included with the sale of the business, needs to be fully appraised and documented also. Intangible assets, such as liquor licenses, franchise agreements, leasehold agreements, etc. should be included in the business appraisal and the method of their valuation should be indicated as well.

These are only a few of the things you can do, as a business owner, to protect your interests in the sale of your business. There are many other considerations as well.

Will you be able to sell your business note as soon as it is created? Probably not. Generally, the best pricing is obtained on notes which have been seasoned for at least 12 months. It's not impossible to sell the note before that point, but you should be prepared to take a larger discount if you do.

If your note is not in first position (i.e. a first mortgage), it is not likely to find an interested buyer. When you sell your business, you should always make sure your note is in the senior position. 

If you do elect to sell your business note, you will need to provide:

• documentation supporting the sales price of the business
• financial records, both before and after the sale of the business
• proof that all payments have been made on time
• other details regarding the business, such as how long the business has been operating at the present location, whether the business has moved recently, and if so, why

Are all business notes sellable? Unfortunately, no. Some types of business notes are unlikely to find a buyer. These include notes secured by businesses such as video stores, insurance agencies, law firms, travel agencies, real estate agencies, and smaller tax preparation firms. It may not be impossible to find a buyer for these kinds of business notes, but it is likely to be more difficult and the discount is likely to be steeper.

Do you have to sell your entire business note? No. Partial purchases are very common when dealing with business notes. Often, a note investor will consider a partial purchase a less risky investment than a full purchase. You gain an advantage this way as well. As your note ages, it increases in value. If you do decide to sell the rest of your note in the future, it will likely be more valuable because of the longer payment history and the greater equity value associated with the note.

If you are planning on selling your business and considering seller financing as an option, or if you are currently holding a business note which you would like to sell, please contact us. We, at First Class Cash Flow Handlers will be happy to answer any questions you have.