Business Notes

Business Notes

Simultaneous Closing

Definition

Basically, a Simultaneous Closing is very similar to liquidating any other note, except the note has no seasoning (it is brand new). Assuming that we are provided with all of the terms of the proposed note and an accurate bill of sale, we will issue a Letter of Intent that states that we will purchase the note for some given amount after the business closing, provided no changes have been made. This assures the seller that the note can be sold and for how much, even before the business closing. We can provide a check to the seller very soon after the business closing, often right at the business closing table

If you have sold a business and took back a note for part of the purchase price, we can probably convert all or part of it to CASH—-

Privately-held business notes can often be liquidated, in full or part. Liquidation of a business note can also be set up before it is even created, in some circumstances. This is referred to as a Simultaneous Closing,  Now known as transactional funding.

Over 80% of all businesses are sold without the participation of a bank.  In these cases, the seller takes back a note requiring the buyer to pay the note over time.  Often, the seller later wishes to cash out for investment or business reason.  We have national buyers who will do whole or partial purchases and who will give fast quotes.

Advantages for Business Seller:

  1. Businesses can be sold for full retail value with little, if any, price concessions.

  2. A larger pool of potential buyers is created.

  3. Owner-Financing can be immediately converted into cash at the same time as the property closing, virtually at the table.

  4. The “discount” of the business note can be minimized by selecting the right buyer and note structure for resale.

  5. Sellers now have the ability to make a deal work almost on the spot instead of waiting a period of time for the buyer to get “qualified.”

 

Advantages for Business Buyer:

  1. Long term financing is now available without the danger of a short fuse balloon payment coming due.

  2. The buyer avoids paying loan points or origination fees.

  3. Qualifying criteria is reduced

  4. Note terms can be “custom tailored” to meet the needs of the buyer’s monthly income.

 

Types of Businesses – Liquidation

Notes on many types of businesses can be liquidated. These are only a few of the examples. Note that a business sale usually does not include the sale of the building in which it is housed.

  1. Restaurants and bars

  2. Liquor stores

  3. Convenience Stores

  4. Florists

  5. Medical/Professional Practices

  6. Laundromats

  7. Drycleaners

  8. Printers

  9. Auto repair shops

  10. And Lots More

 

Business Note Evaluation – Factors

There are many factors that enter into the valuation of a business note. These interact with one another, in such a way that one positive can at least partially offset the negative effects of another.

  1. Type of business

  2. Experience of the buyer

  3. Location

  4. Buyer credit

  5. Down payment/buyer equity

  6. Seasoning of the note – months the buyer has been paying on it

  7. Lien position

  8. Length of term of the note – amortization period

  9. Sales price

  10. Interest rate

  11. Special terms of the note

  12. Buyer payment history

  13. Most note buyers like to see at least 3 to 6 months seasoning before making an offer on the note.
  14. Lastly, have all your documents prepared by a competent attorney, that has plenty of experience, with real estate matters.
  15. Keep in mind when creating a business note to sell, it is advised to stay away from interest only loans and balloon payments.
  16. Don’t make your note more than 3 to 5 years amortization, otherwise buyers will be scared off from buying such notes because of the risk created.

UNDERWRITING REQUIREMENTS FOR BUSINESS NOTE PURCHASES

This is an area that is very difficult to generalize, because each note is reviewed on its own merits. As stated above, some factors will tend to offset others. Shown below is an ideal note, but others can be liquidated.

  1. Substantial Down payment  ( 35%-45% minimum) down (not borrowed) anything less may never get funded.  A larger down payment means the purchaser has more at risk and owes less, both of which make the business note safer and therefore more saleable.  Keep in mind that you will suddenly some day become the seller of the note your creating, so you must act accordingly.

  2. Buyer must have good credit, both business and personal ( FICO score of 650+ ) 

  3. Four to six months seasoning with excellent pay history, if required.

  4. Note must be fully amortized and in first position, and must be fully (or should be) amortized.

  5. Note must be personally guaranteed by the buyers.  If borrower is a CORP., the note seller should insist that the note be guaranteed personally, just in case the loan goes into default the borrower can default by dissolving the articles of organization.  The higher the down payment the better offer made for the note.

 

NOTE EVALUATION (required information)

All of the information listed below should be submitted to obtain a solid note evaluation. It will all be required for underwriting and supplying it upfront prevents surprises later on.

  • Copy of the promissory note

  • Copy of security instrument

  • Copy of title

  • Copy of sales contract

  • Copy of closing statement when business was sold

  • Copy of bill of sale

  • Copy of lease agreement, if applicable

  • Copy of UCC-1 (Uniform Commercial Code Financing Statement)

  • Payment record

  • Social Security numbers of the buyers

 

Full liquidation vs. partial

Many times it may be desirable (or even advisable) that only part of a note be liquidated. Under certain circumstances, a full liquidation cannot be done. Assuming the seller does not need cash from the full value of the note, it usually will not make good financial sense to liquidate the whole note, typically requiring a larger discount. Remember that the longer the funder has to wait to recover his investment, the lower the value of the note.

Partial liquidation can be set up in many different methods. The numbers shown below are examples only. Depending on the situation for each note and the needs of the Seller, a multitude of variations could be explored.

  • The next 3-5 years of the payments could be liquidated. After this time period, the payments would return to the seller.

  • Half of each monthly payment could be liquidated. This would provide the seller with immediate cash from the liquidation of half of the payments, while still providing a monthly income from the half he retained.

  • The monthly payments up to the balloon date might be liquidated and the seller retains the balloon.

  • The balloon might be liquidated and the seller retains the monthly payments.

  • Nearly any combination of the above can be utilized, as long as it makes sense to the investor (purchaser of the note), the value of the note will support the proposal and the proceeds satisfy the seller’s needs.

 

Time Required – Liquidation

Several factors can influence closing time, but in general, once the pertinent information is received by the purchaser of the note, it usually takes about 2-4 weeks.  If you have kept accurate records and can prove that the information is current up to date with good records, we will be able to move in as little as three weeks or less.  Either way, we move as fast as you can provide documents as proof.

Please keep in mind that the buyer of the note,  feels it is safe to assume that this buyer wants to have reasonable assurance that all negative factors have been declared up front, prior to the purchase.

Business Note Simultaneous Closing

 

Basically, a Simultaneous Closing is very similar to liquidating any other note, except the note has no seasoning (it is brand new). Assuming that we are provided with all of the terms of the proposed note and an accurate bill of sale, we will issue a Letter of Intent that states that we will purchase the note for some given amount after the business closing, provided no changes have been made. This assures the seller that the note can be sold and for how much, even before the business closing. We can provide a check to the seller very soon after the business closing, often right at the business closing table.

Reasons for Simultaneous Closings

  1. The buyer does not qualify for a conventional loan
  2. It is difficult to obtain conventional financing on a business
  3. The business has been difficult to sell
  4. Owner-Financing provides more potential buyers
  5. The Seller needs cash, but his Buyer cannot provide it.