A quandary for some owner/sellers of small and mid-sized businesses is that the desire to cash out will probably cost them as much as 25% to 33% of what they want to receive for their businesses. That's how much a buyer often expects to have discounted from a business asking price if the seller is not willing to provide financing. To get paid the full value a seller feels the business is worth will require taking a portion of the price with a promissory note secured by assets of the business and payable over a period of years.
A solution that helps alleviate this problem is seller carry refinancing
. This involves the seller carrying back part of the business purchase price with a promissory note, then selling that note at some point in the future to investors, and receiving perhaps as much as 70% to 90% of its face value. This strategy means the seller won't realize the full price paid for the business, and may have to wait several months, perhaps years for a suitable time to convert the note to cash.
But it's a smart choice in many situations, allowing sellers to get most of what they want in cash and to leverage off the many benefits of offering a business with seller financing.
Business owners who initially wanted an all cash deal when taking their businesses to market often have changed their minds when realizing the many advantages of offering a deal with seller financing, and realizing the carry back note can later be sold.
And even some sellers, who'd planned to carry back a note from their buyer, and receive principal and interest payments for the full term, will change their minds months after the close of escrow when they have a need for more cash.
BizBuyFinancing has been involved for a number of years in helping sellers to refinance their buyers' obligations (notes) by selling them to investors and taking the discounted value in cash. Here are some of the factors we discuss with clients who want to understand the salability of their seller carry refinancing programs
- Seasoning: The marketability and cash value of a promissory note secured by assets of a business are dependent on how long the debtor has been making payments on time--called the "seasoning" of the note. That means an obligation which has been met faithfully for a couple of years is more appealing than a note signed just a few months ago.
- Type of business: Investors being asked to purchase a seller carry-back note always want to know whether the business behind the obligation is positioned to grow in the months and years ahead, or if it's part of an industry with a questionable future. The switch to digital technologies in printing and photography during the 1990s, for example, meant that companies using the latest tools were considered a solid investment. In most cases, the seller of a digital photo lab or printing service had no trouble finding willing buyers when he decided to sell a promissory note secured by the business. That's not what happened for those who sold companies still heavily invested in older technologies and methods.
- Assets of the business: The type of collateral used to secure a seller carry back loan also is an important factor when investors are offered a note the seller received as part of her business deal. A former ad agency owner offering to sell her note will find it challenging to find a buyer willing to pay close to its face value. The capital assets securing the obligation--mostly office furnishings and equipment--won't bring much money, should the creditor take possession following default. More appealing will be a note on, for example, an auto repair garage with car hoists and expensive computer operated diagnostic equipment as security
- Deal structure: There are many ways to fund the sale of a business. And when more than one lender is involved, the investor being asked to replace one of the creditors by purchasing a promissory note wants to know who else is collecting from the debtor, and which creditor has the primary position. With an SBA-backed lender in the deal, for example, any other credits involved will likely be in a secondary position. Depending on deal structure, some sellers may not see the first nickel paid on their promissory note until the entire debt to the prime lender is satisfied. Other arrangements might allow the seller to collect interest only for awhile, and may require a seller to turn over to the institutional lender, any payments received from the borrower. Clearly, deal structure significantly impacts the value of a seller's carry-back note should he want to sell it.
- The buyer of the note should be selected carefully. Who is promising the cash in return for a promissory note is just as important in how much they are offering. As carry-back notes are typically purchased by private investors--a market not regulated--there is a risk that sellers will become unpleasantly surprised when realizing the full consequences of their arrangements to cash in their notes.
An important BizBuyFinancing service, counseling owner/seller clients interested in converting their carry-back notes to cash, is most effective when we're involved early in the process. Getting BizBuyFinancing advice at the point when the business sales agreement is written can insure that the note will yield the most value if it is to be sold many months later.
And the assistance we've provided over the past 20 years for those involved in seller carry note refinancing programs
extends to choice of the investor and the terms of the note sale. We've connected hundreds of sellers with reputable investors, enabling clients to receive the cash they seek without bearing further responsibility for performance on the debt