A business owner may click here or there trying to figure out whether to take a note in addition to or instead of cash for the sale of their business. A business note is a contract between two parties for payment on the sale of a business. A business note does come with some risks. One risk is that the business owner who accepts the business note may get stuck with it. However, there are ways to reduce the
The Seller Knows with a Business Note there Confident in the Business
When a business owner offers a business note during a sale, a seller should take note (no pun included). This shows the buyer is confident the current owner is confident about the company’s future. In other words, they know that under new ownership, the business will succeed.
The Seller Needs to Scrutinize Buyers Wanting the Business
To reduce the risk of things going bad with a business note, scrutinize the buyer. For instance, run the credit check to determine if they can make good on the business note. Ask if the buyer has other assets. If the buyer has other assets, the seller can request the buyer pledge their assets as collateral to secure the business note. Determine the buyer really has the temperament and skills necessary to make the business a success. This means if they don’t, there is a chance of the business closing.
Seller Should Require the Buyer Complete Certain Tasks
A couple things a seller should think about prior to accepting a business note is requiring the buyer to create a safety net for the business. The financial safety net will help ensure the business doesn’t close prior to the business note being paid. These safety net includes a loan covenant like having a certain amount of working capital always on hand. Another safety net is having a networth, so they can maintain the business.
Create a Seller Contingency Plan
A seller should have a contingency plan for taking back the business. This contingency plan should be put into motion only if the buyer can’t make the business a success. The buyer should be aware of this contingency plan, so it does not cause any disruption during the sale. If worse comes to worst, the seller can save themselves a lot of money and headache.
Things to Consider with a Business Note
Any business owner accepting a business note should get a lot of the cash up front. It is important to get funds up front when selling a business. Also, know that a business note can be sold to another company for cash at any time the business owner starts to feel like a banker with a loan. Companies are available who will pay for business notes. This helps the business owner accepting the note move on to their next venture with the money from the prior business.