When it is time to sell your business often the only way to make the sale happen is to carry back a financial note. To give you an idea let’s say you sold your business for $200,000. The buyer puts down $40,000 upfront. They are not able to find financing for the remaining one hundred and sixty thousand dollars. They try to qualify for bank financing or some other financing. Usually they are rejected. The only option to make the sale is for you to carry back a note for the remainder. So from our example you will be carrying back a note remaining $160,000. Carrying back a business note is often the difference between a sale and having to keep the business. Below we will discuss three things that you should keep in mind when writing up a business note to carry for the sale of the business.
1) Ask your lawyer and your accountant to review the financial note and be sure that you are covered legally and professional. Look upon the note as a large amount of cash that you are loaning to the buyer, you need to be sure you are well protected. Have them involved early in the creation of the business note.
2) Understand the details of the seller-own note, how much interest will be paid, when will payments be made, and how long is the note for. Do you need to file a UCC filing to lien against the loan? Have your lawyer help you with filing these liens. Another questions is what happens if there is a disaster such as a fire and the business is destroyed? Are you sure that you have an insurance policy to protect your asset. You may want to carry insurance yourself.
3) Lastly, create the financial note so that if you need a large lump sum payment you will be able to sell the note for cash. This makes sense to do this for 2 reasons: First, you are more likely to create a favorable business note for yourself. It is a business there is risk in selling the business. Second, the better terms of the business note the larger amount of cash you can receive when you sell it.
When creating a seller-own business notes be sure to protect yourself. Follow these three considerations when you have to create a business note.