Re: notes on sales of businesses - Posted by Ed Lisogar
Posted by Ed Lisogar on November 07, 2000 at 15:44:51:
There are a variety of factors that dictate how ANY seller financed note should be structured. One of the most important aspects in a business note is how much the business can afford in debt service each month. A note is just a default in the making if the note payments are taxing the business. Conversely you don’t want to do anything silly like a long amortization as the discount will be huge. So we need to find a middle ground. Typically, best case scenario is about 5 years fully amortized, at AT LEAST a % or two ABOVE what the prevailing business loan rates are. Why? Because if a seller is going to “be the bank”, he should be making a good return on his money. If a buyer balks then tell him to get traditional financing and cash the seller out. Too many times we see the BUYER in control, when it should be the other way around. Unfortunately sellers don’t want to “upset” a buyer and risk having him walk from the sale. The result are horrendously structured notes…6%, fully amortized 20 years, etc., etc. They get the business sold but then find that they created a note that is terribly unattractive to companies like ours that buy business and corporate notes (Incidentally we WILL buy unseasoned and notes with corporate g’tees only as long as the investment exceeds $100,000). The last item to keep in mind is to stay away from balloon payments if at all possible. There’s little financing available for the purchase of businesses which is why there is so much seller financing going on in this arena (close to 80%). If so, where will the Payor get the money to re-fi the balloon? Balloons on busness notes typically do not get paid which means the noteholder (us) will have two choices: Foreclose or give the Payor more time. No one wants to foreclose (who has time to run a tanning salon in Topeka, Kansas?) and if we give them more time our yield goes through the floor. This is why we generally quote the payments only when presented with a business note that has a balloon that exceeds about a 40% ITV.
If a buyer contributes the typically required equity (cash out of pocket) of at least 30%-40% down, the resulting debt service should be more than affordable. If not, then it’s a sure sign the business over sold.
For any assistance on anything you’re working on feel free to drop me a line personally by e-mail. WIth my travel schedule it’s the best way to stay in touch and get a quick response.
All the best!