A partial can be done on a business note, and a buyer has a reason to prefer one: the risk in a single business grows with every year added, so a few years of payments are easier to price than the whole note. Whether one is available depends on what secures the note and how the business is doing.
If you sold a business and carried part of the price as a note, you hold a business note. It behaves differently from a note secured by a house, and so does a partial on it. The sections here cover what changes from the standard arrangement in the partial purchases guide.
What makes a business note different
A real estate note is backed by a property that will still be standing if the payer stops paying. A business note is backed by the business: its equipment, stock, receivables and goodwill, sometimes with a personal guarantee from the buyer of the business, and sometimes with real estate as well. A personal guarantee is the owner’s own promise to pay if the business cannot.
If the business fails, much of what secured the note loses value at the same moment the payments stop. Anyone pricing business notes starts from that fact, and it explains the rest of this page.
Why a partial suits a business note
Buyers price by yield. The less certain the payments, the higher the return they ask for on their money and the lower the price. Uncertainty grows with time. A buyer can form a view on whether a business will keep paying for the next two or three years, and forming a view on year eight is much harder.
So the further out the payments go, the more heavily a buyer discounts them, and on a business note that effect is stronger than on a real estate note. A full sale asks the buyer to take every year of risk, and they charge most for the years they trust least. A partial sells only the near years. You keep the later payments, and having run the business, you are better placed than a stranger to judge whether it will make them.
We have not put figures on this. The example used elsewhere on this site is a real estate note, and its numbers do not carry over.
What a buyer looks at
| Factor | Helps the price | Hurts the price |
|---|---|---|
| Security | Real estate, or a recorded lien on business assets plus a personal guarantee | Nothing securing the note |
| Down payment | The buyer of the business put in a large share of the price | Little or nothing down |
| Payment record | A long run of on-time payments | A new note, or late payments |
| The business | Established, with financial statements that show it covers the payment easily | No financials, falling sales, or dependence on one customer |
| The owner | Experience in the trade and good personal credit | A first-time owner with thin credit |
| Other debt | Your note is the only debt, or ranks first | A bank loan ranks ahead of your note |
A lien on business assets is commonly put on record through a filing with the state, separate from the county land records where a mortgage is recorded. If you are not sure whether yours was filed, or whether it is still in force, find out before you ask for a price. A filing can lapse if it is not renewed, and the rules differ by state, so have an attorney check it.
Before you ask for a price
Whether a bank financed part of the sale
Where a bank lent the payer part of the purchase price, your note may rank behind the bank’s loan. The bank may also have had you sign an agreement limiting what you can do with your note, including whether you can collect on it or transfer it. Read what you signed at the sale, or have an attorney read it, before you ask for offers. A restriction of that kind can limit or rule out a sale of any size.
The tax effect
Income from a note taken in the sale of a business may be reported over the years the payments arrive, depending on how the sale was set up. Selling part of the note may change when that income is recognized. The treatment turns on the structure of your sale and on your own position, so speak to a CPA before you agree to a partial.
How the partial itself changes
It is shorter
A buyer who is cautious about the later years of a business will want a short commitment, and the length they will accept is theirs to set. Ask each buyer the longest period they will consider.
The check on the file is different
There is no house to value. The buyer will ask for the purchase agreement from the sale of the business, the note, the security agreement, any personal guarantee, proof that the lien was filed, the payment record, and recent financial statements or tax returns for the business if you can get them.
The pool of buyers is smaller
Valuing a house and valuing a business are different skills, and a buyer set up for the first may not look at a business note at all. Among those who do, some will not split one. That makes it worth the effort to put the note in front of several.
What to add to the agreement
Everything in what to look for in a partial purchase agreement applies. A business note adds the following.
- Default, in practical terms. Enforcing against a business means taking and selling equipment and stock, or pursuing a guarantor. The agreement should say who decides, who pays, and how anything recovered is divided.
- Your right to step in. You know the business. If it runs into trouble, you may be the only party able to take it back or find a new operator. A right to buy the partial back, at a price set by formula, is worth more here than on a real estate note.
- A sale of the business. If the payer sells the business, the note is either paid off or taken over by the new owner, depending on its terms. The agreement should cover both, including how a payoff is split.
- Your own obligations. If you agreed to a non-compete, a training period or a consulting role when you sold, the payer may try to hold back payments if they claim you broke it. A buyer will ask about this, and you should answer accurately.
When a partial is not available
Some business notes cannot be sold in part, and some cannot be sold at all. The hardest case is a business note with no real estate behind it, from a struggling business with no payment record, which is hard to place with anyone. If yours fits that description, the useful course may be to keep collecting and look again after another year of payments, when there is a record for a buyer to read.
The papers to gather
A business note cannot be assessed from its balance and payment alone, so collect the file first: the agreement from the sale of the business, the note, the security agreement and any personal guarantee, proof of the lien filing, and the payment record. Then send us the details. The first thing we can tell you is whether buyers are likely to look at the note. If they are, we ask for prices on a partial and on the whole note, which is the comparison at the center of selling the note from the sale of your business.
Related questions
Can I do a partial on an unsecured business note?
It is difficult. With nothing securing the note, a buyer relies only on the business continuing to pay, which is hard to price. A strong payment record and a personal guarantee improve the chances.
Does the buyer of my business need to approve a partial?
A partial leaves their terms unchanged, so the answer lies in your documents. Check your note and sale agreement for any clause restricting transfer, and ask an attorney if you find one.
Will a buyer want to see the business's financial statements?
Expect to be asked. The payments come from the business, so its financial health is central to the price. If your sale agreement gives you a right to those statements, request them before you ask for offers.