The note you carried when you sold your business can be sold, and it is priced differently from a real estate note. A buyer is relying on a business that someone else now runs, so the discount is deeper and fewer buyers bid. What secures the note does more to set the price than anything else about it.
What you are holding
When you sold the business, the buyer paid part of the price in cash and promised to pay the rest over time. That promise is a promissory note, and the arrangement is often called seller carryback or “carrying paper”. It made you the lender.
A real estate note is backed by a house or land that will still be standing if the payer fails. A business note is backed by the business: its equipment, stock and customer list, and the new owner’s ability to run it. If the business fails, most of that value goes with it, and this is the main reason business notes sell for less.
What secures the note
Security, or collateral, is what a lender can claim if the payer defaults. Find the closing file from the sale of the business and see which of these it contains.
| What you may hold | What it is | Effect on price |
|---|---|---|
| Security agreement | A contract giving you a claim on the business assets | Buyers will look for one |
| UCC financing statement | A public filing that puts other lenders on notice of your claim | Raises it, if it was filed and is still in force |
| Personal guarantee | The new owner’s personal promise to pay if the business cannot | Raises it, more so if the guarantor has assets |
| Lien on real estate | A mortgage or deed of trust on the business premises or another property | Raises it the most |
| Nothing but the note | An unsecured promise | Lowers it sharply, and some buyers will decline |
A financing statement filed under the Uniform Commercial Code can lapse if it is not continued, and the timing depends on the rules that apply to yours. Ask the attorney who handled the closing whether it is still effective. If your note has no collateral at all, read whether you can sell a business note with no real estate behind it before going further.
What a buyer will want to know
The first question is how long the new owner has been paying. Seasoning is the record of payments made since the note began, and on a business note it shows that the company survived the change of ownership. A note only a few months old has not shown that yet, which makes it hard to sell.
The down payment comes next. A large one means the new owner has their own money at risk and more reason to keep going. The buyer will also want to see whether the business is making money, so expect a request for recent financial statements. Those may need the new owner’s cooperation.
Then there is the question of who else has lent to the business. If the new owner also borrowed from a bank, check whether the bank took first claim on the assets. If it did, your note is subordinated, meaning it is paid after the bank, and the subordination agreement you signed may restrict payments to you or limit your right to sell.
Finally the buyer looks at how much term is left and what kind of business it is. Fewer remaining years means fewer years in which the business could fail. A company with equipment, premises and steady customers is easier to lend against than one that depends on the owner’s personal relationships.
Why the price is lower than on a real estate note
A note buyer starts from the return they want on the money they pay you. The more risk they see, the more return they require, and a higher required return means a lower price for the same payments.
With a house, the buyer can order a valuation and know roughly what stands behind the note. A business can lose value in a single season, and the buyer cannot easily step in and run it, so they ask for more return. We do not quote a typical figure because it varies too much from one business note to the next, though what raises and lowers the price of a business note stays much the same from deal to deal.
The pool of buyers is smaller as well, because some note buyers purchase only paper secured by real estate. With few bidders, offers can sit far apart, which is a reason to hear more than one before accepting any. If you send us the details of the note, we will tell you plainly whether it is one we can place with buyers of business paper, and if keeping it or taking a payoff from the payer looks better than the offers, you will hear that from us too.
Limits on selling in your own documents
Read the note, the purchase agreement and any non-compete or consulting agreement signed at the sale, looking for the following.
- A right of setoff. This lets the new owner reduce payments on the note if they have a claim against you, for example that something you stated about the business was untrue. Buyers price that risk.
- A restriction on assignment. Some notes need the payer’s consent before they can be transferred.
- An earn-out. If part of what you are owed depends on how the business performs, that part is not a fixed payment and is much harder to sell.
What your documents allow is a question for an attorney, and it is worth asking before you approach buyers.
Two ways to keep more of the value
One is to sell part of the note. A partial on a business note is the sale of a set number of upcoming payments, with the remainder returning to you afterwards. The buyer is exposed for a shorter time, so a buyer who will not take a whole business note may take a slice of one, though you still depend on the business lasting.
The other is to ask the payer. The person with the most reason to pay a fair price for your note is the one who owes it. A new owner who can now borrow from a bank may be willing to pay the note off early, perhaps for a modest reduction, and that can beat an outside offer.
When holding on makes more sense
If the business is doing well, the new owner pays on time, only a few years remain and you do not need the money, there is little a sale can give you that the note will not. You also know the business better than any outside buyer can. Sell when you need the cash, when you see the business weakening, or when you want the sale of your company to be finished in every sense. The first two are common to the other situations in which note holders sell, and the third belongs to former business owners alone.
Tax is part of the decision. How the proceeds are treated depends on how the original sale was reported and on your own position, and selling the note can change the timing of what you owe. Check with your CPA before you accept an offer.
Start with the closing binder
Pull out the note, the security agreement, proof of the UCC filing, any personal guarantee and your payment record, and ask the new owner informally whether an early payoff interests them. Their answer is useful either way. A yes gives you a figure to set beside any outside offer, and a no tells you the price will have to come from a buyer who knows the business less well than you do.
Related questions
Does the new owner of my business have to agree before I sell the note?
Only if your note or sale agreement says so. Some business notes restrict assignment or need consent, so read the documents. A buyer may still want the owner's cooperation, because the business's financial statements come from them.
Can I sell a business note that is behind a bank loan?
Sometimes. A note paid after a bank is riskier, so fewer buyers bid and the price is lower. The subordination agreement you signed may also limit your right to transfer the note, so check it first.
What happens to my note if the business is sold again?
It depends on what the note says. Some require payoff when the business changes hands, and others let a new owner take over the payments with your consent. Your attorney can tell you which kind you hold.