Brokering Business Notes: What It Takes to Place One

Brokering a business note means taking a note created in the sale of a company, working out what buyers will actually pay for it, and putting it in front of the buyers most likely to bid. Business notes are harder to place than real estate notes, because there is often no property behind them. A broker earns their keep here by gathering the right file, setting honest expectations on price, and structuring the deal so a buyer can say yes.

What a business note is, from a broker’s chair

When an owner sells a business and the buyer cannot or will not pay the full price up front, the seller often carries part of it as a promissory note. The buyer pays monthly, usually over three to seven years. That is a business note, sometimes called a seller carryback note.

For the full background on how these notes are set up and what they are worth to a seller, see our guide to business notes. If you are the owner who sold and want to know your options, start with selling the note from the sale of your business. This post looks at the same notes from the broker’s side of the table.

Why business notes are harder to place

With a real estate note, a buyer’s fallback is the property. If the payer stops paying, the note owner can foreclose and recover value from the house or land. With a business note, the fallback is weaker and messier:

• The collateral moves. Inventory gets sold, equipment wears out, receivables turn over. A pledge of business assets is worth what those assets are worth on the day of default, which may be little.
• The business depends on the new owner. If the buyer runs the company badly, both the payments and the collateral suffer at the same time.
• Information is thin. There is no appraisal of a house to lean on. The note buyer has to judge a small private company.
• Fewer buyers. Many note investors only buy real estate paper. The pool for business notes is smaller and pickier.

The result is higher discount rates and more declined deals. A broker who tells a seller otherwise is setting up a disappointment later.

What a broker gathers before shopping the note

A business note with a thin file will draw low bids or none. Before contacting a single buyer, a good broker assembles:

1. The note itself, with the rate, term, payment, late fees and any balloon.
2. The purchase agreement for the business, showing the price, down payment and what was sold.
3. The security agreement and UCC filing, if the note is secured by business assets, to confirm the lien was actually perfected.
4. Any personal guarantee from the buyer, and ideally their personal credit.
5. Any real estate pledged as extra security, with a recorded mortgage or deed of trust.
6. Payment history since the sale, ideally from a servicer or bank records.
7. Current financials for the business, such as recent tax returns or profit and loss statements, if the payer will share them.

Our guide on how to package a note for buyers covers the general approach. On business notes, the guarantee, the UCC filing and the payment history do most of the work.

How buyers price a business note

Buyers price business notes the same way as any note: they pick a yield, the annual return they want, and discount the remaining payments to a present value at that rate. The higher the yield they need, the lower the price.

Here is an illustrative example. Say a seller carried a $200,000 note at 8% over five years. The payer owes 60 monthly payments of about $4,055:

Which row applies depends on the file. A note with a strong personal guarantee, a year of on-time payments and real estate as additional collateral will draw bids near the top of the table. An unsecured note from a new owner with no track record may draw bids at the bottom, or none. For a full walk-through of the math, see how note buyers calculate a price, yield and discount.

Structures that help a business note sell

Partials

A partial purchase means the buyer purchases only a set number of upcoming payments, and the rest go back to the seller. On a business note, that matters more than usual. Buyers are much more comfortable with the next two years of a business’s payments than with the last two.

In the example above, a buyer at 15% might pay about $83,600 for just the next 24 payments. The seller gets cash now and keeps the remaining 36 payments. Our guide to partials on business notes goes into how these are set up.

Added security

If the payer owns real estate, a mortgage on it can move a note from hard to place to readily bid. Sometimes a payer will agree to add one, or to sign a personal guarantee, in exchange for something they value, such as a small rate reduction. It does not always work, but it is worth asking.

Seasoning

A note with 6 to 12 months of on-time payments is easier to place than a brand-new one. If the seller is not in a hurry, waiting can improve the price more than any negotiation.

Deal killers to spot early

• No UCC filing, or one filed in the wrong state or name.
• A note that cannot be assigned, or that requires the payer’s consent.
• Late payments with no explanation.
• A payer business in visible trouble: lost key customers, lawsuits, unpaid taxes.
• A balloon payment the payer has no realistic way to refinance.
• Conflicting documents, such as a note that does not match the purchase agreement.

Finding these first saves everyone time. Sometimes the honest answer is that the note is worth more held than sold, at least for now.

Where the broker fits

A broker does not set the buyer’s yield. What a broker can do is make sure the note is seen by buyers who actually purchase business paper, present the file so the strengths are obvious, and bring back more than one bid, including a partial option where it fits. For how brokers are compensated and how that affects the seller’s net, see how note brokers are paid.

Note Brokering prices private real estate and business notes, and this is the work we do on business notes: assemble the file, show the math, and put competing options in front of the seller.

Bottom line

Business notes can be sold, but they take more work than real estate notes and usually sell at deeper discounts. The price comes down to the payer, the guarantee, the collateral and the payment history. Build the file first, consider a partial, and get more than one bid. If you hold a note from the sale of a business, you can have it priced and see exactly how the number was reached.