Yes, it can be sold, though to a smaller group of buyers and at a larger discount than a real estate note would bring. The buyer is relying on the business and its owner, so the price follows how well the business is doing.
What stands behind the note
When you sold your business and carried a note for part of the price, the buyer signed a promissory note. With no building or land in the sale, the note is backed by some mix of other things. There may be a security agreement over business assets such as equipment, inventory, receivables and sometimes the name and customer list, paired with a public filing that gives notice of your claim. There may be a personal guarantee, in which the new owner promises to pay personally if the company does not. Or there may be the promise alone, in which case the note is fully unsecured.
Which of these you hold changes who will bid, because secured and unsecured notes go to different buyers.
Why business collateral counts for less
Of all the types of note, the easiest for a buyer to price is one backed by a house, which can be valued, insured and resold. Business assets are harder on each count. Equipment loses value with use, and inventory is sold in the ordinary course of trade. Goodwill, the value of the name and the customer relationships, tends to vanish if the business fails, which is exactly when a lender would need it. A bank that financed the purchase may also hold a claim ranking ahead of yours.
A note buyer therefore treats business collateral as a partial backstop and concentrates on whether the business will keep producing enough cash to make the payment.
What a buyer looks at
| Subject | What it tells the buyer |
|---|---|
| How long the new owner has been paying | A new owner is still learning the business in the period after a sale, so a long on-time record, called seasoning, is the strongest evidence you can offer |
| The down payment on the business | A large one means the owner has their own money at risk |
| The business’s finances | Recent tax returns or financial statements show whether the payment is affordable, if the owner will share them |
| The owner’s credit and assets | These matter most where there is a personal guarantee |
| The type of business | Equipment, licenses or a location that hold value read better than dependence on one person’s skill |
| The remaining term | A shorter one is easier to sell |
How the price compares
Buyers set a price from the return they need for the risk. Business notes carry more uncertainty than real estate notes, so that return is higher and the price lower for the same stream of payments. By how much depends on the rows above. A well-seasoned note from a profitable business with a solid guarantor can attract real interest, and a recent note from a struggling business may attract none. To learn which end yours is nearer, send us the note details with your payment record, and we will tell you whether we expect buyers to bid.
A partial may suit a business note
In a partial purchase you sell a set number of upcoming payments and keep the rest. The buyer is exposed for a few years only, so a note that would not sell outright may still draw a partial bid, and you give up less of it. Whether a partial on a business note is on offer depends on the payment record and the business.
Before you sell
Find the security agreement first. That document, and the proof it was filed, settles whether a buyer sees your note as secured. Keep it with the note, any personal guarantee, the purchase agreement and your payment record.
Then read the sale documents, or have an attorney read them. A purchase agreement can limit assignment of the note or tie it to other terms, such as a non-compete or a consulting arrangement. Speak to your CPA before you commit, since selling a note that came from a business sale can have tax consequences. And ask the attorney whether your lien filing is still current, because a filing on business assets can lapse if it is not renewed, and a lapsed one is far easier to deal with before a buyer’s search turns it up.
Related questions
Does the new owner of my business have to agree to the sale of the note?
That depends on your purchase agreement and note. Some sale documents restrict assignment, so have an attorney read yours. Expect a buyer to contact the owner to confirm the balance and terms.
How soon after selling my business can I sell the note?
You can ask at any time, but buyers want to see that the new owner can run the business and make the payments. A note with very little payment history is hard to place, and a longer record generally improves the offers.
What if the business is struggling?
Tell us. A buyer will find out when they review the financials, and it will affect whether they bid. In that case, talking to the owner about a restructure or an early payoff may serve you better than a sale.