Should I sell my note? 1.2M @ 8.5% for 4.5 yrs

Question

Hi bigger pocket,Hope someone can help with insights on the situation. I sold my precious business for 1.5M seller carry. Buyer made the down payment and is keep making monthly payment. Remaining balance is 1.2M payable for 4.5 years @ 8.5% interest, 20k minimum. The business itself is generating 20-40k per month. Buyer had 40 employees and is in the same industry. No inventory. Asset sold was mainly transfer of client list and contracts.Does it make sense for me to seek out a note purchaser? And what discount should I expect? Should I be looking for selling all or a portion of the note?

Main motivation is to use the cash for bigger investments like MHP/MF building purchases. Not in any hurry. But is looking to sell at the right discount. TIA

AJ Wong · Answer

You could explore a private note sale but without hard collateral it could be difficult and would come with a discounted buy out. I would suggest approaching the borrower on an accelerated pay out with an incentive. Maybe half upfront and reduce the rate of interest on the balance..

Tracy Z. Rewey · Answer

As @Chris Seveney there are lots of buyers for the real estate backed notes but fewer for the business only notes (without real estate as collateral).  We have worked with a business note buyer over the years and the yields are in teens.  The underwriting is also very tight.  Here are some general guidelines:

Lien Position

• 1st Position Lien

Equity

• Minimum Down Payment of 20-25% (a 30% equity to sale price is preferred)
• Down Payment made in certified funds and not borrowed
• Maximum Funding of 70% ITV (Investment to Value)

Seasoning

• Minimum of two monthly payments already made
• 12 months or more preferred

Payer Credit

• Credit Score of 650 or higher
• No major derogatory trade lines (No 90-180+ days delinquent, foreclosure, repossession, bankruptcy, etc.)
• No decline in credit since purchase of business

Terms

• Prefer 60 months or less
• Maximum of 72 months
• No Balloon Payment preferred

Cash Flow

• Business has positive cash flow
• 1.25 debt service coverage ratio preferred.

Documentation

• Personal guarantee from a creditworthy individual
• Standard documents including Note, Security Agreement, and UCC-1 filing.
• Tax Returns on the business that substantiate profit and loss statements.

Other

• Payment history current and verifiable
• Payer Interview indicating buyer is satisfied with business and comfortable making payments
• Motivation for selling the note is not a result of a deteriorating business
• Consideration of high risk businesses or geographic areas

In these situations, sometimes a partial is a better option.  The discount on the full hurts!

Andy Wang · Answer

Thanks Chris! The intention of this post was more towards asking a question rather than trying to find a note purchaser because I just started SFH and MHP investing not long ago and figured biggerpocket might be a proper place to post this question lol. Based on the comments received thus far I think it's prob make the most sense to hold on to the note. Thanks everyone for responding!

Ronald L Winter · Answer

Food For thought.  If your trying to redeploy your capital,  do you think that you can get more than 8.5% through other projects and could you do that more than once during that 4.5 years?  If you don't want to finance the other projects then you should consider your opportunity costs.   If this were a Real Estate secured note,  a note broker or flipper might offer you up to about 65% of the remaining balance whereas an investor who is building passive income streams week offer up to about 90%.  The reality is though... your only going to be making about $500k on the outstanding principle. Figuring for future value your going to lose about $200k of that future value.

But holding the note and keeping the cashflow if about $30k /month you can use that asset to leverage and fund the new opportunities if you get in for about $1M, and the rate is at least 2 points below your note.  With that much cashflow, you could probably secure 10 or more SFH or 5-6 Duplex...Quadplex.... Or maybe even an apartment complex 20-50 units

Scott Trench · Answer

I'd bet that this note is worth more to you than to most buyers until the note is much lower LTV, but I'm a novice in this space. Following - interesting topic!

Chris Seveney · Answer

Question 1:

What is the security behind the note? Is it just the business with client list and contracts? If its the business then asset based lenders may be interested. Questions they will have is who is the owner, what experience do they have, is their key person insurance against them etc.

Biggerpockets probably not the place to find someone to buy a note against a business as most of us are only real estate.

Real estate notes is a completely different story.

Should I sell my note? 1.2M @ 8.5% for 4.5 yrs

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