If you plan to sell your business using owner financing, it's important to follow certain criteria, in case you decide to sell the note later.

Carrying a business note lets you cast a wider net when promoting the sale of your company-not to mention have more control over the financial terms of the deal. It enables you to collect regular payments from buyers who may not want or be able to complete a cash purchase. Carry-back seller financing, as it's often called, is quite popular in the United States. In fact, nearly 85 percent of all business sales involve business notes, representing literally millions of dollars.

Creating a Marketable Business Note

After the sale of your company is completed, you can opt to sell your business note at a discount for a lump sum of cash. But to do so, your note must adhere to certain underwriting criteria or it will be worthless in the market. First, it's important that the new owner of your business make a cash down payment of at least 33 percent-using unborrowed funds. Having a significant amount of their own money invested will make it more difficult for the buyer to "walk away" from the business later. If the down payment is less than 33 percent, the company that you sell your business note to will require the difference to be made up by additional payments on the note.

Next, your note must hold a first-lien position. If you were to sell the business note with a second-lien position, it would make it more difficult to recover the investment if a default occurs. However, default will be less of a concern, if the criterion of having a credit score of at least 625 is met. Additionally the note must be personally guaranteed by the incoming buyer of your business-not guaranteed by the buyer's company. Therefore, the buyer should provide a personal financial statement to verify that appropriate assets are available to fulfill the personal guarantee.

In the same vein, the cash flow of the business must be adequate to service the note and provide additional cash for the new owner to live on. Cash flow should be at least 1.25 times the amount of the monthly payment on the business note. And the business should have been in the same location for at least three years, and it should have been profitable over that time. Likewise, the new owner of the business should have prior experience running the type of business being purchased. A buyer coming in with greater expertise will have a better chance of succeeding.

You should also keep the term of the note to 36 to 60 months, with 72 months being the limit. If you create a longer business note, the note purchaser will only buy payments beyond a certain point. The longer the term, the greater the chance that something will go wrong.

Also, your business note should be fully amortized over its term. In other words, there should not be a balloon payment at the end because of the unlikelihood of being able to refinance the balloon at the end of the note term. However, a balloon payment isn't necessarily a "deal-breaker." Some business note buyers may accept a balloon if it can be amortized within 24 months using the same monthly payment used to pay the note. Others may buy payments up to a few months before the note term ends, but leave you holding the balloon.

The interest rate is another significant factor when selling business notes. The interest rate should be set as high as possible while still allowing cash flow that can support the required payment for the term of the note.

Additionally, keep in mind that will be difficult to sell a business note for more than $450,000. You can create a note for more, but potential business note buyers won't purchase more than their maximum at one time. However, you could sell more than the maximum amount through a separate contract.

Completing the Proper Paperwork

As a final step to selling a business note, you must ensure you have the proper paperwork completed. Primarily, you (preferably your attorney) should prepare the following: a UCC-1, a "chattel security agreement" or chattel mortgage, a promissory note and a purchase agreement. Here are more details about each of these documents:

UCC-1: The UCC-1 documents that the seller is holding a "perfected" lien on the business. It shows that the seller has sold the business and has carried the financing. The UCC-1, which is filed with county government and becomes part of the public record, is evidence of the seller's position as a secured party. And in case of a default, it indicates that the business seller will be first (after tax liens) to receive proceeds from the sale of any business assets.

Chattel security agreement: This document provides a list of the tangible assets of the business like furniture, fixtures, and equipment. The agreement, which doesn't become part of the public record, simply documents what the tangible assets are at the time of the business sale.

Promissory note: The promissory note discloses the details of the sale of your business note, such as the value of the note, the term of the note, the monthly payment, the interest rate, and any other special terms.

Purchase agreement: This agreement ties the entire transaction together and may specify additional information not contained elsewhere. For example, there could be a requirement to provide periodic financial statements, which could then be made available to a prospective note buyer for evaluation purposes.

Selling Business Notes...a Smooth Process

Once you proceed to sell a business note, you can expect the transaction to be a smooth one-assuming you have created a "saleable" note. Experienced note buyers make the process easy to initiate by handling the costs of the credit report, appraisal, UCC-1's and many other expenses. They typically don't charge you any up-front fees.

The note buyers will examine the terms, degree of risk and other factors for each note offered for purchase. Often, they will quote a fixed percentage of the remaining balance of the note. However, you could also sell a certain number of the beginning payments on the note or a select number of the final payments on the note. Typically, the note buying process takes about four weeks to complete. You should receive the proceeds from the sale within several weeks.