Business Notes With Private Financing Solutions

My first business notes will always be fondly remembered. I helped a friend of mine solve a problem with the sale of his relatively new business with private financing. This business was so new it didn't even have its first client yet!

He and his wife had done all that needed to be done to the physical property. They were poised to begin building a client base when a medical emergency changed their plans. Instead of beginning to grow the business, it made much more sense to capitalize on what the business could do for them right now, and that was to create spendable cash for many years to come.

The business is a personal care home that is contained within a beautifully decorated single family house in an upscale neighborhood. When I break this down, you will truly appreciate how incredible promissory notes are for creating cash value.

The home and the business were actually sold separately. Appraised and sold at $225,000, the home was financed through a traditional lender. The business value was established at $70,000. Furnishings were associated with the business, all of the marketing materials, business licenses and permits, and a web site made up the business.

Noticeably absent in this business case was cash flow, income, and profits. This is an example "intrinsic value", or the unique value associated with the business. Even though cash flow had not yet been established, just a few clients will put this whole thing over the top. That emphasizes how important all of the preparation and due diligence is towards the actual creation of a $70,000 promissory note for a business.

The first payment did not begin for ninety days. This allowed time for the clients that were actually lining up to move in to be processed and admitted to the facility. The new buyer's would hit the ground running. They were also fortunate to have a waiting list at several of their other properties to draw from as well.

Since the buyer provided a 10% down payment for the home purchase, the seller was willing to accept only $5,000 down for the purchase of the business. The balance due of $65,000 was financed with a business note at 10% interest for ten years.

The result was a created cash flow of about $860 per month for ten years! One hundred twenty payments of $860 equals more than $103,000! Don't forget the $5,000 down payment. This deal created more than $108,000. This is a great example of the creative power of paper!

Let's talk about the private financing returns. The seller's returns are infinite because they literally created the $70,000 value and put it on paper! OK, the return on the contract amount of $70,000 over the life of the agreement is about 154% ($108,000/$70,000).

Infinite is a more appropriate return because the value of the note was created and then put to work at an above market interest rate for ten years. That my friend is created money working for you! You might know it as "passive income".

By the way, most business notes are commonly regarded as IOU's. They are typically not very secure. That was not the case here. We structured the note with a "personal guarantee" and second position liens were placed on the buyer's other properties that had enough equity to fully guarantee the note!

The most important thing is the fact the buyer and the seller were very happy with the terms of the deal. It was a newly created business note that resulted in a win-win situation for the seller and the buyer.