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A Tale of Two Business Notes – Which One Would You Buy?

Hey . . .  I really should just be wishing everyone a Merry Christmas, or Happy Hanukkah, or some other politically correct thing (and I just might if I come back to my senses by the end of the post) but it’s been kinda odd lately.

I’ve had more business notes cross my desk in the last month than in the last three years . . . kinda Twilight Zone-ish.

Which reminds me that people selling businesses (and the professionals who advise them) need just as much help at the point of sale as people selling real estate.

So here are two business notes to consider . . . you tell me which one you’d rather buy:

Landscaping supply business

  • Sales price:  $453,193
  • Down payment: $40,000 (borrowed funds)
  • Note amount:  $413,193
  • Amortized over: 120 (10 years)
  • Interest rate: 4.5%
  • Seasoning:  18 months
  • Note balance:  $365,315

Whaddaya think?  So get out your calculators . . . crunch, crunch, crunch, salivate, salivate, salivate . . . wait . . . if you even picked up your calculator at all, then you’re wasting your time.gorilla

What jumps out at you like a gorilla at a tea party? 

Of course!  The down payment!  It was pathetically small for a business (should be somewhere between 25-40%), and even then, it was borrowed!!!  The buyer has very little ‘skin in the game.’  Plus, it’s a real estate related business . . .

No thanks, I’ll pass.

Ready mix cement business

  • Sales price:  $800,000
  • Down payment: $300,000 (cash)
  • Note amount:  $500,000
  • Amortized over: 120 (10 years)
  • Interest rate: 5.25%
  • Seasoning:  45 months
  • Note balance:  $345,965

OK . . . this looks a little better, but there’s some things I don’t like:

  1. low interest rate
  2. amortized over 10 years (5-6 is good)
  3. a corporation signed the note and there is no personal guarantee by any of the corporate members

But there are some things that make up for it:

  1. strong cash down payment
  2. almost 4 years of seasoning
  3. low note-balance-to-value (43.2%)

So, yeah, this is probably something that I can at least quote for a partial (don’t want to be on the hook for any more than the next 48 months, and even that’s stretching it).

So now that you’ve endured this riveting tale, let me take this opportunity to wish you and yours the simple goodness of life at this holiday season:  a warm fire, good food, good health, a hot cup of tea in your hands, and lots and lots of laughter with family and friends.

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