Advice on Holding a Note for the Sale of my Business

[sym3try]

I am not sure that I am posting in the correct place, but here is my quandary:

I own a laundromat which I am interested in selling. I received some serious interest from a woman... however, she was fairly insistent that I be willing to "hold a note" for her. She wants to meet this Sunday to go over the specifics.

My questions are these:

How much should I look to receive as a down payment? (the purchase price is $100,000)

How much interest should I charge? How should it be compounded?

How long should the term of the note be?

What should I know going into holding a note for someone?

Should it worry me that she wants me to hold a note?

I know my questions are very open ended, but really any information on this topic would be greatly appreciated.

Thanks

 

[Antigone*]

I am not sure that I am posting in the correct place, but here is my quandary:

I own a laundromat which I am interested in selling. I received some serious interest from a woman... however, she was fairly insistent that I be willing to "hold a note" for her. She wants to meet this Sunday to go over the specifics.

My questions are these:

How much should I look to receive as a down payment? (the purchase price is $100,000)

How much interest should I charge? How should it be compounded?

How long should the term of the note be?

What should I know going into holding a note for someone?

Should it worry me that she wants me to hold a note?

I know my questions are very open ended, but really any information on this topic would be greatly appreciated.

Thanks

I'd totally walk away from that deal. You don't know who this woman is and you don't have anyway to really check out her background. Without checking out her back ground you don't really know what risk measurementto assign her and therefore, you'd be pulling an interest figure out of the air without any real way to match the risk and reward.

 

[Zigner]

Agreed -

And, to boil it down...if the bank won't lend her money, why should you?

 

[tranquility]

You need a book, not a web forum. Ask the questions of your accountant.

The main thing to consider is what will happen if they don't pay. Add to that that they can destroy the business and it's assets, you need a down payment high enough that can protect you during the time you foreclose on the note.

 

[sym3try]

Thank you for all your advice.

The woman in question owns another laundromat in my area, so I am slightly more inclined to work with her... that said, I am still very wary of exactly why she wants me to hold a note. She says that credit is not an issue and that she can get a bank loan, but would prefer if I could hold the note.

Under what circumstances would it be advisable to consider taking on that level of liability?

 

[Antigone*]

Thank you for all your advice.

The woman in question owns another laundromat in my area, so I am slightly more inclined to work with her... that said, I am still very wary of exactly why she wants me to hold a note. She says that credit is not an issue and that she can get a bank loan, but would prefer if I could hold the note.

Under what circumstances would it be advisable to consider taking on that level of liability?

We already told you that we don't recommend it, but hey if she is willing to put enough down and you feel comfortable with the thought of you not getting the rest, then go for it.

I can tell you that the bank I underwrite for won't touch a laudromat with a 50ft pole.

 

[CameronNewport]

You don't know who this woman is and you don't have anyway to really check out her background.

There's something very useful in these situations called a credit report.



Anyway, to answer the OP:

How much should I look to receive as a down payment? (the purchase price is $100,000)? That's up to you, but personally I would require at least 20%.

How much interest should I charge? How should it be compounded? Again, it's up to you how much interest to charge (though it must be within the legal limits). Something around 5-10% is likely appropriate, depending on the facts. The interest should not be compounded, however. Simple interest.

How long should the term of the note be? And again, that's up to you and how long you want to have the note. It could be 5 years or 50 years depending your preference (or any other period of time). Only you can decide.

What should I know going into holding a note for someone? You should know that the note should be secured by the business. If the buyer defaults on the note, then you can execute on the lien to get paid. If you don't secure the note, then you could be screwed if she stops paying (particularly if she files for bankruptcy).

Should it worry me that she wants me to hold a note? It's a business decision. There are risks. If she defaults then it could be a royal PITA to get your money (if you can get your money). On the other hand, it may be worth taking the risk if the buyer is willing to pay more than other buyers who do not need your financing. Or maybe there aren't other buyers at all, so it's her or nothing. In my opinion, it's not an ideal situation, but it's certainly not uncommon ... it's just one method to get the deal done.

 

[Antigone*]

There's something very useful in these situations called a credit report.



Anyway, to answer the OP:

How much should I look to receive as a down payment? (the purchase price is $100,000)? That's up to you, but personally I would require at least 20%.

How much interest should I charge? How should it be compounded? Again, it's up to you how much interest to charge (though it must be within the legal limits). Something around 5-10% is likely appropriate, depending on the facts. The interest should not be compounded, however. Simple interest.

How long should the term of the note be? And again, that's up to you and how long you want to have the note. It could be 5 years or 50 years depending your preference (or any other period of time). Only you can decide.

What should I know going into holding a note for someone? You should know that the note should be secured by the business. If the buyer defaults on the note, then you can execute on the lien to get paid. If you don't secure the note, then you could be screwed if she stops paying (particularly if she files for bankruptcy).

Should it worry me that she wants me to hold a note? It's a business decision. There are risks. If she defaults then it could be a royal PITA to get your money (if you can get your money). On the other hand, it may be worth taking the risk if the buyer is willing to pay more than other buyers who do not need your financing. Or maybe there aren't other buyers at all, so it's her or nothing. In my opinion, it's not an ideal situation, but it's certainly not uncommon ... it's just one method to get the deal done.

The OP does not have enough sophistication to be able to calculate if the buyers has a strong enough primary or secondary source of repayment ~ you don't get that from a credit report Cameron.

20% down is ridiculous. The OP will be left with nothing. Now if the 80% down is a different story on this kind of property and this kind of risk.

I could go on and on, but at the end of the day, Cameron, you have no clue.

 

[CameronNewport]

The OP does not have enough sophistication to be able to calculate if the buyers has a strong enough primary or secondary source of repayment ~ you don't get that from a credit report Cameron.

20% down is ridiculous. The OP will be left with nothing. Now if the 80% down is a different story on this kind of property and this kind of risk.

I could go on and on, but at the end of the day, Cameron, you have no clue.

I disagree with this entirely since you have no idea whether the OP can acquire enough information to make an informed decision. Moreover, you have no basis to say that 20% down is ridiculous.

 

[tranquility]

With CameronNewport's answer giving an interest range to charge, I decided to see what usury was in the OP's state. Which brings me to an astonishing fact, Zigner has posted here and even HE forgot the rules.

U.S. law only.

 

[sym3try]

Firstly, @Antigone why exactly won't the bank that you underwrite for touch a laundromat with a 50ft pole?? From my understanding, laundromats are comparatively stable business ventures... please explain.

Secondly, you may want to avoid insulting ones level of sophistication in the future. I am not very business savvy, but that said, I doubt you could accomplish even the most basic of my daily tasks in my area of expertise (software engineering, not laundromat ownership)... so try to be nice

 

[Zigner]

With CameronNewport's answer giving an interest range to charge, I decided to see what usury was in the OP's state. Which brings me to an astonishing fact, Zigner has posted here and even HE forgot the rules.

U.S. law only.

Yes, I did miss that - but my answer is universal

 

[CameronNewport]

I decided to see what usury was in the OP's state.

Usury doesn't generally apply to commercial transactions, but obviously I can't say for sure either without knowing the OP's state.

 

[sym3try]

Rhode Island

 

[Antigone*]

Firstly, @Antigone why exactly won't the bank that you underwrite for touch a laundromat with a 50ft pole?? From my understanding, laundromats are comparatively stable business ventures... please explain.

Secondly, you may want to avoid insulting ones level of sophistication in the future. I am not very business savvy, but that said, I doubt you could accomplish even the most basic of my daily tasks in my area of expertise (software engineering, not laundromat ownership)... so try to be nice

If you can underwrite a commercial real estate deal then you have enough sophistication. If you could to that you would not be here, so it was not meant as a slam. Do you understand what it is to analyze financials, to do the necessary due diligence and industry analysis. To run the numbers through a repayment model. No, you don't, again, you wouldn't be here if you did.

Most commercial banks will not underwrite a laundromat because it is generally investor property. It is too heavily reliant on income that is not steady. Banks are cash flow lenders and really have no interest in taking back properties that they cannot sell.

You go ahead and do what you want. Sell it to this woman just do yourself a favor and involve a CPA and an attorney.