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Kim Roberts Freedom Group

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Note Buying Companies


A seller note, also commonly known as seller paper and seller debt, is a form of financing used in small company sale transactions whereby a seller agrees to receive a portion of the acquisition proceeds in a series of debt payments.




note buying companies



In the first instance , a seller note can bridge a gap between the amount of capital a buyer can access and the total purchase price. If the buyer can only secure a bank loan that is 70% of the acquisition price and equity that is 20%, there may be a seller note issued that holds the remaining 10% of the price.


In exchange for accepting this risk, Earn-Outs often have a larger total value than seller notes. The value of the Earn-Out is driven solely on the future performance of the business. If the business does not perform, the seller may not be paid.


A seller note may be more desirable for the seller than an Earn-Out because the buyer receives interest and principal payments, the seller note is senior to the equity, and most Earn-Outs are tied to future performance.


A seller note can be an effective way to bridge a gap between the price a buyer is willing to pay and the price a seller is willing to accept. If a buyer and seller are close, but not together, the seller note can be one way to make the transaction work for both parties.


Similarly, when a business owner seeks a sale of his or her business to their management team, a seller note is often used to fund a portion or all of the purchase price. In many cases, the management team will not have the equity capital required to fund the purchase price so the seller will issue a seller note to the management team.


In a typical acquisition including Senior Debt, seller notes, and equity, the Senior Debt has the highest priority for payment, followed by seller notes and then equity. As a result, there is more risk to a seller note than Senior Debt.


In relation to the current market, most Senior Debt is repaid on a straight line basis over five years at a rate of 4% - 5%. A typical seller note will mature over a similar period and carry an interest rate of 6-10%. Further, the interest on a seller note may or may not be paid on a current basis through the maturity date. Instead, the interest may be deferred or accrued until the maturity date.


A bullet note can also include current interest payments rather than PIK interest payments. The original principal is still paid at maturity date, but the interest payments are made annually and do not compound. Using the same example above - a $10,000 seller note with 5% interest - the annual cash interest expense would be $500 each year. In the figure below, the interest is paid annually (or current) to the holder of the seller note.


A straight line amortization note contrasts with a mortgage-style note where each payment amount is the same and the portion of principal paid increases over the life of the loan while the interest portion decreases.


The word "void," as used in the provision in 110 of G. L. c. 140, "Any loan made or note purchased or endorsement or guarantee furnished by an unlicensed person in violation of ... [ 96-111 of that chapter] shall be void," is used in its literal and technical sense.


In a suit in equity under 103 of that chapter, by the maker and the payee of a note for a sum less than $300, made for the payee's accommodation, which the payee had sold at a discount rate in excess of forty per cent per annum to a lender of money not licensed under the provisions of the statute, who in turn had sold it to the defendant, a purchaser for a fair price and in ignorance of the circumstances of the purchase by the unlicensed lender, a decree declaring the note void and directing its cancellation was proper.


BILL IN EQUITY under G. L. c. 140, 103, filed in the Superior Court on July 17, 1928, and afterwards amended, to have declared void certain notes, of which the plaintiff John A. Cuneo was payee and indorser and the plaintiff Phillip H. Wall was maker and which were alleged to have been discounted by the defendant Realty Investment Company, an unlicensed lender, in violation of the provisions of 96-1ll of the statute.


The suit was referred to a master. He in substance found that Wall made for the accommodation of Cuneo at different times four notes: a four months' note for $150, two four months' notes for $200, and a three months' note for $200; that Cuneo sold these notes to the Realty Investment Company, which was not licensed under the provisions of G. L. c. 140, 96, the $150 note for $125 and each of the $200 notes for not more than $175, thus selling the


$150 note at a discount rate of sixty per cent per annum, the three months' $200 note at a discount rate of not less than fifty-seven and one tenth per cent per annum, and the four months' $200 notes at a discount rate of not less than forty-two and eight tenths per cent per annum; that the Realty Investment Company sold the note to the defendant Morris Glickman for $700; "that the price paid by Glickman for the notes was a fair price and that at the time of the purchase, he was ignorant of the circumstances under which the Realty Investment Company purchased the notes or the price which it paid for them"; and that Glickman was a "holder in due course."


The suit was heard by Lummus, J., by whose order there were entered an interlocutory decree confirming the roaster's report, and a final decree declaring the notes and the loans described in the plaintiffs' bill to be "wholly void," ordering the defendant Glickman "to deliver up said notes to the plaintiffs forthwith to be cancelled and destroyed," and permanently enjoining and restraining the Realty Investment Company, Bornstein and Glickman from "commencing any proceeding against the plaintiffs or either of them on account of the said loans or said notes."


"SECTION 96. No person shall directly or indirectly engage in the business of making loans of three hundred dollars or less, if the amount to be paid on any such loan for interest and expenses exceeds in the aggregate an amount equivalent to twelve per cent per annum upon the sum loaned, without first obtaining from the commissioner of banks, in sections ninety-six to one hundred and fourteen, inclusive, called the commissioner, a license to carry on the said business in the town where the business is to be transacted. When an application for a loan or for an endorsement or guarantee or for the purchase of a note is made by any person within this Commonwealth, and the money is advanced or the endorsement or guarantee is made or furnished by any person without this Commonwealth,


the transaction shall be deemed a loan made within this Commonwealth, and such a loan and the parties making it shall be subject to sections ninety-six to one hundred and thirteen, inclusive. The buying or endorsing of notes or the furnishing of guarantee or Security for compensation shall be considered to be engaging in the business of making small loans within said sections. In prosecutions under said sections, the amount to be paid upon any loan of three hundred dollars or less for interest or expenses shall include all sums paid or to be paid by or on behalf of the borrower for interest, brokerage, recording fees, commissions, services, extension of loan, forbearance to enforce payment, and all other sums charged against or paid or to be paid by the borrower for making or securing directly or indirectly the loan, and shall include all such sums when paid by or on behalf of or charged against the borrower for or on recount of making or securing the loan, directly or indirectly, to or by any person, other than the lender, if such payment or charge was known to the lender at the time of making the loan, or might have been ascertained by reasonable inquiry. Any person directly or indirectly engaging in the business of negotiating, arranging, aiding or assisting the borrower or lender in procuring or making loans of three hundred dollars or less, for which the amount paid or to be paid for interest and expenses, including all amounts paid or to be paid to any other party therefor, exceeds in the aggregate an amount equivalent to twelve per cent per annum, whether such loans are actually made by such person or by another party, shall be deemed to be engaged in the business of making small loans, and shall be subject to sections ninety-six to one hundred and twelve, inclusive."


CARROLL, J. This is an appeal by the defendant Glickman from a final decree ordering the cancellation of certain notes, executed by the plaintiffs, for money loaned in violation of the small loans act, G. L. c. 140, 96, and declaring that the notes were wholly void.


It was found by the master that Glickman was a holder in due course; that he purchased the notes in question for $700, which was a fair price, and that he was ignorant of "the circumstances under which the Realty Investment Company purchased the notes or the price which it paid for them."


G. L. c. 140, 96, prohibits one from engaging in the business of making loans for $300 or less, if the amount to be paid on any such loan for interest and expenses is in excess of twelve per cent per annum, without first obtaining a license. By 103 any loan upon which a greater rate of interest is charged than is allowed by 96-111, inclusive, may be declared void in equity upon petition by the person to whom the loan is made. By 106 the unlawful interest may be recovered; and 110 enacts that any loan made or note purchased or indorsement or guarantee furnished by an unlicensed person in violation of the statute shall be void.


The Realty Investment Company during the year 1928 was engaged in the business of making and buying loans of $300 or less, charging interest exceeding twelve per cent per annum, without a license. The defendant Bornstein was the president and treasurer of the company. In 1928 the plaintiff Wall made on four occasions promissory notes for the accommodation of the plaintiff Cuneo. These notes were purchased from Cuneo by the Realty Investment Company, and were sold by Bornstein and the company to Glickman, who was not in the business of making small loans. The defendant Glickman contends, although the statute declares notes given in violation of the statute shall be void, that the word "void" should not be construed in its technical sense, and should be construed to mean voidable; that the notes in suit are not void in the hands of a holder in due course. He cites a number of cases in support of this contention. 041b061a72


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