How to Buy a Business by Taking Over its Cash Note

Research Your Investments Carefully before Investing

Companies that have substantially leveraged up or borrowed their assets may find it difficult to meet debt service responsibilities during recessionary times. This creates the opportunity for an investor who sees a business in which the market value of assets exceeds the cost of the assets. Opportunities also arise with assets that can be redeployed in another, more profitable situation. If the investor accumulates the notes, he may take over the company by negotiation or bankruptcy court. In this case the value of the business, as a going concern, is purchased for free.

Things You'll Need

• Spreadsheet program

Instructions

1. Analyze the balance sheet of the business. Look to see that the cash flow of the business is positive and that prospects for the business are reasonable. Total the amount of long-term and short-term debt that the business is carrying. If necessary, add an amount to upgrade and improve the business.

2. If the assets of the company are about equal to the company's liabilities it may be possible to buy the liabilities of the company and relieve the seller of her payment. If the net value of the liability and assets is near zero, the company's value is close to nil. Buying the notes of the company gives you the control of the assets if there is a default.

3. Entice the owners of the company to sell by relieving them of their personal guarantee, if any. Know that the asset values should be greater than the liabilities on a market basis in order to provide you, the investor, with a margin of comfort in buying the business. If the company is generally profitable but going through a rough patch, missed interest payments can create an instance of default. As creditor you will have first claim on the business.

4. Beware that a company whose notes have been purchased may attempt to redeem the notes by securing a new loan at another financial institution, thereby relieving itself of the threat of takeover. For that reason try to buy any liabilities at a discount as the loans will be repaid at par.

5. Know that buying a company through its notes may allow substantial rewriting of the assets of the company. By creating tax deductions through the revaluing of assets, tax savings may be realized in future years.

Tips & Warnings

• Make certain you understand the industry and the niche that the company fills before investing in its assets.

• Do not pay a premium for the notes, as they may be called at any time.

References

• The Importance of Due Diligence

Resources

• Discussion of Note Vs. Bond Purchase