Many sellers expect to receive the full balance when selling a business note—or something very close to it.
In practice, business notes almost always trade at a discount to their face value. This isn’t unique to any particular buyer. It’s how the market works across the board.
This guide explains how buyers actually think about value, why discounts exist, and what factors determine how much a business note is worth when you’re ready to sell.
What Is the Face Value of a Business Note?
The face value of a business note is the contractual principal balance—the amount owed on paper according to the promissory note.
If you financed the sale of your business for $400,000 through a seller note and the borrower has paid down $100,000, the remaining face value is $300,000. That’s what the payment terms say the borrower owes.
Face value is a contractual number. It represents what should happen if everything goes according to plan.
Here’s what face value does not reflect:
- Risk – The probability that payments stop or the borrower defaults
- Time – How long it takes to collect the full amount
- Uncertainty – Business volatility, industry shifts, or enforcement complexity
Face value assumes perfect execution. The market doesn’t price based on assumptions. It prices based on expected outcomes.
What Buyers Mean by “Market Value”
When a business note buyer evaluates a note, they’re not buying a piece of paper with a number on it. They’re buying future cash flow—a stream of payments that may or may not arrive as scheduled, from a business that may or may not remain stable.
Market value reflects:
- Risk – The likelihood that payments continue as agreed
- Time – The opportunity cost of tying up capital for months or years
- Execution uncertainty – What happens if the borrower defaults and enforcement is required
This is why market value is almost always lower than face value. The buyer is absorbing risk and committing capital long-term, and they need to be compensated for that.
A business note is typically worth a percentage of its unpaid principal balance, depending on several factors. Performing first-position business notes often sell in the range of 65%–95% of the unpaid balance, while performing second-position notes usually fall in the 45%–75% range. Non-performing notes and other lien positions generally don’t qualify for purchase until the note has demonstrated a consistent payment history.
These ranges aren’t guarantees—each note is evaluated individually based on its specific risk profile.
Why Business Notes Are Discounted
Business notes sell at a discount for fundamental economic reasons:
Time value of money – A dollar today is worth more than a dollar five years from now. Even if every payment arrives on time, buyers need to discount future cash flows to present value.
Business cash flow risk – Unlike real estate, which is relatively stable, small businesses are volatile. Revenue can swing. Industries shift. Cash flow can deteriorate quickly. This risk reduces what buyers are willing to pay.
Industry volatility – Some industries are inherently riskier than others. A note tied to a medical practice carries different risk than one tied to a restaurant or retail business. Buyers adjust pricing based on industry characteristics.
Limited liquidity – Business notes aren’t traded on public markets. There’s no quick exit if things go wrong. Buyers need to be compensated for holding an illiquid asset.
Cost and complexity of enforcement – If the borrower defaults, recovering value is difficult and expensive. Even with collateral and personal guarantees, enforcement costs can consume most of the recovery. Buyers price this risk into the discount.
These factors apply to all business notes, regardless of who’s buying them.
How Buyers Calculate Risk in Business Notes
Buyers aren’t trying to lowball sellers. They’re pricing for what could go wrong.
When evaluating a business note, buyers are asking:
- What’s the probability every scheduled payment arrives on time?
- What happens if the business struggles or the borrower defaults?
- What will it cost to enforce the note if necessary?
- What return do I need to justify this risk?
The discount compensates for:
- Missed payments – Even good borrowers occasionally miss payments or pay late
- Business downturns – Economic cycles, industry shifts, and competitive pressures affect business performance
- Collection and enforcement costs – Legal fees, time, and complexity of recovering value if things go wrong
- Opportunity cost of capital – What else the buyer could do with the same capital
A buyer who pays full face value for a business note is taking on all the risk with no return. That doesn’t make sense for anyone deploying capital professionally.
This is why discounting is standard market practice, not opportunistic behavior.
Key Factors That Influence Business Note Pricing
Every business note is different. Pricing depends on several factors that buyers evaluate:
Payment history (non-negotiable) – This is the single most important factor. A note with 24 months of perfect on-time payments is worth significantly more than one with 3 months of history or irregular payments. Past performance is the best predictor of future performance.
Business cash flow coverage – Is the business generating enough revenue to comfortably cover the monthly payment, or is it barely scraping by? Stable, predictable cash flow reduces risk and improves valuation.
Industry risk profile – Some industries are more stable than others. Buyers adjust pricing based on industry characteristics and economic sensitivity.
Interest rate – The interest rate on the note affects total cash flow. A note with an 8% interest rate generates more cash than one with a 4% rate, all else equal.
Remaining term – How much time is left on the term of the note? Longer terms mean more uncertainty. Shorter terms mean faster capital return. Both affect valuation.
Collateral and guarantees – Secured notes with strong collateral and personally guaranteed obligations reduce risk. This can improve pricing, though it doesn’t eliminate the discount.
Note size – Larger notes may attract more buyer interest. Very small notes may be harder to sell because transaction costs don’t justify the effort for some buyers.
Documentation clarity – Clean, enforceable documentation makes a note easier to underwrite and reduces execution risk. Missing or unclear documentation hurts valuation.
None of these factors alone determines value. Buyers consider the complete picture when pricing a business note.
Performing vs. Non-Performing Notes and Valuation
Payment status has an enormous impact on business note valuation.
Performing notes are the primary market. If the borrower is paying on time and the business is stable, there’s real buyer interest. The discount will still exist, but there’s an active market for these assets.
Non-performing notes are rarely priced meaningfully. If the borrower has stopped paying, the note is worth a small fraction of its face value—if it’s marketable at all. Most buyers won’t touch non-performing business notes at any price.
Many non-performing notes have little to no market value. This is difficult for note holders to accept, but it’s the reality. A note in default with a failing business and questionable collateral simply doesn’t have buyers. The theoretical face value is irrelevant.
This is why sellers with non-performing notes often find their best option is to work directly with the borrower to cure the default, rather than attempting to sell.
Why Discounts Can Vary Widely Between Buyers
Different buyers will price the same note differently, sometimes with significant variation.
This happens because buyers have different:
Capital costs – If a business note buyer has a lower cost of capital, they can pay more for the same note while still achieving their target return.
Risk tolerance – Some buyers are more conservative and price in wider safety margins. Others are comfortable with tighter spreads.
Execution priorities – Some buyers prioritize speed and certainty over price. Others are willing to negotiate longer for better terms.
This is why sellers sometimes receive different offers from potential buyers for the same note. It’s not that one buyer is being “fair” and another is exploiting the seller. They’re using different underwriting models and targeting different returns.
The differences usually aren’t extreme. The market for business notes is specialized enough that pricing tends to cluster around similar ranges for similar assets.
What About Notes With Recent Payment Issues?
Not all payment disruptions affect valuation equally.
If a note was current for two years, missed a few payments during a business disruption, and then resumed with six months of perfect performance, buyers will view that differently than a note that’s chronically late or in active default.
Buyers want consistency. A note with re-established payment history can be valued materially higher than one that’s currently struggling, even if both have the same remaining balance.
In some cases, waiting 6-12 months to build a clean payment track record can improve the sale price more than selling immediately. This isn’t Seller Edge Capital policy—it’s just how the market responds to risk.
If your note has had recent issues but the borrower is now current, waiting may make sense. If the note is in active default with no resolution in sight, waiting probably doesn’t help.
Common Seller Misunderstandings About Valuation
Sellers frequently believe things about business note pricing that don’t align with market reality:
- “The balance owed is the value” – Not true. The balance owed is a contractual number. Market value is what buyers will pay based on risk-adjusted expected cash flow.
- “Collateral guarantees a high price” – Collateral helps reduce risk, but it doesn’t eliminate the discount. Buyers price cash flow first. Collateral is a secondary consideration, especially if enforcement is complex.
- “All buyers price notes the same way” – Buyers use different models, have different capital costs, and target different returns. Pricing varies based on these factors, though not wildly for similar assets.
Understanding these misunderstandings helps business owners set realistic expectations before engaging with the market.
How Seller Edge Capital Approaches Business Note Valuation
Seller Edge Capital is an evergreen, private debt fund that uses internal capital to acquire business notes. We’re not a note broker. We don’t pass notes to other buyers. We evaluate and price notes using our own underwriting standards and our own capital.
Seller Edge Capital evaluates business notes based on expected cash flow, risk, and execution certainty—not just the balance owed. We’re looking at:
- Payment consistency and track record
- Business stability and industry risk
- Collateral quality and enforceability
- Documentation clarity and completeness
We price for execution certainty. We’re focused on notes that can realistically close—performing notes with demonstrated payment history and stable underlying businesses.
If your note is performing and fits our criteria, we can usually provide an evaluation quickly. If your note has performance issues or other complications, we’ll be honest about how that affects pricing—or whether there’s a viable market at all.
We’re not trying to be all things to all sellers. We’re focused on acquiring notes where we can execute with confidence using our own capital.
Should You Sell at a Discount or Hold the Note?
This depends entirely on your situation and priorities.
When selling makes sense:
- You need liquidity now for other investments or obligations
- You don’t want the ongoing risk of holding the note
- You’d rather have a lump sum today than payments over time
- The business or borrower shows signs of instability
When holding may be better:
- You don’t need immediate cash
- The borrower is paying reliably and the business is stable
- Collecting the full face value over time is worth more to you than discounted cash now
- Recent payment issues have been resolved and you’re willing to wait for valuation to improve
Why certainty sometimes outweighs face value: Selling gives you certainty—cash in hand, no more risk, no more management. Holding gives you the potential to collect more over time, but you bear the risk that something goes wrong. A business owner who needs capital now or wants to eliminate risk may find that certainty is worth more than the difference between market value and face value.
Neither choice is inherently right or wrong. It depends on your financial situation and risk tolerance.
Summary — Discount vs. Face Value
A few key points to remember about business note valuation:
- Face value is contractual – It’s what’s owed according to the payment terms
- Market value reflects risk – It’s what buyers will actually pay based on expected outcomes and execution certainty
- Discounts are normal – Business notes almost always sell below face value due to time, risk, and uncertainty
- Each note is unique – Payment history, business stability, lien position, and documentation all affect pricing
Understanding why discounts exist helps sellers approach the market with realistic expectations when selling a business note.See if your business note qualifies or understand the selling process by exploring our resources on performing vs. non-performing business notes, secured vs. unsecured business notes, and how to sell a business note.