GMO Buy a Business

The Ins & Outs of Vendor Finance

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Whether you are buying or selling a business, Vendor Finance can play an important role in the success of the business transaction.

What is Vendor Finance?

As the name suggests, Vendor Finance is Finance supplied by the Vendor (Seller) during the sale of their business. In this instance, instead of acquiring a loan from another financial institution, the Buyer acquires a loan from the Seller, allowing the Vendor to become the financier.

The Buyer will pay an initial deposit (generally a significant amount) and the balance, including interest, is paid over a set period of time at regular intervals, agreed upon by both parties prior to the commencement of the agreement.

What are the benefits to the Seller?

For Sellers, offering Vendor Finance can increase the pool of potential Buyers, especially if the business is an expensive purchase. This also allows the Seller to potentially sell their business at a higher price than originally planned.

What are the benefits to the Buyer?

For Buyers, Vendor Finance can be an additional source of funding, outside traditional options such as banks and other major financial institutions. This may be an attractive option If finance is difficult to obtain from external financial institutions for one reason or another.
The details of the Finance option may be able to be negotiated, and the Seller may be more willing to provide Finance than other financial institutions in order to sell their business.

Important things to consider:

  • There are certain risks associated with Vendor financing. As with all financial decisions, all avenues should be explored in detail and due diligence conducted by both parties.
  • Ensure that the Buyer has adequate security to allow for the Finance, such as property, guarantors, and other assets.
  • Does the Buyer have other loans in place with third-party financial institutions? If so, the Seller may be able to enter a ‘Deed of Priority’, allowing them to be the first in line for repayments.
  • Ensure that all loan documentation address all necessary aspects to make sure that repayments are achievable in a timely manner. This should be discussed with both the Seller and Buyer’s lawyers to determine the viability of the agreement.

 

In certain situations, Vendor Finance could be the difference between a successful and unsuccessful business sale, and therefore something to potentially consider in future business endeavours. We recommend discussing your options in detail with your financial advisor when exploring the possibility of Vendor Finance.