The Ins & Outs of Vendor Finance

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.

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Whether you dream of buying a business, want to sell your Perth or WA business, or want to know the value of your company – GMO’s business brokers and valuers are here to assist you. We have won the City of Perth Award for Business Excellence and our Managing Director has been elected as a fellow of the Australian Institute of Business Brokers. Whether you are a buyer or a seller, GMO can introduce you to the right person.

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  • The disclosers are willing to disclose such information to the recipient subject to their acceptance of the following conditions:
    1. The recipient shall treat all information received from the discloser as confidential and shall ensure that all such information remains confidential and shall not use any such information in any way other than for the specific purpose aforesaid. The recipient acknowledges that all conditions subsequent in this disclosure apply to the recipient and any associates of the recipient be they partners, co‐directors, trustees, holders of shares or officersin entity(s) the recipient has interest in.
    2. The obligations of paragraph 1 shall not extend to any such information which is in the public domain, or which hereafter becomes part of the public domain otherwise than as a result of any unauthorised activity or omission of the recipient, or which is already in the possession of the recipient and was not derived from the disclosers.
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    4. The obligations set forth in paragraph 1, 2 and 3 shall terminate 12 months from the date of this agreement or upon the disclosers and the recipients entering into an agreement whichever event occursfirst.
    5. The recipient shall obtain no rights of any kind to such information other than for the specific purpose stated in this agreement.
    6. The receiving party will not utilise any material made available to improve, construct or change another business, in such a way as to allow that business to compete with the business being discussed.
    7. The recipient understands that the information has been compiled by GMO from details provided by the Vendor. Prospective purchasers should be aware that it is not intended that any projections or this information be treated as a representation, warranty or promise by GMO or its representatives, as to the correctness of the information, or that all relevant information is contained in the information provided.
    8. The recipient acknowledges that they will not act on information provided without first seeking independent financial and legal advice.
    9. The recipient hereby agrees to declare any beneficial interest in any business that could currently be interpreted as being in competition with the subject business.
    10. The recipient agrees to return all documents supplied within 50 days of receipt (and any copies) should they decide not to proceed. The recipient further agrees to destroy any electronic information supplied by the Seller or GMO and to instruct their professional advisors to also destroy any information passed on by the Seller, the recipient or from GMO.
    11. The recipient acknowledges they are precluded from physically visiting the premises of the business or talking to any client, supplier or employee of the business without the permission of the discloser.
    The recipient/s hereby accepts the above conditions as binding on them in respect of the information referred to.
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