You may be considering selling your business to a buyer using ‘vendor finance’, but how does it work?
Vendor finance is the name given to an agreement where a seller assists the buyer with paying the purchase price. It can be used in sales of a business or property, particularly when the buyer is having trouble obtaining other types of funding for the entire purchase price.
Vendor finance is an alternative to a traditional mortgage or a bank loan. The most common use of vendor finance is where the buyer pays part of the purchase price and relies on the seller to fund the balance of the purchase price by way of a loan. The buyer is usually expected to repay the seller in regular instalments over an agreed period, just as they would with a loan from a bank or other lender.
In a vendor finance arrangement, the parties generally enter into a vendor finance agreement. This is a separate agreement prepared in addition to the contract of sale and similar to any other loan agreement. The vendor finance agreement sets out the loan amount, payment instalments, due dates, and any applicable interest rates. Generally, a vendor will also require the buyer/borrower to provide security for the loan which can include property, the business or company assets and personal guarantees of the borrowers or its directors. The vendor will call on this security where the buyer does not meet its repayment obligations.
As a seller, vendor finance can often mean that you can achieve a higher purchase price. However, there are serious risks to consider, including:
- Vendor finance is a slower way of getting paid. If you need the sale proceeds straight away, whether it be to pay your own loans, buy another business, or simply to retire, vendor finance may not be an option for you.
- You are at risk if the buyer defaults on their payments. If default occurs, you may need to rely on legal action to recover the financed amount.
If you are thinking about giving a buyer vendor finance, please book in a free 20 minute consultation with us to discuss your options.