Buying A Business Using Vendor Finance.
Vendor finance can often be a practical solution to facilitate a business sale – benefiting both the buyer and seller. This scenario highlights how, when well planned and executed, vendor finance can be a valuable tool.
Paul has owned has owned his light engineering firm for 25 years and is now ready to sell. A business broker helps Paul market the business, and Jim shows interest in buying it.
Paul’s asking price is $2 million. After reviewing the financials, Jim agrees to the price. They draft up a sale and purchase agreement, conditional on Jim securing the necessary financing to complete the purchase.
Jim requests financing from his bank, and they agree to lend him $1.5 million, taking security against his family home and over the assets of the business. This leaves a shortfall of $500,000.
Both parties are keen to complete the transaction and want to find a way to make it work.
To bridge this gap, Paul agrees to provide vendor finance for the remaining $500,000. The bank will have the first security over Jim’s home and the business, while Paul takes second security over the business, behind the bank. Paul also receives a personal guarantee from Jim.
Paul trusts the business’s strengths and Jims ability to repay the loan. Additionally, Paul commits to working in the business part time for a year post-sale, to ensure a smooth transition.
On the settlement date, the bank lends $1.5 million to Jim and the remaining $500,000 of the purchase price is covered by Paul. Documentation formalising the loan terms and security arrangements are signed off by all parties.
A year later, Paul completely exits the business. Within three years, his loan is also fully repaid.
Vendor finance, when properly planned and executed correctly, is a practical solution to facilitate a business sale – benefiting both the seller and buyer alike.
Benefits include: Eases Financing Challenges: Vendor finance helps buyers overcome financing shortfalls, making it easier to complete the transaction when traditional financing options fall short.
Facilitates Faster Sales: By offering vendor finance, sellers can attract more potential buyers and expediate the sale process, reducing the time the business remains on the market.
Increases Sale Price Realisation: Sellers may achieve a higher sale price as they provide flexible financing terms, making the business more accessible to buyers.
Ensures Smooth Transition: With vendor finance, sellers often remain involved in the business for a transition period, providing stability and continuity, which can enhance the business’s success post-sale.
If you feel you could use some specialist advice, don’t hesitate to contact the Commercial Team.
