Buying or selling a business doesn’t always follow a straightforward path. Vendor finance can provide a practical solution when traditional bank lending falls short, bridging the gap and allowing deals to go ahead. This example shows how vendor finance can benefit both buyer and seller when properly structured and executed.
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.