With the challenging bank finance situation we are currently experiencing, an effective way to achieve a sale at the best possible price, is for the seller (vendor) to help finance the sale. Vendor finance is not new, but is now being used more often to achieve a business sale.
Vendor finance is where the seller agrees to allow a buyer to pay part of the purchase price on completion of the contract and the balance payable afterwards, based on pre agreed terms and conditions.
What are the benefits to the Seller?
Widens the pool of buyers
Shows you have confidence in your business performance
Your business stands out from competing businesses on the market
The interest rate is reflective of the level of risk .
The terms and conditions are contracted and transparent
Can be the difference between selling the business or not.
The biggest advantage to the seller is making the business more affordable to more buyers. By widening the pool of buyers you vastly increase your chance of achieving a sale and based on the principles of supply and demand, negotiating a better price.
What are the benefits for the Buyer?
It solves the difficulties of obtaining finance from a bank
Buyers and sellers can make their own arrangements without the involvement of the bank
It is relatively quick and easy
Provides confidence in the business performance
The conditions around vendor finance are detailed and agreed in the business sale contract and associated documentation prepared by the solicitor.
Some of the usual terms to be considered in this documentation includes;
How much is to be borrowed by way of Vendor Finance;
The interest rate to be charged;
Over what period is it to be repaid;
What frequency the payments are to be made
What security is to be provided to the seller e.g mortgage over property
What reporting is required for the seller to monitor the capacity to pay back.
What happens if the buyer misses a payment
Who pays the legal costs associated with it (eg the buyer)
In my opinion Vendor finance is an excellent business exit strategy that all business sellers should consider. So when it is time to sell or if you have been on the market without achieving a sale make sure you investigate this option. It may make your sale more successful and not only profitable, but also quicker and easier.