Sometimes business brokers need something special to get a business sale “over the line”. That something could be good old fashioned vendor finance.
In the current environment vendor-financing part of a business sale may:
- Increase the potential number of business buyers. Many lenders are nervous about lending against business assets and falling real estate values are also limiting security options.
- Increase the purchase price otherwise achievable.
- Demonstrate confidence in the past performance of the business by the vendor.
- Allows a period for the lender/bank to get comfortable with the borrower (especially one with limited business experience) and to eventually take over the vendor finance.
Like any loan agreement, vendor finance needs to be documented and specific terms and conditions negotiated including duration, rate of repayments, interest charged and security offered. From general observation the following comments are to be considered for a successful loan.
- In most business transactions, vendor finance tends to be 6-24 months. Initially, it should be considered as a bridging facility and the borrower should have a sound strategy to refinance within 2-3 years
- For vendor finance in conjunction with bank finance the repayments tend to be mostly interest charges
- Interest rates for an initial period tend to be competitive with business bank loans. Rates after an initial term often increase sharply thereafter as an incentive to refinance
- Security is usually by a combination of a “bill of sale” over plant, goodwill and stock together with appropriate guarantees. Do be extremely wary, guarantees and security offered by parties not directly involved in the ownership and control of the business.
Risks to the vendor are always higher with vendor finance but this has to be balanced not only against the risk of default, but also the genuine risk that the vendor will not attract sufficient buyer-interest, or the price he is after. Generally the vendor finance component is only a small component of the overall financing package. The nature of the finance means that the vendor needs to seriously assess the purchaser’s aptitude and ability to make the business succeed.
Adequate documentation prepared by a competent legal practitioner is essential as the vendor will need to minimise the scope for non-repayment due to the purchaser’s failure.
Conclusion: Vendor finance should be considered as a valid strategy in attracting business buyers and securing good sales outcomes in a difficult market.
For further ideas and advice as to how to make vendor finance a safer and more effective tool, call Bernard Hoey of Burswood Partners on 0419 045 908 or 9472 4944 to discuss.