Sellers (vendors) and purchasers of a business sometimes enter into a transaction which involves Vendor Finance. The vendor provides some of the funding required by the purchaser to buy the business – usually the purchaser pays a deposit or portion of the purchase price and the vendor funds the balance.
From a commercial and practical perspective, these arrangements can be beneficial to both vendor and purchaser in that:
If you are considering Vendor Finance for the sale or purchase of a business, there are important issues to consider. Your lawyer can explain the proposed transaction to you and work through solutions to reduce some of the risk involved.
Vendor finance is essentially a legal transaction and like all such arrangements carries risk for both parties. It is important that the terms of the agreement are embodied in a legally enforceable document that clearly sets out the obligations and rights of both parties and provides for contingencies should things go wrong.
Business owners bear considerable risk in financing the sale of a business however this may be the most feasible way to sell the assets and goodwill at the desired price. For a range of reasons and circumstances unique to the vendor, a quick sale may be warranted or opportunistic.
Vendors can mitigate the risk by ensuring the full negotiations are discussed with a lawyer who will draft the appropriate business and loan agreement and arrange for securing the loan.
Insisting that the purchaser provides a reasonable deposit may help secure the new owner’s commitment to the business generally and his or her obligations to repay the loan. If the purchaser has little to lose under the arrangement, then the incentive to perform and repay is arguably lower.
Before entering into a transaction involving Vendor Finance, business owners should request access to a purchaser company’s financial statements prepared by an accountant.
The following are some typical matters to address when preparing an agreement for Vendor Finance.
If the purchaser is a company, then the agreement should provide for personal guarantees from its directors. Purchasers must be fully aware of their personal obligations under such guarantees.
Generally, the sale of a business will include specific assets such as motor vehicles, machinery, plant and equipment. These should be described as precisely as possible including, where relevant, serial numbers. An inventory which lists the assets and equipment is generally included.
The vendor may also consider requesting a mortgage over other property owned by the purchaser or that the purchaser enter a deed of priority which will put the vendor ahead of other third party lenders.
Vendor Finance offers an alternative means to secure the sale and purchase of a business. As each arrangement is unique, so too should be the agreement documenting the parties’ intentions. Too often people enter into agreements and are not fully aware of their impact, their rights and obligations. Alternatively, agreements are prepared that do not accurately reflect the parties’ negotiations
Your lawyer will look at the full scope of negotiations to ensure that a Vendor Finance arrangement is workable in consideration of the parties’ intentions and the business and assets being purchased.
After recognising potential pitfalls and implementing strategies to avoid these, an informed decision can be made to determine if Vendor Finance is suitable for your sale or purchase of business. Documents can then be drafted to suit your particular needs.
If you or someone you know wants more information or needs help or advice, please contact us on (02) 9274 8820 or email firstname.lastname@example.org.