How vendor financing can help your acquisition
Read time: 3 minutes
If you’re working on a business acquisition, the vendor may be more than just the person who sells you the company. He or she could also be one of the key sources of financing for the transaction.
Vendor financing (also sometimes called “vendor take back,” or VTB) usually involves the owner agreeing to be paid a percentage of the sale price over time with interest.
Vendor financing typically amounts to 10 to 15 % of the transaction amount, says Daniel LaBossière, Assistant Vice President, Business Development at BDC.
It’s important to suggest vendor financing in your offer to purchase, along with proposed terms of the loan including the interest rate. “Mention it from the get-go,” LaBossière says. “It’s very hard to go back and negotiate afterward. It’s vital to include it in the offer.”
But first, even before making an offer to purchase, it’s best to talk with your bankers to understand how much financing they will provide. That way, you’ll know the extent of any shortfall that the vendor can be asked to cover.
Here are four benefits of using vendor financing.
1. Offers favourable terms
Vendor financing is sometimes seen as patient capital because it typically is not secured on the assets of the company and involves an initial principal repayment postponement period of a few years. After that time, the balance owing to the vendor may be repaid over a scheduled repayment term or in a single lump sum. The repayment term is usually shorter than for a bank term loan, but the interest rate is often lower.
2. Provides a way to finance unsecured assets
Vendor financing can be especially useful to cover unsecured intangible assets that are part of the transaction, such as goodwill and intellectual property, which banks are often reluctant to accept as collateral for a business loan.
3. Keeps owner engaged
The existing owner’s financial participation in an acquisition ensures that he or she remains engaged in the business after the sale, LaBossière says. That’s important for making sure the often-challenging transition period goes smoothly.
“It’s really important for the vendor to stick around and not disappear, especially if the buyer has never run a business in that industry before,” LaBossière says. “The vendor can help you understand how everything works, and their participation gives you time to document and absorb information you need to effectively run the company.”
The vendor financing agreement can also include provisions requiring the former owner to stay on as an employee or consultant for several weeks or months in order to assist with the transition.
4. Gives recourse for the buyer
Vendor financing gives the buyer recourse in the event of surprise costs or liabilities that weren’t disclosed before the transaction. “I’ve seen this many times—the vendor says they forgot about a bill or some issue that costs you money,” LaBossière says. “If the vendor has provided financing, the buyer has an excellent mechanism for recovering the cost by taking it out of the financing.”