You’re selling or buying a multimillion-dollar business. Both the buyer and the seller have conducted an in-depth due diligence analysis, and the sale price and terms make sense to both parties. Everything’s a perfect fit! There’s only one question left to answer:
Where is the buyer going to get the money to buy the business?
They could get it all by borrowing from banks, but that can put a serious strain on their ability to secure financing for business growth. In almost all sales at the multimillion-dollar scale, bank loans are just one part of an acquisition package - and that package will usually include vendor financing.
Let’s get to the point: Vendor financing is when the seller loans the buyer money to purchase their business. That might seem counterintuitive; why would you lend someone money to buy your business? The whole point of selling is to get out of the game, right?
Here’s why: It can make it easier to sell your business, and it can make you more money in the long run. Let’s dive into vendor take-back:
Key Takeaways
- Vendor take-back (or VTB, also called vendor financing) is a form of financing where the seller loans money to the buyer to purchase their business.
- VTB is commonly used in financing packages for M&A deals.
- With VTB, the seller stays involved with the business for longer.
- VTB financing is very flexible.
- There are pros and cons to VTB for buyers and sellers.
- VTBs are complex; the team at Catchfire can help you determine if VTB financing is right for your business, then draft VTB agreements for you - all as part of our white glove M&A advisory services.
What Does VTB Mean In Business?
Vendor take-back is a form of financing where the seller of a business loans money to the buyer. The seller (or vendor) is effectively deferring the payment of a portion of the sales price of the business, and taking back a promise of repayment with terms (the VTB agreement) instead of taking back cash.
How Does A Vendor Take-Back Work?
The terms of a vendor take-back agreement are extremely flexible - that’s one of the reasons that they’re so attractive to buyers and sellers. At their most basic, here’s how they work:
- The seller defers some amount of the purchase price of the business (usually 15%-20%).
- The buyer agrees to pay back that amount over some period of time, with interest.
Everything from the amount of interest to the repayment period can be negotiated in a vendor take-back agreement. Sellers can even mix vendor take-backs with earn-outs if you’re feeling particularly confident in the success of your business; as the lender, the terms are largely up to them.
Benefits Of A VTB Arrangement
There are a lot of potential benefits to a vendor take-back agreement.
For the buyer:
- It’s a way to secure more flexible financing.
- It’s a sign that the seller believes in their business.
- It’s a way to get the seller to stay involved with the business after the sale is complete (they don’t want to risk the buyer defaulting on the loan).
- Payment is often deferred for the first year.
For the seller:
- It can increase the pool of buyers interested in the business.
- It can mean more money in the long run, thanks to interest and a higher sale price.
Risks And Considerations In VTB Deals
Risks For Buyers
For buyers, vendor take-back agreements are often highly advantageous, especially when compared to the more stringent terms that can be imposed by banks. Payment is often deferred for the first year, and you get buy-in from the seller; what’s not to like?
Quite a few things. Here are the downsides:
- VTB loans are often structured with large payments at the end; if you haven’t made enough money by the time this payment is due, your business could be at risk.
- Having the seller involved in financing can make refinancing and selling more challenging.
- The deal might have clauses limiting how you can run the business until the seller is paid off.
The last point is important: if you get vendor take-back financing, the seller will be in your business. This can be a huge benefit - they know their clients and their business better than anyone - but it can also feel like you’ve got the former business owner breathing down your neck. Be sure you know what you’re getting into!
Risks For Sellers
When you’re trying to sell a business, the risks of VTB are more obvious - and more pronounced. Here are the downsides:
- You have to stay involved in the business for longer, and if you’re selling, you probably want to retire as soon as possible.
- VTBs are almost always junior debts; the bank gets paid back first, which can leave you on the hook for a lot if the buyer goes bankrupt.
- You might not get back the money the buyer owes you, and you may need to renegotiate the terms with the buyer if they can’t pay - more work.
Basically, you’re increasing your liability and your workload; it can be worth it if you’ve got a great buyer lined up who can’t finance otherwise or if you want to make a little extra money off of interest.
How To Set Up A VTB Agreement
Setting up a VTB agreement is complex; it’s like setting up a loan, but with a lot more contingencies and potential pitfalls. The risk you’re taking on by offering a VTB should also be reflected in the purchase price - and by that, we mean you should ask for more money.
Our advice? Let us negotiate the terms of the VTB for you. It’s an area of the sales process where our team has had extensive experience. We take a white glove approach, guiding you through every step with care, because we know that most business owners are new to the process and complexities of selling a business.
From preparing your business for due diligence, giving you an accurate assessment of the value of your business, sourcing qualified buyers, to negotiating the purchase agreement terms – we manage it all so you can focus on running your business.
Is A Vendor Take-Back Right For You?
When Buyers Should Consider A VTB
Buyers should consider a VTB when:
- They want the seller to stay involved with the business
- They cannot secure enough financing through other means
- They can secure financing through other means, but they want leverage for other business operations and improvements
For many buyers, it makes sense to mix different sources of financing - friends and family, banks, VTB, mezzanine financing, and more - in addition to the money they are able to put up themselves.
When Sellers Should Consider A VTB
Sellers should consider a VTB when:
- They want to expand the pool of potential buyers for their business
- They want a stream of revenue through interest payments
- They don’t have a problem with putting energy into helping the new business owner in order to secure their investment
Looking to retire quickly or move on to new projects? VTB financing might not be for you; it basically guarantees your continued involvement in the business until the loan is paid back. On the other hand, if you’ve got the time and the willingness, VTB financing can net you more money in the long run.
Final Thoughts
We’ve done a lot of deals where VTB was part of the financing package; it’s a great option for business owners who are okay with having a hand in the business after it’s sold, and even better for people who actively want a hand in the business for a few years.
Compared to all-cash offers (which are rare for the businesses we work with), VTB, as part of a financing package, can lead to more money in the seller’s pocket and more flexibility for the buyer.
Want to know whether VTB is right for your business? Our M&A Advisory Services can help. We recommend working with us years before you plan on selling, so we can get everything in place to maximize your sale price, but we’re also happy to assist if you’re selling right away.