VENDOR TAKE-BACK: Internal Financing of Business Acquisition
Corporate Buy-out - Selling Shares - Forced to Sell - Buying out Shareholders - Buying into a Company
Contact Neufeld Legal PC at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
A Vendor Take-Back (which goes by the acronym VTB) is a financing arrangement that can be undertaken in a business acquisition such that the seller of the business acts as a lender to the buyer for a portion of the purchase price. With a Vendor Take Back, instead of receiving the entire sale price in cash at closing, the seller agrees to defer a part of the payment and receives it at a later date, typically represented by a promissory note from the buyer, which is repaid over an agreed-upon time period with interest, with appropriate security being provided to the seller.
The key aspects associated with a Vendor Take-Back include:
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A Loan from the Seller: The current owner is essentially loaning the buyer some of the money needed to complete the purchase of the business.
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Portion of Price: The Vendor Take-Back typically represents 10% to 25% of the total transaction amount, though it can vary.
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Terms: The buyer and seller negotiate the terms, including the amount, the interest rate, and the payback period (often three to five years). Payments are sometimes deferred for the first few months or even the first year to help the new owner manage initial cash flow.
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Subordination: Vendor Take-Back debt is almost always subordinated (junior debt) to any senior bank loans the buyer secures for the acquisition. This means the bank gets paid first if the business defaults, which is why Vendor Take-Back debt often carries a higher risk and can command a higher interest rate for the seller [more on subordination and protections].
The advantages that have the potential of being realized through a Vendor Take-Back arrangement for the buyer can include:
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Closing the Deal: A Vendor Take-Back arrangement can helps secure the necessary financing to undertake the business acquisition, especially if traditional bank financing is insufficient.
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Lender Confidence: A Vendor Take-Back arrangement signals to other lenders that the seller has faith in the business's continued success.
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Flexibility: Payment terms for a Vendor Take-Back arrangement are generally more flexible than bank loans.
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Recourse/Security: A Vendor Take-Back arrangement can provide the buyer with a means of recourse if there are hidden liabilities or undisclosed issues arising post-closing, allowing for a potential adjustment of through VTB’s repayment.
The advantages that have the potential of being realized through a Vendor Take-Back arrangement for the seller can include:
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Attract Buyers and a Higher Price: A Vendor Take-Back arrangement can make the business more attractive to a wider range of buyers and may lead to a higher overall sale price.
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Tax Deferral: A Vendor Take-Back arrangement can spread the taxable income from the sale over several years, which can minimize the immediate impact of capital gains tax.
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Ongoing Interest: A Vendor Take-Back arrangement results in interest income being earned on the VTB loan.
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Smooth Transition: A Vendor Take-Back arrangement results in the seller having a vested interest in the business's success and can increase their motivation to assist with a smooth transition and knowledge transfer.
For knowledgeable and experienced legal representation in undertaking business acquisitions, or facilitating the sale of your current business, contact corporate business lawyer Christopher Neufeld at Chris@NeufeldLegal.com or 403-400-4092 / 905-616-8864.
