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Seller finance

Seller finance is when the seller lends the buyer part of the purchase price, to be repaid with interest after completion. It is also called vendor finance or a seller note.

Also called vendor finance, seller note

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Definition

Seller finance is when the seller lends the buyer part of the purchase price, to be repaid with interest over an agreed period after completion. It is also called vendor finance, particularly in the UK, Australia and South Africa, a vendor take-back in Canada and a seller note in the US. It usually ranks behind any bank loan, which means the bank is repaid first if the business runs into trouble.

Worked example

Ironbark Plumbing Pty Ltd is a fictional Australian business sold for A$1,000,000. The buyer funds the purchase with:

  • A$300,000 of their own money
  • A$500,000 from a bank loan
  • A$200,000 of vendor finance, repaid over three years with interest

The seller receives A$800,000 at completion and the remaining A$200,000, plus interest, over the following three years.

Why buyers care

Seller finance reduces how much cash and bank debt you need, and it keeps the seller financially interested in a smooth handover. A seller willing to be repaid from the business's future profits is showing some confidence in the figures they have given you.

Lenders treat seller finance in different ways, and some require it to wait behind their loan, with no repayments for a period. Check the interest rate, any security, what happens if you miss a payment and whether you can set warranty claims off against the balance still owed.

A flat refusal to consider seller finance is not proof of a problem, but it is worth asking why. Take advice from a lawyer and your lender before you agree terms.

Related terms

  • Earn-out

    An earn-out is part of the purchase price paid only if the business meets agreed targets after the sale. It can bridge a gap between the seller's price and the buyer's view of the evidence.

  • Senior debt

    Senior debt is borrowing that ranks first for repayment and is usually secured on the business's assets. It is typically the cheapest part of acquisition finance and carries the strictest conditions.

  • Debt service coverage

    Debt service coverage compares the cash a business generates with the loan repayments it must make. Lenders use it to judge whether an acquisition can carry its debt.

  • SBA 7(a) loan

    An SBA 7(a) loan is a US business loan made by an approved lender and partly guaranteed by the US Small Business Administration. It applies only in the United States and is widely used to buy small businesses.

  • Letter of intent

    A letter of intent sets out the main terms on which a buyer proposes to acquire a business, before due diligence and the full purchase agreement. In the UK the equivalent is usually heads of terms.

  • Holdback

    A holdback is part of the purchase price the buyer keeps back at completion and pays later if no valid claims arise. Unlike escrow, the money stays with the buyer.

Guides

Red flags

  • Refusal of any seller finance or earn-out

    The seller wants the whole price in cash at completion and will not defer any part of it. That can be a reasonable preference, but it can also mean the seller does not expect the business to keep performing.

    Severity: price it inSeller and process

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  • See a low, likely and high value from the figures you have, and whether the asking price holds up.

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