What is Vendor Financing?
We are seeing an increased number of business sales where Vendor financing plays a role. This is partially due to the fact that the banks are not financing business purchases very often and hence the buyers are looking at alternate ways to leverage into businesses. Talk to your Bonza Business Broker how this may work for you.
With vendor financing we recommend limiting this to a maximum period of 24 months after transaction and taking payment on a regular basis. The amount financed should be payable from the cash-flow of the business, while leaving the new owner enough to make a good wage.
As an example if the purchase price is $300,000 and the business is making $150k return to the owner, then we would recommend taking at least 2/3rds as an upfront payment with $100,000 as a deferred payment, payable over 24 months, either in monthly (preferred ) or quarterly installments. The $100,000 vendor finance means that $50k per annum is repaid, which is available out of the $1050k cash flow without stressing the new owner. This amount should be viewed as “at risk”and the total value of the business may then be more than for a cash payment to compensate for this.
Preferably there is some sort of security provided, assets of the business or receivables of the business or a second mortgage over a home to ensure this is not defaulted on. Most importantly the contract should be drawn up by a reputable legal company to ensure that the debt collection can be enforced through the courts if required.