Selling your business with vendor finance; a big no no
Vendor finance is a fancy term for 'when you sell your business, you act as the bank'.
Sometimes my clients, in the intensity and excitement of finding a buyer for their business, don’t think about the potential issues that can arise with vendor finance. The solution that parties often come up with seems to solve everyone's problem – the seller becomes the 'bank' and the buyer takes over the business and pays the seller by instalments.
This can seem like a really good idea, but often it isn't.
Where the buyer can't get finance from a bank, this should be an immediate red flag.
For a vendor, it can sometimes lead to getting a better price for the business, or selling to someone they want to sell to. However, there are significant risks involved.
Often, vendor finance arrangements fall over. My key advice: there is nothing better than money in the bank and a clean break. You’ve heard the saying - a bird in the hand is worth two in the bush.
For vendors that do offer finance, there are some band-aid solutions:
- Mortgages over real estate owned by the purchaser and making sure there is equity, and you are first in line.
- Registering a charge over the assets of the business and the purchaser's company.
- Director guarantees (when the purchaser is a company, the director personally guarantees the repayments).
One of the main concerns is that if the buyer can't pay the vendor, they likely can't pay anyone else.
There is the risk that the purchaser will become insolvent. In the case of insolvency, there is no guarantee that you will be paid at all.
Sometimes people ask about a clause to re-take-over the business. This is often very messy and completely ineffective because the purchaser owns the business and has run it for some time. You need to transfer over business assets (such as leases of premises and machinery) with the consent of the lessor – which is probably not going to be forthcoming because of the tenant’s default. The suppliers or customers of the business might also lose confidence and stop using you.
The bottom line is vendor finance is rarely worth it and often invites trouble.
Our business lawyers can help you with all aspects of selling or buying a business, including discussing the use of vendor finance. Contact Lachlan Edwards on 5445 1031 or Brian Hill on 5445 1000.