EXCLUSIVE: NAI Business Series with Alf Sanderson*, VP Business Advisory
After forty years of selling businesses, I have learned that no two sales are ever the same. Every business is unique, and to maximize the value of a business, you must find a willing and able party who will agree to the most favourable terms for the disposition of your business.
I have learned that there are always people willing to buy a business, but sometimes the best operator, who can pay the highest price, can not get the necessary financing to pay what a vendor desires.
In some cases, if a proven operator whom the Seller has confidence in, buys a business but cannot come up with all the money to buy a business, Vendor Financing may be an excellent solution for both the Buyer and the Seller.
Vendor Financing (also called “Vendor Take Back, or VTB)” usually involves the Seller agreeing to be paid a percentage of the sale price over time with interest.
Typically, Vendor Financing accounts for 10% to 20% of the transaction amount but can be significantly more, depending on the transaction and the Seller’s and Buyer’s needs.
One of the considerations that Sellers and their advisors often overlook is that if a Buyer defaults on the VTB, this normally would put them out of covenant with the bank with the potential bank default. This puts the Buyer in a not very enviable position with the bank realizing their security and the personal guarantee the purchaser probably has with the bank.
Vendor Financing can also be a tool used to realize superior pricing for a business. In a recent case, there were two bidders for a business, one Buyer did not want any financing and was willing to pay $4,000,000 for the business. The other Buyer was willing to pay $4,750,000 but required the Seller to finance $1,000,000 for a period of two years, with payments at the end of year 1 and year 2. The Seller was confident in their business and the Buyer. Realizing their business was in good shape, and could easily handle the financing, decided the Buyer at the higher price was worth the risk and the reward of a higher price.
There is no right or wrong way, but Vendor Financing should be something a Seller is willing to consider and examine to maximize the value of their business. It does not mean the preferred Buyer will require it, but it creates more opportunities to maximize value.
Written by Alf Sanderson*
Vice President Business Broker, Mergers and Acquisitions Consultant
604 691 6646
*Personal Real Estate Corporation
Alf has over forty years of industry experience, building and operating businesses, taking companies public and assisting firms in coordinating and selling their businesses. Contact Alf with your questions regarding the disposition of your business.