Vendor Finance: Should I Offer It When Selling My Business?

Article Author: Garry Stephensen
Position: Managing Director
Read time: 4 mins

When selling a business in Australia, one strategic option available to vendors is offering vendor finance. This approach can open the door to a broader pool of potential buyers and help secure a favourable sale outcome. But like all business decisions, timing and context are key. So, when should you offer vendor finance?

This article explores what vendor finance is, the benefits and risks, and the specific scenarios where it can be a smart move for business sellers.

What Is Vendor Finance?

There are various ways to obtain finance in Australia. Vendor finance (also called seller finance) is when the seller of a business agrees to lend a portion of the purchase price to the buyer. Instead of receiving the full payment upfront, the vendor allows the buyer to pay off a part of the agreed price over time, typically with interest.

Benefits of Vendor Finance

Expand the Buyer Pool
Vendor finance allows buyers with strong potential but limited access to capital to enter negotiations.
Faster Sale
Flexibility with payment terms can accelerate the sales process, especially in slow markets. Time can kill a business sale. So if vendor finance helps a quicker settlement, it may be worth while.
Better Sale Price
Sellers may be able to command a higher price by offering favourable terms. Vendor finance is seen by buyers as lower risk and therefore can help you achieve the best price for your business.
Ongoing Income
Regular repayments provide a predictable post-sale income stream.

Vendor Finance: Should I Offer It When Selling My Business?

When to Offer Vendor Finance

In a Buyer's Market
If market conditions are slow and competition among buyers is low, vendor finance can give your business a competitive edge. Buyers are more likely to move forward if financial barriers are lowered.
When Your Business Has Strong Cash Flow
If your business generates consistent, reliable cash flow, it's easier for buyers to make repayments. This can reassure both parties and reduce the seller's risk.
When the Buyer is a Good Fit But Lacks Capital
Sometimes, a buyer is a perfect operational and cultural fit for your business but falls short on capital. Vendor finance can bridge the gap and make the deal possible.
To Maximise Valuation
If you're struggling to achieve your desired sale price, offering vendor finance may justify a higher valuation because you're reducing buyer risk. Vendor finance can be a valid strategy for business growth.
To Facilitate a Generational or Management Buyout
If you're selling to a family member or long-time employee, vendor finance can ease the transition and help retain business continuity.

When Not to Offer Vendor Finance

You Need Immediate Full Payment
If your retirement, reinvestment plans or debt obligations require full capital at settlement, vendor finance might not be suitable.
You're Unsure of the Buyer's Capability
If you're uncertain about a buyer's ability to manage the business or meet payment terms, it's wise to proceed with caution.
The Business Has Volatile Cash Flow
Irregular income makes it harder for buyers to meet repayment schedules, increasing the risk of default.

Protecting Yourself in a Vendor Finance Deal

Work with a business broker to qualify the buyer and negotiate clear terms.
Secure repayments with guarantees, personal assets, or a charge over the business.
Use a professionally drafted loan agreement.
Set milestones and contingencies in case of default.

Case study: $8 Million Restoration Business Acquisition:

Renan Cortez acquired an $8 million restoration business through a 100% seller-financed deal. Despite the rarity of such arrangements, the seller was willing to finance the entire purchase price, demonstrating significant trust in Cortez's ability to manage and grow the business successfully.
Source: https://acquiringminds.co/articles/renan-cortez-syndicate-building-solutions

Vendor finance can be an effective tool for closing a deal, especially in a competitive or uncertain market. However, it's not suitable for every seller or situation. Understanding when to offer it, and when not to, is key to using vendor finance strategically.

If you're considering selling your business and wondering whether vendor finance is the right move, reach out to Lloyds Business Brokers for a confidential discussion. Our experienced brokers can guide you through deal structures, buyer vetting, and all the steps to achieve a successful sale.