Vendor Finance & Business Sales

Vendor Finance: What is it?

Vendor finance occurs when the seller is prepared to fund part of the purchase price payable by a buyer. Normally, the seller will agree to allow the buyer to pay part of the purchase price on completion with the balance payable afterwards. The business is transferred to the buyer on completion.

This is different to an instalment sale where the seller retains ownership of the business until such time as the whole of the purchase price is paid. An instalment sale has many difficulties for a buyer. Whilst the buyer is in control of the business, the buyer is not the owner of the business and may experience difficulties dealing with the lessor under the lease and other suppliers and creditors of the business.

Sellers are often prepared to provide vendor finance when the money market is tight, such as it is now. When buyers are having difficulty borrowing money from the banks, vendor finance is an option that facilitates the sale and allows the seller to achieve its price, even though a part will be paid after completion.

The terms upon which finance is provided by the seller is normally contained in the business sale contract itself or a separate vendor finance agreement. The recording of the arrangement will mean that the seller can sue the buyer for breach of contract if the buyer fails to make payment of the balance monies owing.

As the seller will transfer the business to the buyer prior to receiving the full purchase price, the seller will also normally take “security” over the business or some other asset of the buyer. This could be in the form of a bill of sale over the business assets, charge over a company or mortgage over the lease or other freehold property. That way, if the buyer does not meet its obligations the seller should be able to take possession of the business personally or through a receiver and manager and re-sell it.

Also, if the purchaser is a company, the seller will usually also require the directors of the purchaser to guarantee the debt of the company.

Normally, the costs of completing the documents relating to the vendor finance is charged to the buyer.

Joe Kafrouni, Legal Practitioner Director, Kafrouni Lawyers

Disclaimer

The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. Business people should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.

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