Vendor finance, and when it makes sense to carry part of your own sale price

Vendor finance means you lend the buyer part of your own sale price, and you are repaid only if the business keeps paying under someone else. It can get a sale done that would not happen otherwise. It is also a loan to a borrower you did not pick for their credit history, secured on a business you no longer run.

Both of those are true at once, and the deal is only as good as the way it is written.

What it is

The buyer pays part of the price at settlement, from their own money and from a bank. You agree to take the rest later, in instalments over an agreed term, with interest. The amount owed is written into the sale contract or a separate loan agreement, and it is secured.

It is not an earn out. An earn out is a conditional part of the price, paid only if the business hits agreed targets after settlement, and it is covered in the earlier piece on earn outs. Vendor finance is a fixed debt. The buyer owes it whether the business does well or badly.

That difference matters on paper and less in practice. A buyer who cannot pay cannot pay, whatever the contract calls the money.

Why buyers ask for it

Lending. A bank lends against what it could sell if the loan goes bad. Plant, vehicles and property can be sold. Goodwill, the part of the price that pays for the earnings, is hard to sell on its own once the owner has gone.

In a 2018 Bulletin article on access to small business finance, the Reserve Bank reported that entrepreneurs on its Small Business Finance Advisory Panel found banks reluctant to lend without real estate as collateral. A buyer with a good record and no spare property can find the bank will fund part of the price and not all of it. Vendor finance fills the gap.

Business Queensland makes a related point about insiders. Family, friends and employees may pay more than an outside buyer, it says, but are less likely to have the capital for an outright purchase. That is why vendor finance comes up in sales to employees.

There is a second reason a buyer asks. Some want the seller to stay financially tied to the business after settlement, as a sign the numbers are real. That is a fair request, and it is worth knowing which of the two reasons you are hearing.

The risks sit with you

Default. The buyer stops paying. Your remedy is in the documents, and documents take time and money to enforce.

Ranking behind the bank. Security over business assets is registered on the Personal Property Securities Register. The register's own guidance is that a perfected security interest normally has priority over an unperfected one, that between perfected interests the order runs from earliest registration to latest, and that a perfected purchase money security interest takes priority over a perfected interest that is not one. A seller's security for unpaid price can qualify, but only if it is set up and registered correctly and in time, and that is a question for your solicitor. Whatever the register says, a bank funding the rest of the price will expect to rank ahead of you and will ask you to agree to that in writing. If the business fails, the bank is repaid first from whatever the assets fetch. You are repaid from what is left.

The business run down. This is the risk that is easiest to underrate. A new owner can lose customers, let good staff go, stop maintaining the plant or draw out cash. By the time the payments stop, the thing securing your loan may be a smaller business than the one you sold.

Taking it back is not a rescue. You inherit a business in worse shape, a workforce that has been through two changes of owner, and the job of selling it again.

The protections that matter

None of these removes the risk. Together they decide how much of it you carry.

A deposit large enough to matter. A buyer who has put a real sum of their own money into the purchase loses before you do. A buyer funding everything with bank debt and your loan has very little at stake.

Security, registered properly. Over the business assets, and over property where the buyer has some. Agree the order of priority with the bank in writing before settlement, and know exactly where you rank.

Personal guarantees. From the people behind a company buyer. A guarantee is worth what the guarantor owns, so ask what that is.

A short term. The longer the loan runs, the further the business drifts from the one you sold and the less your knowledge of it is worth. A short term keeps your exposure inside the period where you would still know how to run it.

Interest. At a commercial rate, written down. Interest pays you for the risk and for the wait. An interest free loan to a buyer is a price cut by another name.

Step in rights and reporting. Monthly figures, defined events of default, and the right to act when one happens. Business Queensland lists the buyer defaulting on instalment payments among the problems a sale contract should provide for. What counts as default is a drafting question for your solicitor, and it needs to be answered before you need the answer.

The test before you agree

Treat the vendor finance as money at risk, the same way you would treat an earn out. Then ask whether the cash at settlement, on its own, is a price you would accept.

If it is, the loan is an extra and you can negotiate its terms calmly. If it is not, you are being offered a lower price plus a loan to the buyer, and the place to negotiate is the settlement figure.

Then look at the buyer as a borrower, not only as a buyer. Their experience in the industry, their own money in the deal, what they own outside it, and what happens to their plans if the first year is slow.

It is also worth running the free readiness check on your own business. The weaknesses a lender marks down are the ones that make a bank cut its share, and whatever the bank will not fund is the gap a buyer asks you to fill.

The tax timing question

This belongs with your registered tax agent, and it is worth asking before the contract is signed.

The ATO's guidance is that where there is a contract of sale, the capital gains tax event happens when you enter into the contract, not when you settle. With vendor finance the money can arrive over years while the gain may fall in the year you signed. Ask what that does to your tax in that year, and how you will pay it while part of the price is still owed to you.

Ask too what happens if the buyer defaults. The ATO says capital proceeds are reduced where you are not likely to receive some or all of them, it is not due to anything you did or failed to do, and you took all reasonable steps to get paid. Whether that would apply to you depends on the facts. The interest you receive raises its own questions.

Take all of it to a registered tax agent, with the draft terms in hand, before you agree.

When it is the right answer

Vendor finance is a fair tool when the business is sound, the buyer is capable and has money in, the term is short, the security is real, and the cash at settlement is a price you would take anyway. In that shape it can widen the pool of buyers and let a good buyer complete.

It is the wrong answer when it is the only way the numbers work. Then your loan is carrying the risk the bank declined to carry, and you are the one who finds out whether the bank was right.