The Ultimate Guide to Vendor Finance for a Business Sale cover image
07 Aug 2023

The Ultimate Guide to Vendor Finance for a Business Sale


Only rich people can just go and "buy a business" right? Nope! Vendor Finance is one popular option you have to help you finance some of your ideal business acquisition.

Imagine you're buying a car from a friend. Instead of getting a loan from the bank, your friend says, "Hey, just give me a down payment now, and you can pay me the rest over the next couple of years."

So, you make a deal to pay a bit every month until you've paid off the full amount. This way, you get the car now, and your friend gets a bit more money over time, including some extra for letting you pay over time.

Now, lets apply that simple idea to buying a business.

Vendor financing when buying a business is pretty much the same concept. Instead of getting a loan from a bank to buy a business, the current owner (the seller) lets you pay them directly over time.

You give them a portion of the money upfront (a down payment) and then pay the rest in instalments, usually with a bit of interest.

Advantages of Vendor Financing for the Buyer

  1. Easier Checkout: Just like an express lane in a store, seller financing can be quicker and smoother than waiting in line at a bank. You might not need all that paperwork and time banks ask for if you try to apply for a loan through your bank. (Reply to this email with “bank” if you need help finding a bank friendly to acquisitions and I can share some suggestions)

  2. Friendlier Terms: Imagine if you could negotiate how much pocket money you give and when? That's the beauty here. You and the seller can chat and come up with payment plans that work for both of you creating a win, win agreement. This is one of the reasons why it is so important to build a great relationship with the seller.

  3. Save Money: With seller financing, you might be able to skip some of the admin fees banks usually charge, so you keep more money in your pocket.

  4. More Choices: Think of it like being able to buy a toy even if it's not on the shelf at the big stores. Some businesses might not qualify for bank loans, but with seller financing, you can still buy them. This often applies to online businesses or businesses that don’t include a large amount of Real Estate as collateral.

  5. A Helping Hand: It's like having a friend guide you on how to play a new game. The seller, who knows the business inside-out, might offer advice or help during the transition, since they have a vested interest in seeing you succeed.

The best Vendor Financing terms, make the deal a win, win. How does that work? What is in it for the seller?

The advanges of Vendor Financing for the Seller

  1. Vendor Financing Helps Businesses Sell Faster:

Our surveys show that more than half of buyers like it when sellers offer financing. By offering this option, sellers attract more potential buyers and often sell their business faster. Plus with more interested buyers competing…

  1. You Might Get a Better Price:

Imagine selling lemonade with a bonus cookie. You can charge a bit more, right? Similarly, if sellers offer vendor financing, they can often set a higher price for their business. More people want businesses that offer financing, and that demand lets sellers ask for a bit more money.

  1. Earn Extra with Interest:

Picture a piggy bank that slowly fills up over time. That's what seller financing can do! Apart from getting a good price for the business, sellers also earn money from the interest. It's like a two-for-one deal. And the best part? The deal can often wrap up faster than waiting for a bank's thumbs up.

  1. More Confidence for Buyers:

When the seller offers financing, it's like a seal of approval. It tells the buyer, "Hey, I believe in this business and its future." Buyers always get nervous when the deal deadline gets closer, having a seal of approval like this can go a long way to calming nerves. Plus you get to see your legacy continuing as a successful business.

  1. Tax Benefits:

This will vary based on your personal finances and the size of the business. But by spreading out the taxable income from the sale over time. You can often minimise the amount of tax you have to pay on your sale. (Need help with working out taxes on the sale of your business, reply with ‘tax’ and I can provide some recommended people to talk to).


Disadvantages of Vendor Financing for the Buyer

While seller financing can sound like a sweet deal, just like that extra scoop of ice cream on a hot day, there are sometimes things to watch out for. Here are some potential "melty" bits for buyers:

  1. Higher Prices: Imagine you find a toy you really want, but because it comes with a special deal, the price tag is a bit higher. Similarly, businesses with seller financing might be priced a bit more since the seller is offering you the convenience of paying over time. 

  2. Deposit Payment: Some sellers might ask for a bigger initial payment to feel secure about the deal. Buyers love the idea of 100% vendor finance, but if you put yourself in the sellers shoes, would you ever do that deal? If you would, then the business is probably not as quality as you might first think. 99.99% of deals have a sizable up front down payment or deposit.

  3. Interest Rates Can Vary: Sellers might set their own interest rates, and sometimes, they might be higher than what banks offer. This is negotiable in your offer but it is sometimes a potential stumbling block to be aware of.

  4. The Fine Print: Ever get a toy, but then you realize it has a gazillion pieces to assemble? Seller-financed deals might come with terms and conditions that can be complicated. Always good to read and understand them fully. Make sure you have a good lawyer (by good, I mean one that has experience with multiple SMB acquisitions, not just your local golf buddy lawyer). They can help with setting your preferred terms in writing.

  5. No Standardised Process: Unlike banks, which have a set way of doing things, every seller might have their own style. This means the process isn't always predictable. A good broker or deal manager will be able to help with standardising the terms of the deal.

So, while vendor financing can be a cool option, it's always good to understand these "sticky" parts, kind of like when you're choosing the right flavor on a sunny day. It's all about finding the best fit for your taste.


Disadvantages of Vendor Financing for the Seller

Alright, let's flip the coin and take a friendly peek at the other side! Imagine seller financing is like lending your favorite toy to a friend. Sounds fun, but there might be some things you'd worry about, right? Here's what sellers might face:


  1. Waiting Game: Instead of getting all your pocket money at once, it's like getting a few coins every week. Sellers won't get the full payment right away, so they have to be patient. You would get an up front amount though so only a percentage of the total price would normally be vendor financed.

  2. Risk of Non-Payment: Imagine lending that toy, but your friend keeps forgetting to return it or its pieces. If the buyer struggles financially and can't make payments, the seller might end up in a tough spot. This is a real risk and requires vetting of the buyers experience and a contract that has been professionally written by a lawyer from the acquisitions space.

  3. Reclaiming Process: If your friend doesn't return the toy, getting it back might be a big fuss. Similarly, if a buyer doesn't keep up with payments, the seller might need to go through legal processes, like foreclosure, which can be time-consuming, costly and stressful seeing your business and customers like that.

  4. Tied Up Funds: Think of it as having your best marbles in a game for a long time. The seller's money is tied up in the business, which means they can't use it for other opportunities or investments right away. I am looking at you, fancy boat, big golf trips or that holiday home at the beach.

  5. Paperwork and Management: Imagine having to keep a diary of when you lent your toys and to whom. Sellers have to manage and keep track of payments, paperwork, and maybe even tax implications. Your accountant can help with structuring some of these details but with any incoming revenue, it creates additional paperwork.

  6. Emotional Connection: It's hard to watch your favorite toy being played with differently by someone else. For many sellers, the business is their "baby", so watching its new direction under a different owner while still being financially connected can be challenging for some. 

So, while seller financing can feel like a simple way to maximise the sale of your business, there are a few puddles to watch out for. Just like lending toys, it's always good to build a good relationship with the buyer and to have really clear expectations written out in a professional contract.

When should I ask if the seller will consider Vendor Finance?

Deciding when to ask about seller financing is a bit like timing the perfect moment to dive into a pool. You want to feel the waters before taking the plunge! Here's our guide on the right timing:

Ask in your first few conversations but not the first: Before you ask, make sure you've thoroughly researched the business and understand its value. It's like studying for a test; you'll feel more confident in your conversation if you're well-prepared.

Have a conversation first: Establish a good rapport with the seller. Have a conversation about the business, its history, and its future. It's always easier to discuss terms once you've built a bit of trust and understanding.

When Discussing Price: If you're discussing the pricing details and the terms of the sale, that's a natural moment to bring up seller financing. Ask if that is something that the seller would consider.

Before Making a Formal Offer: If you've decided you want the business and are leaning towards seller financing, bring it up before you present an official offer. This way, your offer can include the financing terms right from the start.

Remember, not all buyers will consider vendor financing so before you spend too much time diligencing a business. 

Make sure the seller understands that your interest in seller financing isn't because of a lack of confidence in the business but perhaps because it makes the transaction smoother for them or fits your financial strategy for the future of the company better.

And, just like that well-timed dive, with the right approach, you'll create a splash that's just right and a smooth transfer of ownership from seller to you.


What to include in your Vendor Finance clause?

When you're doing a vendor finance deal, there are a few key details both sides usually chat about and put into the contract of sale:

  1. The total amount being borrowed

  2. The interest rate

  3. The repayment schedule

  4. The term of the Loan Agreement 

  5. How business financial reports will be provided


Vendor finance is a pretty cool way many folks in Australia get to own a business. But, guess what? It's not the only way. If you're eyeing a smaller business, priced under $100k, there are heaps of people who just buy them outright with cash.

For all the sellers out there: if you're happy with vendor financing, pop it into your ad! It will help widen your buyer pool so you can find the perfect buyer.

And if you're looking to buy, it's a good idea to chat early on about vendor finance with the seller or broker. Just a tip: maybe don’t put it front and centre in your first enquiry.


Wishing you all the best in your business buying adventures. And hey, if you ever need a bit of guidance or a second opinion on your deal, just give me a shout. Always here to help.