Businessmen agree on a vendor loan

Seller loan: This is how compa­ny purcha­se finan­cing works

Seller loans can be a useful tool for compa­ny acqui­si­ti­on financing.

Through these loans, buyers can raise a large part of the purcha­se sum, without having to resort to exter­nal sources of finan­cing. This signi­fi­cant­ly reduces the risk for the future entre­pre­neur and the Compa­ny acqui­si­ti­on Funding simpli­fied overall.

Don’t have much time to read? Here are the most important facts about the vendor loan:

  • The seller grants the buyer a loan

  • The vendor loan ensures securi­ty and better condi­ti­ons for residu­al financing

  • The compa­ny must genera­te suffi­ci­ent profits to repay the loan

  • It is almost exclu­si­ve­ly struc­tu­red as a subor­di­na­ted loanwhich puts the seller’s repay­ment claims at the back of the queue.

Defini­ti­on of vendor loan

A vendor loan is a loan that the buyer of a business recei­ves from the seller. This loan is usual­ly used to finan­ce the purcha­se price. The future entre­pre­neur can repay the loan in instal­ments or in one sum. As a rule, the loan is granted at a fixed interest rate.

The vendor loan is there­fo­re a promi­sing oppor­tu­ni­ty for the buyer to afford the purcha­se price. In additi­on, it is often treated by banks in a similar way to equity capital, thus impro­ving the equity ratio of the buyer. Another important aspect is that if the accom­pany­ing bank recog­ni­s­es the seller’s confi­dence in the buyer through a seller’s loan, the bank’s confi­dence in the project to be finan­ced is often also greater.

To deter­mi­ne the enter­pri­se value of the corre­spon­ding project, we recom­mend taking a look at our enter­pri­se value calculator:

Image with link to the company value calculator

Vendor Loan / Share­hol­der Loan

In M&A parlan­ce, vendor loans are also refer­red to as “vendor loans”. English term ?vendor loan? designa­ted. They are from the Share­hol­der loan which can only be used in the case of compa­nies. In the latter case, it is a share­hol­der who grants a repaya­ble loan to the company.

Subor­di­na­ted loan

Almost exclu­si­ve­ly, seller loans are granted as subor­di­na­ted loans. This means that they are treated as subor­di­na­ted in repay­ment, i.e. Repaid only after other debts have been settled become. The finan­cing banks are usual­ly in first place in the event of a default on payments.

This becomes a problem for the lender, i.e. the seller, in the event of the buyer’s insol­ven­cy. Becau­se in this case, other credi­tors are served first. As a rule Subor­di­na­ted loan with higher interest rateHowever, this need not be the case in the special case of the vendor loan.

Alter­na­ti­ve Earn Out

It can happen that the purcha­se price for a compa­ny is too high or that the buyer simply cannot raise suffi­ci­ent funds of his own for finan­cing. In this case, a vendor loan may be the soluti­on for both sides. However, this is not the only way to obtain a Imple­men­ta­ble finan­cing struc­tu­re for the chall­enge of business succes­si­on to attain.

A Earn Out Clause is a contrac­tu­al agree­ment based on the future turno­ver or earnings after the sale of the business. The clause speci­fies how much of the purcha­se price will be paid immedia­te­ly and how much will be paid in instal­ments depen­ding on the future success or failure of the business.

The clause serves to protect the Risk to be shared between buyer and seller and ensure that the seller remains invol­ved in the success of the compa­ny. The stagge­ring of the further purcha­se price payments can be very detail­ed and of course also take into account an exces­si­ve success of the sold compa­ny in a parti­cu­lar­ly positi­ve way for the seller.

This arran­ge­ment can be attrac­ti­ve to the buyer, as it allows him or her to Reduce the risk of acqui­ring a compa­ny and genera­te signi­fi­cant success in the future and ideal­ly to finan­ce the further purcha­se price from this.

Requi­re­ments

For a vendor loan in the sale of a compa­ny, there are requi­re­ments that must - or should - be met:

  • The Buyer must be suita­bleto be able to successful­ly handle the succes­si­on of the compa­ny. Other­wi­se, no seller will take the risk.

  • The credit­wort­hi­ness (ideal­ly also the existing equity ratio) of the buyer should be good so that a bank or savings bank has no reser­va­tions about granting the loan for the purcha­se in principle

  • The seller’s compa­ny should have a certain value and show good business opera­ti­ons with secure earnings prospects

  • It should conti­nue to genera­te suffi­ci­ent profits to allow for redemption

  • The term of the loan should be reasonable and there should be suffi­ci­ent colla­te­ral be in place. Term life insurance with a suici­de clause is the minimum.

  • The seller must usual­ly be prepared to stand behind the banks and savings banks in the event of a possi­ble colla­te­ral realisation

  • It is advisa­ble to bring the person and not only the compa­ny of the buyer, exten­ded into a priva­te and perso­nal liabi­li­ty for the seller’s loan

Finan­cing gap after positi­ve due diligence

A positi­ve Due Diligence is an important step in the Compa­ny sale. However, it may happen that the gaps in the finan­cing resul­ting from the purcha­se price cannot be fully cover­ed by conven­tio­nal bank finan­cing. In this case a vendor loan can help close the gap.

At the same time, it is a very signi­fi­cant signal from the seller and buyer towards the finan­cing banks. Becau­se if both sides deter­mi­ne the future over the sale and the seller even takes an exten­ded risk, a bank or savings bank assumes that both sides belie­ve in a successful coope­ra­ti­on. That is worth an extre­me amount.

KERN-Graphics-Vendor-Loan-as-a-Means-of-Closing-The-Financing-Gap

Facili­ta­ted finan­cing Compa­ny acquisition

Many business buyers are quite happy to decide to ask for a vendor loan becau­se the finan­cing is thus signi­fi­cant­ly simpli­fied and the seller will accom­pa­ny the further develo­p­ment in a commit­ted and benevo­lent manner. After all, he wants to make sure that he also gets his loan back.

This means that the buyer does not have to go in search of further finan­cing partners himself and can instead comple­te­ly on theCompa­ny takeover concen­tra­te. In additi­on, the buyer can spread the purcha­se amount over several years and does not have to raise the entire amount at once.

Proof of confi­dence for the buyer in the transaction

An essen­ti­al aspect of acqui­ring a business is the trust that the buyer must place in the transac­tion. This confi­dence can be streng­the­ned through the use of a vendor loan. It repres­ents a important proof of trust for the buyer The seller thus conver­se­ly places his confi­dence in the transac­tion and in the person or compa­ny of the buyer.

In the case of a share­hol­der loan (e.g. in the case of a parti­al sale), the loan can be brought in as an equity substi­tu­te for another bank loan. This is not least Securi­ty for the bank in the event of residu­al finan­cingwhich can favour the interest rate.

Subor­di­na­ti­on

The subor­di­na­ti­on is One of the most frequent causes of reluc­tance on the part of the sellers’ side in this finan­cing through a vendor loan. As seller, the previous compa­ny leader not only steps down from his origi­nal positi­on as managing direc­tor and designer, but the loan is usual­ly secured after the banks.

The seller must there­fo­re not only trust in the buyer’s abili­ties for the future, but also in the finan­cial repay­ment of his loan. There­fo­re, all options of colla­te­ral and priva­te, perso­nal guaran­tees must be exami­ned and, if neces­sa­ry, also clari­fied together with the finan­cing banks.

Advan­ta­ges for buyers

A seller’s loan can be a promi­sing way for buyers to close the purcha­se price gap and make finan­cing possi­ble. Becau­se it is often the case that, especi­al­ly for younger indivi­du­als the credit­wort­hi­ness and the frame­work at the banks are not suffi­ci­entto finan­ce the entire purcha­se price. However, with a seller’s loan, the buyer can make up the diffe­rence and thus make the purchase.

On the subject of Take over a compa­ny without equity capital the vendor loan can be of central importance.

In additi­on, the Interest rates for seller loans usual­ly lower than for other types of loans. The repay­ment of the loan can also be arran­ged flexibly.

If you are still looking for suita­ble buyers for your compa­ny, we will be happy to support you

Advan­ta­ges for the seller

A vendor loan can create the frame­work to make a transac­tion possi­ble at all and thus secure the future of a compa­ny. However, the follo­wing appli­es to shed light on the buyer’s securi­ties and liabi­li­ties in great detail and to shape it.

Further­mo­re, “guard rails” should be agreed in the purcha­se contract on which planning figures the further develo­p­ment of the compa­ny should be based and, if neces­sa­ry, even a right of veto should be granted to the seller for special invest­ments. This means that both sides commit­ted to success and cannot act arbitra­ri­ly without the interests of the respec­ti­ve side.

Positi­ves: The seller of a business, by provi­ding a vendor loan, can someti­mes a higher purcha­se price negotia­te and receive.

Repay­ment of the vendor loan

The repay­ment of the seller’s loan is subject to some condi­ti­ons. For examp­le, the buyer must repay the loan usual­ly repay within a certain period of time and assumes perso­nal liabi­li­ty in the event of a default. Unsche­du­led repay­ments should also help in the case of a very successful business develo­p­ment so that both sides can leave the joint frame­work more quick­ly and with pleasure.

The psycho­lo­gi­cal, positi­ve effect on other finan­cing partners in a compa­ny sale should not be undere­sti­ma­ted. If the buyer and seller take this option, it is a weigh­ty signal of future credi­bi­li­ty for all lenders.

Get a KERN free initial consultation on the vendor loan
Map with KERN locations for the seller's loan

Conclu­si­on

A seller’s loan is a sensi­ble oppor­tu­ni­ty to Compa­ny acqui­si­ti­on to finan­ce. However, one must inform oneself well in advan­ce and plan this form of finan­cing. In any case, it is advisa­ble to have a seek profes­sio­nal advice.