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.
Table of contents
- Don’t have much time to read? Here are the most important facts about the vendor loan:
- Definition of vendor loan
- Vendor Loan / Shareholder Loan
- Subordinated loan
- Alternative Earn Out
- Requirements
- Financing gap after positive due diligence
- Facilitated financing Company acquisition
- Proof of confidence for the buyer in the transaction
- Subordination
- Advantages for buyers
- Advantages for the seller
- Repayment of the vendor loan
- Conclusion
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:
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.
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.
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.