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

Meaning

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 seller's loan is thus a good way for the buyer to afford the purchase price.

In order to determine the company value of the respective object, we recommend taking a look at our company value calculator:

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Vendor Loan / Shareholder Loan

Vendor loans are also granted with the 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.

Alternative Earn out

It may happen that the purchase price for a company is too high and therefore a seller's loan has to be used. However, this is not the only way to obtain a feasible financing structure for this challenge on the buyer side.

An earn-out clause is a contractual agreement based on future sales or earnings after the sale. 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 for the buyer, as it allows him to reduce the risk of the company purchase and to generate significant successes in the future and ideally to finance the further purchase price.

Requirements

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

  • The Buyer must be suitableto be able to run the company successfully

  • The creditworthiness 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 company being sold 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 present

  • 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.

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Facilitated financing Company acquisition

Many business buyers are happy to opt for a seller's loan because it makes financing much easier and the seller will be committed and sympathetic to the further development. After all, he wants to make sure that he gets his loan back. This way, the buyer does not have to go in search of further financing partners himself and can instead vollkommen auf die Unternehmensübernahme konzentrieren. 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 a security for the bank in case of a possible residual financing, which can favour the interest rate.

Subordination

Subordination is one of the most common causes of seller reluctance in this finance a seller loan. As a seller, the previous business 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. This is because it is often the case, especially with younger individuals, that the credit rating and the framework at the banks are not sufficient to finance the entire purchase price. Through a seller's loan, however, 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 seller's loan can create the framework to enable a transaction and thus secure the future of a company. However, the collateral and liabilities of the buyer must be examined and structured in detail. 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. In this way, both sides are committed to success and cannot act arbitrarily without the interests of the respective side in mind.

Positive: The seller of a business can, through the provision of a seller's loan 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 usually repay the loan within a certain period of time and assumes personal liability in the event of 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 also 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.

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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.