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 form of Company acquisition financing This significantly reduces the risk for the future entrepreneur and simplifies the overall payment of the purchase price.
Don’t have much time to read? Seller’s loan in a nutshell
- 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? Seller’s loan in a nutshell
- What is a vendor loan? Definition and explanation
- Vendor loan vs. shareholder loan
- Subordinated loans: Importance for buyers and sellers
- Earn-out as an alternative to the vendor loan
- Requirements for a vendor loan
- Financing gap after positive due diligence
- Vendor loan: Facilitating the financing of company acquisitions
- Seller’s loan as a sign of trust for buyers and banks
- Subordination for seller loans: What buyers need to know
- What advantages does a vendor loan offer buyers?
- Why a vendor loan is also advantageous for sellers
- Repayment of the vendor loan
- Conclusion
What is a vendor loan? Definition and explanation
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.
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Vendor loan vs. 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 loans: Importance for buyers and sellers
Seller loans are almost exclusively granted as subordinated loans. This means that repayment is only made after other liabilities have been settled. Nevertheless, the vendor loan is usually available to the buyer immediately after the contract is signed, making it easier to finance the company purchase. The financing banks are usually in first place in the event of a payment default.
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.
Earn-out as an alternative to the vendor loan
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
For a vendor loan in the sale of a company, there are requirements that must - or should - be met:
- The Buyer must be suitable and have sufficient expertise to successfully manage the company succession. 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
- Seller loans can be particularly attractive if they are combined with a Property financing be combined. A property that is part of the company sale offers buyers and banks additional collateral, which strengthens the buyer’s credit rating and increases the likelihood of successful financing.
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.
Vendor loan: Facilitating the financing of company acquisitions
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.
Seller’s loan as a sign of trust for buyers and banks
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 for seller loans: What buyers need to know
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.
What advantages does a vendor loan offer buyers?
On the buyer’s side, a seller’s loan can be a promising way to close the purchase price gap and make financing possible. This is because it is often the case that younger individuals in particular 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
Why a vendor loan is also advantageous for sellers
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.
If a property belongs to the company, additional income from renting or selling it can contribute to the repayment of the vendor loan. This can be an attractive solution, especially for companies with a large property portfolio.
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 vendor loan is not only a sensible option for financing the acquisition of a company or shareholdings, but also an important part of the Mezzanine financingwhich offers benefits to buyers and sellers alike. If you would like to find out more about how you can make the most of this hybrid form of financing, we will be happy to provide you with professional advice.
