I have previously written about how as a seller, you should know your buyer, in particular, whether they have the money to pay you what your business is worth. You can read more about this here.
I can give you some painful stories about vendor finance. I recall a sale of a local tavern in an urban shopping centre precinct. The purchaser was a frequent visitor to the location. Loved it so much that he and his friend decided to buy the business, the classic Remington story!
Offer made. Offer accepted. The buyer didn’t have the money. They sought financing from their bank. They were rejected. They tried their friends but couldn’t raise enough capital. They withdrew from the purchase. The business broker offered and structured a vendor finance arrangement which the vendor accommodated and the buyers accepted. The loan was provided, documents drawn up, and personal guarantees signed. Done. They were now proud owners of a local pub. Off they went.
The purchasers were not prepared to leave their full-time employment, so they engaged and employed a local manager. They would still frequent the venue as they did before, help on shifts when needed, and managed the financial recording and reporting.
Now that they are the owners, they discovered the numbers are not as reported by the seller. Debts started to accumulate and before you know it, they were in the red. They couldn’t pull the pin on this business, after all, they signed a new 5-year lease, so they were liable for this at a personal level and of course, there was a vendor finance agreement that had to be paid, also personally.
They put the business back on the market and sold it. 6 months had lapsed from the time of purchase to the time (re)sale. The sale price of course was not enough to pay the debts and vendor finance. That still needed to be dealt with. These guys are now out of pocket. An unhappy experience.
Vendor finance is a useful way to manage a sale. It converts your business value to a debt and if there is a default, you enforce recovery of the debt. This is a much simpler process than trying to sell a business, so long as the buyer has the personal assets to back the loan you have given them. For the buyer, it enables you to access funding. Due diligence is critical here. Forget about the romance of owning your own business. It becomes hard work very quickly. You must be certain you can operate the business; you can handle the debt and more importantly, you have the personal assets to deal with any default if the business you bought turns out to be a lemon. This should be enough motivation to keep you going.
