Vendor Loan: smart financing for business acquisitions

In takeover practice, one of the most important aspects is the purchase price that is paid. From a financial point of view, it is not always possible for a buyer to pay the purchase price in one go. There are therefore various ways of financing the purchase price of a company. One of the instruments that is regularly used is the so-called “Vendor Loan.” This article explains what a Vendor Loan is, when it is used, what advantages and risks it entails for the buyer and seller, and what legal considerations need to be taken into account. I will also use a practical example to illustrate this.

What is a Vendor Loan?

A Vendor Loan is a loan that the seller, or “Vendor,” provides to the buyer when selling a company. Instead of (or in addition to) full payment of the purchase price upon transfer, the seller finances part of the purchase price by means of a loan to the buyer. The buyer repays this portion of the purchase price at a later date. This Vendor Loan is then repaid to the seller with interest. This instrument is often used when the buyer is unable to finance the full purchase price immediately with its own resources or external financing, or when external financiers are only willing to finance part of the purchase price.

Advantages and risks for parties

For the buyer, a Vendor Loan offers the advantage that the immediate financing requirement is lower and the transaction can be completed more quickly. The buyer can acquire the company with less equity and is less dependent on external financiers. On the other hand, after the acquisition, the buyer has a debt position vis-à-vis the seller, which can impose restrictions on business operations, for example due to agreements in the loan agreement.

For the seller, a vendor loan increases the chances of a sale, especially if buyers are having difficulty obtaining financing. In addition, the seller can generate interest income on the outstanding portion of the purchase price. However, the risk for the seller is that payment of (part of) the purchase price is postponed and uncertain. In the event of financial problems at the company, the seller runs the risk that the loan will not be repaid (in full).

Practical and legal considerations

When agreeing on a Vendor Loan, it is important that the parties make clear agreements on, among other things:

• The principal amount, term, and repayment schedule of the loan;
• The interest rate and the method of interest payment;
• Any collateral or a subordinated position in relation to other financiers;
• The possibility of early repayment and any penalty interest;
• Provisions that may impose restrictions on business operations while the loan is outstanding.

A carefully drafted loan agreement is essential to prevent disputes and safeguard the interests of both parties. It is also advisable to make agreements about the ranking of the loan, its transferability, and its impact on business operations.

Real-life example

Suppose a company is sold for €10 million. The buyer can finance €8.5 million through a bank loan and its own resources. For the remaining €1.5 million, the seller provides a vendor loan with a term of five years and a market-based interest rate of 6% per annum. The loan is subordinated to the bank financing. If the buyer fails to meet its obligations, the seller runs the risk of not seeing (part of) the loan repaid, especially if the company runs into financial difficulties.

Conclusion

The Vendor Loan is a flexible financing instrument that can offer a solution in takeover practice when full financing is not immediately possible. However, both the buyer and the seller must be aware of the associated risks and cover them well in the contract. Clear agreements and a carefully drafted loan agreement are indispensable in this regard. Fruytier Lawyers in Business will be happy to advise you on the possibilities and pitfalls of Vendor Loans within your acquisition process.