Vendor Take-Back, also known as Vendor Financing or Seller Financing, is a key component in business acquisitions. It refers to a portion of the purchase price—typically around 10-25%—that's withheld at the time of closing. Instead of receiving this amount upfront, the seller extends a loan to the buyer, to be repaid over a period of 2-5 years. Essentially, it means the current owner is lending money to facilitate the sale of their business.

For buyers, Vendor Take-Back offers several advantages. Firstly, it can enhance the likelihood of securing financing for the deal. Many banks and lenders require a portion of Vendor Take-Back as a condition for approval. Additionally, it can help maintain the seller's involvement in the business's ongoing success, which can be invaluable.

From the seller's perspective, offering Vendor Take-Back might seem risky, especially if their retirement funds are tied up in the sale. However, there are compelling reasons to consider it. Firstly, it often results in a higher overall value for the business, as it supplements the purchase price. Secondly, it can serve as a tax deferral strategy, minimizing the seller's tax burden. Furthermore, with proper protections such as security agreements and business recapture clauses, the risk can be mitigated.

In recent years, Vendor Take-Backs have become increasingly common in business deals. For example, in one instance, 17% of the total purchase price was held back, with deferred payments in the first year to support the buyer's financing needs. In another case, nearly 50% of the purchase price was structured as Vendor Take-Back to facilitate the acquisition of a business where the assets and equipment were valued similarly to the annual revenue. Such arrangements help both parties achieve their objectives in a mutually beneficial way. In conclusion, Vendor Take-Back can be a valuable tool for structuring deals that satisfy both buyers and sellers. By understanding its benefits and implementing it effectively, parties can navigate acquisitions with confidence and achieve favorable outcomes.

Craig Panek Broker, Alberta Business Sales and Commercial Ventures

If you have any questions on how vendor take-back works, or if it’s the right time to sell your business, reach out today: