Should you offer Vendor Finance?

If selling your hospitality business – whether it’s a café, bar, or restaurant – is on the horizon, now’s a great time to learn about vendor financing. If you sell your business you are the 'vendor', it's just a real estate term for 'seller'. This approach is becoming increasingly popular in New Zealand business sales, we're seeing it here in the Bay of Plenty all the time, especially with tighter bank lending regulations.

Um... What is Vendor Financing?

Vendor financing, or seller financing, allows you to offer a loan to the buyer as part of the sale. Instead of relying entirely on bank loans, the buyer pays you in instalments over time, usually with interest. This setup makes your business more appealing to a wider pool of buyers, especially those struggling to secure full bank financing.

Is it Common?

Vendor financing, while not exactly common, has a growing place in the sale of businesses in New Zealand. Traditional bank lending processes changed significantly after the introduction of new lending regulations in 2022. As a result, vendor financing is gaining traction in the sale of hospitality businesses, offering a practical alternative to the conventional banking route.

What are the benefits?

Benefits for the vendor

The primary benefit for the vendor is enhancing the business's affordability to a broader array of buyers. This expansion in the buyer pool significantly boosts the likelihood of a sale and can lead to a more advantageous selling price.

Expands Purchaser Pool: Broadens the range of potential purchasers.
Exudes Confidence: Demonstrates your belief in the business's success.
Enhances Market Appeal: Differentiates your business from competitors.
Interest Earnings: Generates income at a risk-adjusted rate.
Clear Terms: Offers transparent and agreed-upon contractual terms.
Facilitates Sale: Increases the likelihood of a successful transaction.

Benefits for the Purchaser:

Eases Financing: Simplifies the process compared to traditional bank loans.
Speed and Simplicity: Offers a more straightforward transaction process.
Vendor Confidence: Indicates the vendor's trust in the business's potential.

How Vendor-Financed Deals Can Work for You as a Vendor

When offering vendor financing, there’s no one-size-fits-all approach. The structure of these deals can vary depending on what’s needed to close the sale. As the vendor, you have some flexibility to shape the arrangement, balancing your risk with the buyer’s ability to repay. Here’s an overview of the most common structures and what they mean for you.

Types of Vendor Financing Structures

Vendor Loan: Simple and Transparent

This is the most common structure in hospitality business sales. With a vendor loan, you agree to regular payments from the buyer over a set period, including principal and interest. It’s straightforward and predictable, which makes it easy to manage. For you, it offers the benefit of generating interest income and a clear repayment schedule.

Earn-Outs: High Risk, High Reward

While earn-outs are more common in industries with fluctuating cash flows, they can occasionally be used in larger hospitality sales. With this method, part of the sale price is paid upfront, and the rest is contingent on the business’s future performance. Be aware that this structure comes with higher risks for you, as you’re betting on the buyer’s ability to maintain or grow the business.

Key Terms to Include in the Agreement

Vendor-financed deals are formalised in the Sale and Purchase Agreement and other legal documentation, prepared by a solicitor. Some important terms to consider include:

Loan Amount: The portion of the sale price you’re financing.
Interest Rate: The rate applied to the financed amount.
Repayment Period: The timeframe for the buyer to repay the loan in full.
Payment Frequency: How often the buyer will make repayments.
Security: The assets or guarantees protecting your interests (see below).
Reporting: What financial updates the buyer must provide throughout the repayment period.
Missed Payments: Procedures for handling late or missed payments.
Legal Costs: Typically covered by the buyer, but this should be clearly defined.

Is Vendor Financing Right for You?

While vendor financing offers significant benefits, it isn’t suitable for every vendor. Consider the following before offering this option:

Your Financial Needs: If you need the full sale amount immediately to settle debts or fund retirement, vendor financing may not be feasible.
Risk Appetite: Vendor financing ties your financial outcome to the buyer’s success. Some vendors may find this level of risk uncomfortable.
Market Conditions: In a hot market, you might prefer buyers who can pay in full upfront. However, in slower markets, vendor financing can be the competitive edge that attracts serious buyers.

Securing Your Interests as a Vendor

When offering vendor financing, protecting your interests is essential. Several security options can be built into the agreement:

General Security Agreement (GSA): A GSA gives you a legal claim to the business’s assets if the buyer defaults. It’s registered on the Personal Property Securities Register (PPSR) to formalise your interest.
Personal Guarantee: This makes the buyer personally liable if the business cannot meet its repayment obligations, offering you an additional layer of security.
Mortgage Over Real Property: If the sale includes real estate, a mortgage over the property can secure your loan.
Key Person Insurance: Requiring the buyer to take out insurance on key individuals, with you as the beneficiary, mitigates your risk if something unexpected happens.

These security measures ensure that you have recourse if things don’t go as planned, helping protect the value of your business sale.

Final Thoughts: Is Vendor Financing Worth Considering?

Vendor financing isn’t just about offering a loan – it’s about creating opportunities and making your business more attractive to buyers. It can be especially useful in today’s market, where bank lending is tighter and more buyers are looking for flexible options.

By structuring a vendor-financed deal carefully, you can attract more interest, increase your chances of selling, and even earn additional income through interest. However, it’s essential to balance the benefits with the risks and ensure you’re comfortable with the terms.

Even if you’re not planning to sell right now, learning about vendor financing early will prepare you to make informed decisions when the time comes.

Planning Ahead Pays Off

Even if you’re not looking to sell just yet, it’s worth learning about vendor financing now. Offering vendor finance not only increases exposure for your listing but also gives you more flexibility when structuring the sale.

If you'd like to know more about how vendor financing can work for your business sale, let’s chat. We’d be happy to walk you through the options so you can plan with confidence and get the best result when the time comes.

Vendor financing is more than just a financial tool – it’s a marketing advantage that gets more buyers looking your way.

Need Guidance? Let’s Chat.

If you’d like to explore how vendor financing could fit into your sale strategy, we’re here to help. Get in touch for a confidential, no-obligation chat, and we’ll walk you through your options. With the right plan in place, you’ll have the flexibility to attract buyers and get the best result from your business sale.