vendor finance....HELP!

[capsink]

hi there. i am new to flyingsolo and am looking at buying an existing business through vendor finance. i can't seem to find much information about it on the internet and was wondering if anyone has bought a business this way or maybe just knows a bit more about it? any information will help. thanks, capsink.

[Warren Cottis]

Hi Capsink

I am assuming that you are talking about the scenario where the person selling the business will take a deposit from you, transfer the ownership of the business to you and let you you pay the remaining amount over a period of time with interest.

This doesn't often happen with great businesses because the vendor has the risk that you run the business into the ground and they never get paid the balance of their money.

So either the vendor is Santa Claus or the vendor needs to offer this inducement to make the sale.

The question to ask yourself is... if you took this business to a bank would they lend you the money. I know the answer is probably "no" if you don't have real estate security but assume that the bank wouldn't want that security and still ask yourself... if you took this business to a bank would they lend you the money because the bank thinks it's a good business.

Of course, if you have done your homework and are confident that you can make the business a success then vendor finance is an excellent way for you get going providing the interest rate is a market rate.

[BB]

I guess there's always a place for 'vendor finance' - but sometimes I'm just not sure where.

It can be a good deal but one thing that you must be aware of -

In most cases - the business/property/asset is NOT transferred into the purchasers name until the last payment has been made.

That way - the vendor has himself covered should the purchaser default. (he gets his 'property' back to re-sell, and he has your money to keep)
It's a win-win situation for the vendor, but can make for an insecure purchase for the buyer.

If you do decide to proceed make sure you read all the terms and conditions and get your solicitor to check it through also!

cheers,

B.B.

[investor_eddie]

Originally Posted by B.B.

I guess there's always a place for 'vendor finance' - but sometimes I'm just not sure where.

It can be a good deal but one thing that you must be aware of -

In most cases - the business/property/asset is NOT transferred into the purchasers name until the last payment has been made.

In that case I would prefer to pay off the vendor finance asap. Is it possible to have a 20% deposit, 50% business loan and 30% vendor finance?

edit: on second thought I don't think this would work because I assume you'd need an unsecured business loan and they probably wouldn't lend 50%?

[timlea50]

I used to work within the acquisition finance space for GE Commercial Finance. In a number of deals that I was involved in structuring we did it the following way:

GE would finance :

receivables - ie debtors - up to 90%
inventory up to 60%
P&E up to 85% of Orderly Liquidated value
Up to 65% against property

If vendor finance were used we would treat this as "quasi-equity" which means if you gear up highly against the assets and maximise the level of vendor finance - you could buy a business with nil cash down - I helped two companies (one a listed company) and the second a private company acquire with no cash down.

Admittedly these deals were done two years ago - but even now with clever structuring acquisitions can be made with limited cash down. We have just structured a Management Buy Out using the receivables as the primary security - and the MBO team took on board historic employee entitlements and with "some" equity they bought the business.

If you go to our website we have a video on acquisition finance (in our learning centre) which shows you how this is done (be careful through you need to ensure you are staying within the Corp. Act - section 256)

Hope this helps

Tim Lea
partner,
www.cashstream.com.au