Vendor finance when buying a business in Australia

What vendor finance is

Moneysmart defines it as the seller of a house or other asset offering to lend you money to buy the property or asset as part of the sale.¹ Applied to a business, the seller is also your lender.

How it works in a business sale

A typical shape, as an example and not a market norm:

• You pay a first amount at settlement.
• You agree to pay the rest to the seller in instalments over an agreed term.
• You sign a separate vendor finance agreement that sets out the repayments.

It can help when a bank will not lend against goodwill. The finance guide explains why lenders treat goodwill as poor security.

What is negotiated

Five things are open to negotiation, and none has a standard answer:

• The amount: how much of the price is deferred.
• The term: how long you take to pay.
• Interest: whether any is charged, and at what rate.
• Security: what the seller can claim if you stop paying.
• Default: what counts as a default, and what the seller can do then.

Have your own lawyer draft or check the vendor finance agreement, separately from the sale contract. See also contracts for a business sale.

Security and the PPSR

A seller lending you money will often want security over the business's assets. The Personal Property Securities Register (PPSR) is a register of security interests in personal property. Security interests are created by an agreement where a person can take property if a debt is not repaid.³

The PPSR is not a register of property ownership.³ If a seller has a security interest, registering it on the PPSR is optional. Registering protects them, and a lender who does not register will likely be an unsecured creditor, and generally secured creditors are paid first.³

Priority matters if a bank lends too. A perfected security interest normally has priority over an unperfected one, and in most cases a perfected interest is one registered on the PPSR. Between several perfected interests, the order is from earliest registration date to latest, with some exceptions.⁴

A PPSR search is worth doing before you buy. The PPSR says a search costs $2 and tells you if an item is listed as security for someone else's debt. If it is and that debt is not paid, you could lose the item and the money you paid, even if you bought it in good faith.² That page is written for buying a single item, such as a car. Ask your lawyer to search the assets of the business you are buying.

Does consumer credit law apply?

Often not, but check. The National Credit Code applies to a credit contract only if all of these hold when the contract is entered into: the debtor is a natural person or a strata corporation; the credit is provided or intended to be provided wholly or predominantly for personal, domestic or household purposes, or to purchase, renovate or improve residential property for investment purposes, or to refinance credit for that investment purpose; a charge is or may be made for the credit; and the credit provider provides it in the course of a business of providing credit, or as part of or incidentally to any other business of the credit provider.⁵

Buying a business is not on that list of purposes.⁵ The Code also says that investment by the debtor is not a personal, domestic or household purpose, and that the predominant purpose is the one for which more than half of the credit is intended to be used, or, where the credit buys goods or services for different purposes, the purpose for which they are intended to be most used.⁵

Whether the Code applies to your arrangement is a question for your lawyer, especially if part of the credit is for a personal or home purpose, or the purchase includes property.

Tax

Your accountant should confirm how this applies to your deal. For the seller, the ATO says CGT event A1, the disposal of an asset, happens when the disposal contract is entered into or, if there is none, when the owner stops being the asset's owner.⁶ Tax rules for earn-outs are separate (below).

Vendor finance and earn-outs

They are different. Vendor finance, as described here, is a debt agreed at settlement and repaid on the agreed terms. An earn-out makes part of the price depend on how the business performs after you buy it.⁷ The ATO describes earn-outs as often used to structure a business sale because of uncertainty about its value.⁷ Ask your accountant how either would be taxed in your deal. See tax when selling a business and the finance guide.

Questions to ask a seller who offers it

• Why are you offering it? A seller willing to be paid over time is worth asking about. It is not proof the business is sound.
• How much of the price is deferred, over what term, and with what interest?
• What security do you want, and will you register it on the PPSR?
• If a bank is also lending, who ranks first?
• What counts as a default, and what can you do if I miss a payment?
• Can I repay early, and is there a cost?
• Does the sale contract say what happens to the debt if I sell the business on?
• What is already registered against the assets, and will it be removed at settlement?

Do your due diligence as you would with a bank loan.

Try the numbers

The business loan calculator has a seller finance option: 0, 10, 20 or 30 per cent of the price, worked at 8 per cent over 3 years. The rate and the term are fixed settings Signetry chose for the calculator. They are not a market rate and not a typical vendor finance rate, so treat the result as a rough guide and work out the seller's actual offer with your accountant.

Signetry is a listing platform. It is not a lender, broker or adviser, and it is not a party to any sale. You can look at businesses for sale and ask each seller or broker whether vendor finance is on offer.