Canadian small businesses have faced many challenges over the past few years and businesses for sale were no exception. Even those in thriving areas, like quick-service restaurants and online retailers, felt the effects of pressures on small businesses when trying to sell. Specifically, owners learned first-hand that banks were reluctant to provide financing to potential buyers. A lack of bank loans meant that many businesses for sale languished on the market.
Being open-minded to non-traditional financing methods is one thing that helped Acuity Business Group to successfully complete transactions in 2021. Specifically, vendor financing has been critical in helping many small businesses change ownership. Vendor financing, sometimes referred to as a vendor take back, is when the current business owner helps finance the sale. The buyer agrees to pay the seller a percentage of the sale price, including interest, over a period of time. The buyer and seller work together to decide the terms of the deal including interest rate, payment amount and frequency, and the length of the repayment period. While not as widely used in Canada, vendor financing is popular in the United States and Europe to buy and sell small businesses. Here are just a few advantages of vendor financing when selling a business.
1. Helps to instill a buyer’s trust
This type of financing can be hugely beneficial to both parties: the seller can provide guidance and training to the new owner, and the new owner can hit the ground running with fewer errors and missteps. When a business owner offers vendor financing, buyers immediately know this owner believes in the future success of the business. It also reassures the buyer they will have an avenue for financial recourse if they need to recover significant costs that were not disclosed before the sale agreement was finalized.
2. Gives the business for sale a competitive edge
There will be times when a business for sale is one of many comparable businesses on the market. Offering vendor financing can give the business a competitive advantage over others for sale. This type of deal can be significantly more flexible than one financed traditionally and offer more opportunities for ongoing mentoring. Working together, the buyer and seller draft a sale agreement that outlines the payment terms as well as accountabilities for coaching and support. It is a legal agreement that is difficult for either party to abandon. Buyers are assured the previous owner will be available for training or help, as outlined in the sale agreement. This can be very valuable to a new business owner in a world full of unknowns.
3. Can increase the likelihood that a bank will also finance a portion of the deal
With vendor financing, sellers have more control over the sale of their business than they think. Sellers can make their business even more attractive to potential buyers by proactively approaching their bank to finance a portion of the deal. Currently, it is challenging for potential buyers to obtain traditional bank financing. A business owner who has a long-term relationship with their bank can present the vendor financing agreement to their banker and negotiate additional funding. This strategy is more likely to succeed than having a new business owner approach the bank. It also shows buyers that the seller is proactive and motivated to help the deal cross the finish line.
If we have learned one thing in the past year, it is that we need to adapt to current circumstances and be willing to do things differently. Business is not the same as before 2020, but we can still succeed by being flexible and open-minded. Acuity Business Group has recently facilitated transactions in Western Canada that included vendor financing. If you are ready to sell your business and think vendor financing might be right for you, let’s chat!