Vendor take-back financing, explained simply

Many small business sales only happen because the seller agrees to be paid part of the price over time. Here is how that usually works, and how to do it safely.

What it is

In a vendor take-back, often called a VTB or seller financing, you agree to receive part of the price after closing. For example, a buyer might pay most of the price on closing day and the rest to you in monthly payments over a few years, with interest.

Why sellers agree to it

• More buyers can afford your business. Banks rarely lend the whole price, especially to a first-time owner such as an employee.
• It shows you believe in the business. Buyers and lenders take comfort when the seller is willing to wait for part of the money.
• It can help you get your asking price rather than cutting it for a cash buyer.

The risks

The big one is simple: if the business struggles after you leave, the buyer may not be able to pay you. You may also be waiting behind the bank, which usually gets paid first if things go wrong.

How owners usually protect themselves

1. Check the buyer first. Look at their experience, their own money going in, and their lender's approval. See how to spot serious buyers.
2. Keep the financed part modest and the payment period reasonable.
3. Put it all in writing. A promissory note with the amount, interest rate, payment dates and what happens if a payment is missed.
4. Take security. Your lawyer can register security over the business assets, and you can ask for a personal guarantee.
5. Ask for regular financial updates until you're paid in full.

Where it fits in the sale

Seller financing is usually agreed in the letter of intent and written into the purchase agreement. It is common when selling to an employee or to family. For the tax side, read taxes when you sell a small business, and speak with your accountant.