Financing contract
Introduction
Seller financing, also known as "vendor financing"[1] or "seller financing",[2] is a type of financing in mergers and acquisitions (M&A) operations[3] or the purchase and sale of companies where the seller agrees to receive a part of the sale price in a deferred manner, effectively acting as the buyer's lender. This practice is especially common in small and medium-sized business (SME) transactions, where access to traditional bank financing may be limited or unattractive to the buyer.
In this type of financial structure, the seller typically receives a down payment at the closing of the transaction (between 10 - 50% of the total price), while the remainder of the purchase price is structured as a loan that the buyer must repay within an agreed period, usually with interest. This type of financing represents a practical solution to close the gap between the seller's price expectations and the buyer's ability or willingness to pay immediately.
Main features
Typical structure
Seller financing is typically structured as a loan documented by a promissory note or loan agreement, which is signed simultaneously with the sales contract.[4] The structure usually includes a defined payment schedule, with installments that may be monthly, quarterly or annually, depending on the agreement between the parties.
Typical financing percentages
In the SME market, the buyer makes an initial payment or deposit (down payment) that generally represents between 10% and 50% of the sale price. The percentages vary depending on factors such as the size of the transaction, the sector of activity and the risk profile of the operation. Consequently, the seller usually finances the remainder of the total transaction price.
Terms and financial conditions
Financing terms usually range between 3 and 7 years, although they can be extended up to 10 years in exceptional cases. Interest rates are usually between 2% and 5% above bank reference rates, reflecting the greater risk assumed by the seller compared to a traditional bank loan. That is, if the bank interest rate for companies is 5%, the seller's financing contract may have an interest between 7% - 10%.