How can I secure a vendor take-back loan when I sell my business?

A vendor take-back is a loan from you to the buyer, and without security you are an unsecured creditor who is repaid only if the buyer is willing and able to pay. The tools that change that are a written security agreement, a public registration and, sometimes, a guarantee. Our guide to seller financing explains how the arrangement works. This page covers the security.

Take security in the assets, then register it

A security agreement gives you a claim over named assets, such as equipment, inventory and receivables. Registration is what makes that claim visible to everyone else. Ontario’s registry guidance says creditors who secure a debt with a security interest in personal property should register a financing statement under the Personal Property Security Act, and Alberta’s says to register to protect yourself if the borrower does not repay. Provinces run their own registries, and Quebec keeps a separate register of personal and movable real rights.

Register early, because order decides priority

Under Ontario’s Act, unless another provision applies, priority between security interests perfected by registration is determined by the order of registration. An earlier registration by a bank or another creditor of the buyer can therefore rank ahead of yours. The Act also gives special priority rules to purchase-money security interests, which it defines to include a security interest taken in collateral to secure all or part of its price and one taken by someone who gives value so the debtor can acquire the collateral. Whether a particular take-back note qualifies is a question for your lawyer.

Agree your place behind the buyer’s bank

BDC describes a purchase financed by some mix of the buyer’s own investment, a business loan and seller financing. When a lender is in that mix, you and the lender need to settle in writing which of you is paid first from the assets and what each may do if the buyer defaults. Settle it before closing, so the signed documents say what you expect rather than leaving it to assumption.

Other ways to back the note

• A personal guarantee from the buyer’s owners, so you can claim against them as well as the company.
• A pledge of the shares, where the buyer is acquiring a company rather than assets.
• A mortgage or charge on land, which is registered against the land rather than in the personal property registry.