How do I ask for seller financing when I make an offer to buy a business?
BDC says to bring vendor financing up as early in the negotiations as possible, ideally in your initial offer, then settle terms both sides can accept: the amount, interest rate and payback period. Name it in your letter of intent.
Raise seller financing in your first offer, not after the price is agreed. The Business Development Bank of Canada (BDC) advises buyers who want vendor financing to bring it up as early in the negotiations as possible, ideally in the initial offer. From there, BDC says, you and the seller can decide on mutually agreeable terms, including the amount, interest rate and payback period. This page uses seller financing to mean what BDC calls vendor financing.
Where it goes in the offer
BDC describes a letter of intent as a document that can set out a price range for the acquisition, subject to amendment, and the terms of payment, with the final price decided only once due diligence is complete. That makes it a natural place to state that part of the price would be paid over time. BDC also notes that a letter of intent can carry legal weight and cautions against using a template found online, so have a lawyer draft or review the wording.
Terms to put on the table
The first offer does not need every detail, but it should show that you expect the seller to finance part of the price. Items worth raising:
- The amount the seller would finance, and the amount you would pay at closing.
- The interest rate and the payback period.
- Where the seller’s note ranks behind any bank loan.
- How often you would report financial results to the seller while the note is outstanding, and what role, if any, the seller keeps after the sale. BDC says the agreement should set out the seller’s post-sale involvement.
Points to make clear early
BDC says vendor financing is, in almost all cases, junior debt, subordinate to bank loans and other financing, and that you should make sure the seller understands this from the outset. BDC also says the seller’s own legal and financial teams should approve the terms, and that if they do not see them until you are ready to close, the whole deal could fall through. Show the seller’s advisers the terms early.
Check how it affects your loan
If you plan to use a Canada Small Business Financing Program loan, Innovation, Science and Economic Development Canada’s guidelines say that when a vendor finances part of the purchase price, that amount is not eligible for a CSBF loan. Ask your lender how any seller note fits with its loan before you submit the offer. For what a seller note is and why sellers agree to one, see can I buy a business using seller financing.
Related reading
5 pages on the same subject, grouped by topic.
Financing
Sources
This answer is checked against primary sources. Links were last confirmed on the dates shown.
- 01Business Development Bank of CanadaGovernmentVendor financing (VTB) for mergers and acquisitions
- 02Business Development Bank of CanadaGovernmentLetter of intent and confidentiality agreement for a business acquisition: What clauses should be included?
- 03Innovation, Science and Economic Development CanadaGovernmentCanada Small Business Financing Program — Guidelines
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