In the modern world, businesses are always being bought and sold, often at multiples of the respective annual earnings. So, it can be said that the seller will be expecting a significant amount of cash, no matter what the size of the business is. Unfortunately, people like Roman Abramovich are few and far between, who can both afford the business straight away, and have the cash for future investments and running costs. In fact, not many people can afford the basic asking price, let alone anything else.

This is where Vendor Finance, also known as Deferred Consideration, comes into play. The seller quite commonly provides the buyer with the remaining cash that the buyer needs to complete the sale. While Deferred Consideration can get quite complicated, there are positive sides to it:

1. Insisting on an all cash deal reduces the amount of potential buyers. Economics tells us that a higher price reduces the quantity demanded, thus via Deferred Consideration, it becomes easier to sell.
2. Insisting on cash up front can show instability in the business, or even a lack of confidence in the future of the business on the part of the seller. Deferred Consideration once again makes the purchase of one’s business look more attractive.

Thus it can be said that by financing the sale for the buyer, they will have more money to spend, so the seller will get more for the business. Added bonuses are that the seller can charge interest, which constitutes an extra separate element of income, and that cash receipts for tax purposes should be prepared in good time.

However, as is the case with large amounts of money, there is a big risk factor, thus a lot of security may be desired on the part of the seller.

This can be achieved in a number of ways. The buyer could borrow against the business’ assets, thus if repayments aren’t kept up, the seller can reclaim his assets and get the money that way; this is known as a fixed charge.

The seller could request a personal guarantee of the buyer’s obligation to pay the balance of the price.

The seller may provide in the agreement that title to specified assets is to remain in the seller until the purchase price is paid in full.

The seller may oblige the buyer to place a specified sum in a joint deposit account on completion and define the circumstances in which this can be released to the parties.

However, it could be said that the value the buyer pays is not a true, up to date value, but one of the future, the hopes, the earnings to come. Seen as how banks don’t see the future as well as today’s entrepreneurs, the only choices left to the buyer are wealth, or failing that the Deferred Consideration option. So the seller gets less cash up front, but in the long run will get more cash than he would have done without the Deferred Consideration.

So when it all boils down to it, Deferred Consideration is a wise choice for the seller, as long as he secures himself fully, and keeps to the do’s and don’ts set out below:

DO

1. Insist upon a fair bit of the cash up front, as the more you get then, the more secure you will be. However, don’t go over the top, as asking for too much could send the business down. A delicate balance is needed.
2. Allow credit precautions, by doing credit searches and obtaining credit references. This reduces risk a quite a lot.
3. On receipt of a Personal guarantee, try to get it supported by a charge on the buyer’s house
4. Try to keep the repayment period as short as possible, yet long enough for the buyer to pay comfortably. Give the buyer a chance to be a success before you demand your money back.
5. Charge interest. This can act as an incentive for the buyer to pay as quick as possible.
6. Ask for regular sets of accounts, if, as expected, the payment is coming from future profits of the business. Also make sure you can inspect the company’s records at any time.
7. Only EVER consider an "Earn out" if you are very confident in, and possibly good friends with, the buyer.

DON'T

1. Consider an "Earn out" unless you know the buyer well. Sometimes repayments are not fixed, but are to be determined by future trading performance. You could be caught out, especially if there is uncertainty surrounding the business’ future performance.
2. Take things for granted. The overall agreement between both parties is a delicate contract that may not suit your every taste, nor cater for the future changes in the business. Don’t get caught in a dispute.

In conclusion, Deferred Considerations are vital in keeping businesses going when they change hands, and despite the ongoing lists of do this and don’t do that, don’t be put off by them. When handled carefully, they can be of huge benefit to both the buyer and the seller.

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