Vendor finance when selling a business: how it works, the risks, and how we protect the seller

How vendor finance is usually structured

In a typical Queensland small-business sale, the buyer pays a deposit, pays a large part of the price at settlement from their own funds or a bank facility, and the balance — commonly 15% to 40% — is left outstanding as a deferred amount owed to the seller.

That deferred amount is documented as a loan or as deferred purchase price, with interest, a repayment schedule, and security. Terms of 12 to 36 months are the norm. Interest is usually charged at a commercial rate, with a higher default rate if payments are missed.

• Deposit held in the agent's or solicitor's trust account
• Cash at settlement, often 60% to 85% of the price
• Deferred balance payable by monthly or quarterly instalments, sometimes with a balloon
• Interest, a default rate, and a right to accelerate the whole balance on default
• A security package over the business assets, and usually personal guarantees

Why a seller would agree to it

Vendor finance widens the buyer pool. Banks lend cautiously against goodwill, so many capable buyers cannot raise the full price even where the business is sound. Offering finance typically brings a higher price and a faster sale, and the interest is real return on money the seller would otherwise have received in cash.

It also signals confidence. A seller prepared to carry part of the price is telling the market the earnings are genuine — which is often exactly what a nervous buyer needs to commit.

There can be tax timing advantages in receiving the price across income years, but that turns on the seller's circumstances and the CGT small business concessions, and it needs accounting advice before the contract is signed, not after.

The risks a seller carries

The core risk is simple: the buyer now runs the business, and the buyer's performance determines whether the seller gets paid. A seller who has handed over the customer list, the staff, the lease and the goodwill has very little practical leverage left unless the documents create it.

• The buyer runs the business badly and the earnings that were meant to fund the instalments disappear
• The buyer stops paying and the seller has to sue, at their own cost, to recover
• The buyer sells or encumbers the business assets before the balance is paid
• The buyer's company is a $2 shell with no assets and no guarantee behind it
• A bank financing the buyer takes first-ranking security, leaving the seller behind it in a wind-up
• The landlord will not consent to a further assignment, so the seller cannot realistically step back in
• The buyer claims a breach of warranty and withholds instalments as a set-off

How we protect the seller

The protection is built into the transaction documents. In a vendor-financed sale we would ordinarily insist on most of the following.

• A written loan agreement or clear deferred-consideration terms — never a handshake or a clause in the sale contract alone
• A general security agreement over all the buyer's present and after-acquired property, registered on the PPSR within the statutory time so the interest is perfected and enforceable in an insolvency
• Personal guarantees and indemnities from the individuals behind a corporate buyer, supported where the amount justifies it by a registered second mortgage over real property
• A charging clause in the guarantee so a caveat can be lodged against a guarantor's property
• Priority arrangements or a deed of priority with any bank financing the buyer, so the seller knows exactly where they rank
• Acceleration on default: one missed instalment beyond a short cure period makes the whole balance immediately due
• Step-in and enforcement rights, including a power of attorney to deal with the business assets, and the ability to appoint a receiver under the security agreement
• Restrictions on the buyer while money is owed — no sale or further assignment of the business, no new encumbrances, no stripping of assets or unusual dividends without consent
• Reporting obligations: monthly or quarterly management accounts and BAS lodgements, so a decline is visible before the payments stop
• Retention of the lease position — landlord consent obtained on terms that allow the seller to be reinstated or to nominate a replacement tenant
• Insurance obligations over the business assets with the seller noted as an interested party
• Where the deferred amount is large, holding legal title to key assets or a right of re-entry until the final payment
• No set-off clause, so warranty disputes do not become an excuse to stop paying

PPSR registration — the step that decides the outcome

Security over business assets is governed by the Personal Property Securities Act. Registering on the PPSR is what makes the seller's interest effective against a liquidator and against later financiers. An unregistered security interest vests in the company on insolvency — the seller simply loses it.

Timing matters. A registration made outside the periods in the Act can be vulnerable if the buyer becomes insolvent within six months. Register correctly, against the right grantor identifier, and immediately.

Earn-outs are not vendor finance

An earn-out ties part of the price to the business hitting agreed performance targets after settlement. Vendor finance is a fixed debt that must be paid regardless of performance.

Sellers are often offered an earn-out dressed up as vendor finance. The difference is significant: with an earn-out the seller carries business risk they no longer control, and disputes about how the accounts were prepared are common. If the seller is carrying risk either way, the fixed debt with security is the better structure.

What to do before you agree to carry any of the price

Do the diligence on the buyer that the buyer is doing on your business.

• Company and PPSR searches on the buyer and each guarantor
• Bankruptcy and litigation searches on the individuals
• Title searches on any property offered as security, and a check of existing mortgages
• A statement of position from each guarantor, and independent legal advice certificates so the guarantee cannot later be attacked
• Confirmation of the buyer's own funding and any bank's security requirements before terms are agreed

Getting it documented properly

We act for sellers of small and medium businesses across the Sunshine Coast, Moreton Bay and Wide Bay, and vendor finance is one of the areas where the documents genuinely decide the outcome. The commercial terms are usually agreed in a paragraph; the protection sits in the security agreement, the guarantee and the PPSR registration. Coastside Law prices this work up front, and it is worth having the structure reviewed before you sign heads of agreement rather than afterwards.

Vendor finance in a business sale — common questions