When selling or buying a business, financing the deal can often feel like navigating a maze. One term that pops up frequently is "vendor note," leaving many buyers wondering: what is it, and how does it work? This short read dives into one of the top FAQs we receive, breaking down the concept of a vendor note (also called a seller note), why it’s used, and how it can be structured to benefit both parties in a transaction. If you're considering buying (or selling) a business, understanding this common financing tool could be key to closing the deal.

So what is it?

A vendor note, or seller note as it is sometimes called, is a financial instrument commonly used in small business purchase and sale transactions. It is similar to a bank loan and, in the same fashion, comes with rights and responsibilities for both buyers and sellers. Generally, it is subordinate to any lending provided by primary financiers and is used for several reasons, including bridging a perceived valuation gap and ensuring that the seller still has some "skin in the game" after the deal is completed.

How does it work?

The vendor note can be structured as a traditional loan, with interest and principal payments starting immediately after closing (similar to a car loan). Alternatively, it can be structured as an interest-only loan for a period of time, with a balloon payment due at the end of the term. When structured in this way, the vendor note acts as equity for the buyer.

Consider the following scenario: You are buying a business for $1 million. You have $200,000 in personal funds to invest, but the bank requires 30% equity to finance the deal. You negotiate an interest-only vendor note with the seller, with the balance due in five years at an interest rate of 10%. You would owe the seller $10,000 per year in interest and $100,000 in five years, but you would be able to buy the business because the primary lender treats this type of loan as buyer equity.

Conclusion

Navigating the ins and outs of business acquisition financing, including vendor notes, can feel overwhelming, but it doesn't have to be. A well-structured vendor note can bridge financial gaps, build trust between buyers and sellers, and make your business ownership dream a reality. Whether you’re new to the concept or need advice on structuring a vendor note in your favour, we’re here to help. Book a meeting with our Managing Partner, Keith MacKenzie, to discuss vendor notes and creative deal structuring in detail. Let us simplify the process and guide you toward a successful purchase: Book confidential call