Benefits Of VTB
If you’ve ever purchased a home, you might be familiar with the term VTB mortgage, which stands for Vendor Take Back. In real estate, a VTB is when a property owner finances the mortgage to the buyer directly.
A Vendor Take Back also plays an important role in the successful sale of a business. The previous owner does more than sell their business—they also finance a portion of it to the buyer. If you want to learn more about VTBs and whether you should consider negotiating one, keep reading:
What is Vendor Take Back?
VTB is a legal term for seller financing. Most lenders will require that the seller finances at least 10% of the purchase price of the business for 5 years—some lenders may require as high as 25% VTB. This amount is securitized and earns you interest.
The terms of the VTB will be negotiated at the Letter of Intent stage, but will mostly be determined by the lender when the business gets pre-financed. The lenders essentially say that if you are not willing to finance at least 10-25% of the deal, then they are not willing to finance 50-65% of the deal. (The buyer will typically have to pay 15-35% of the purchase price as a down payment.)
Advantages & Disadvantages of VTB A VTB helps get the deal financed. It also helps you get the highest price for your business. When you earn interest on VTB payments, you can make more money from selling your company than you would have otherwise.
If you’re having trouble getting your deal pre-financed, a VTB loan can be a great asset. It takes some of the risks off the lender and makes your deal more feasible for a greater pool of buyers.
Often, sellers will claim that they are not willing to offer a VTB. If that happens, the valuation will be significantly lower; all-cash buyers will almost always be the lowest offers.
Why are some sellers reluctant to offer a VTB? It seems like it carries more risk than a sale without one. This is because you aren’t being paid for a portion of the business outright—instead, you’re essentially financing it for the buyer. You lend the sale price to them while they pay for it over time. But in reality, a deal with out VTB is usually a lower sale price. As an example, a business may sell for $1,000,000 to an all-cash buyer. Yet that same business may sell for $1,200,000 if the seller offered 20% of the deal as VTB. So sellers need to be mindful that they don’t leave money on the table by excluding VTB.
What is Earnout?
Another way to finance business deals is with an earnout. This is when the seller gets a portion of future profits based on a performance threshold. The return is dependent on how much revenue the business generates.
An earnout lasts for a designated period; for example, between 5-10 years. There may be a maximum payout amount—once this total is reached, the seller will no longer receive revenue from the earnout.
This is advantageous for a buyer in that they only need to pay an earnout if the business performs well. If the revenue is lower than anticipated, they won’t need to pay it back to the seller. Earnouts are a good way to sell if the “potential” is there, but yet the profit history is not.
When selling your business, you need to weigh the pros and cons of each aspect of the deal. Is a VTB worth the additional risk if you can secure a higher asking price and more support from lenders? Or is it better to work with an all-cash buyer for an immediate (albeit lower) payout?
A Vancouver business broker can help you with financial decisions like these. To schedule your free consultation call, contact Jason Brice today.