Vendor financing of business sales skyrockets

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For Sale Sign
Photo: RNZ / Angus Dreaver

The increased number of vendor financed-business sales over the past year are a sign of the times, says the managing director of business brokerage ABC Business Sales.
Photo: 123RF

Vendor financing has helped close the deal in one out of 10 business sales over the past year, compared with about one-in-100 deals the year earlier.

ABC Business Sales managing director Chris Small said it was a sign of the times, with vendor financing helping to bridge the gap between asking and selling prices, and was especially popular with younger buyers needing finance to buy their own business.

“A large portion of our new purchasers are younger buyers who don’t have the financial ability to buy these businesses outright, and many of our listings are ‘boomer-owned businesses’ where the vendors are highly motivated to sell and also have the capacity and flexibility to make the deal work,” Small said.

“This method is also a very positive signal to the buyer of the vendor’s confidence in the business.”

Chris Small, managing director of ABC Business Sales, says vendor financing is especially popular with younger buyers needing finance to buy their own business.
Photo: ABC Business Sales / Supplied

Small said established business owners viewed vendor finance as an acceptable investment, with standard interest rates in the region of 12 to14 percent.

He said vendor financing was also influenced by high interest rates, as well as caps on how much banks would lend on business purchases – in a range of 30 to 60 percent of the total value of the business – leaving a gap for vendor financing.

Vendors had more knowledge about the risks in their business and were therefore more comfortable than banks in offering financing, he said.

In addition, Small said the financing option made it easier to close a deal when there was a gap between what vendors were prepared to accept and what purchasers were prepared to pay.

While there was still a high volume of would-be buyers, he said asking prices were under pressure given the economic downturn and high interest rates.

“In the last 12 months we’ve had almost 20,000 sign confidentiality agreements across New Zealand. It’s 50 percent higher than the year before,” he said, adding that the number of signed confidentiality agreements was a key measure of interested buyers.

“So there’s certainly a lot of buyers but they’re very conservative and they’re cautious given everything they read about the economy.”

Despite the downturn he said prices were holding up, though sales volumes were down about 5 to 7 percent in the ended March 2024 over the year ended 2022, which was its best ever.