What is vendor take-back financing in an Ontario business sale?

Vendor take-back (VTB) financing is an arrangement where the seller of a business agrees to finance part of the purchase price themselves, rather than requiring the buyer to pay everything at closing. Instead of receiving the full price upfront, the seller accepts a promissory note from the buyer for a portion of the amount, which the buyer pays back over time with interest.

VTB financing is common in smaller Ontario business transactions where traditional bank financing does not cover the full purchase price, or where the buyer wants to spread payment and the seller wants to facilitate the deal. It can also signal seller confidence in the business's ongoing performance.

From the seller's perspective, the risk is that the buyer defaults on the note. The seller's security for repayment is negotiated: it might be a general security agreement over the business's assets, a pledge of the shares purchased, or a personal guarantee from the buyer. The security must be properly registered under Ontario's Personal Property Security Act to be effective against the buyer's other creditors.

From the buyer's perspective, VTB financing can be more flexible and lower-cost than bank debt, but negotiating the interest rate, repayment schedule, and any prepayment rights is important.