Selling a Small Business When the Buyer's Bank Wants to Come First

The situation

Keisha started the business four years earlier while finishing a college diploma part-time, running it out of a rented unit in Grimsby with whatever hours she had between classes. Winston, who worked full-time as a hotel front-desk supervisor, joined a year later as an equal partner, covering evening and weekend hours she couldn't. Between them they built a small, steady operation worth roughly $150,000 by the time they decided to sell — Keisha had finished school and taken a full-time job in her field, and Winston's shifts at the hotel had become harder to juggle with running a business on the side.

They found a buyer, Genevieve, who wanted to take the business over as a full-time owner-operator. She had savings for part of the purchase price and a conditional approval from her bank for a small business loan to cover most of the rest. The gap between what her cash and bank loan could cover and the agreed $150,000 price was about $55,000. Genevieve asked Keisha and Winston to carry that gap themselves as a vendor take-back — a seller-financed loan, often called a VTB, where the sellers accept a promissory note for part of the price instead of full cash at closing, and get paid back over time with interest.

Keisha and Winston agreed in principle. A VTB is common in small business sales, especially when a buyer's own financing doesn't quite stretch to the full price, and it can make a deal work that would otherwise fall through. But agreeing to be paid later, instead of in full at closing, meant they needed the loan properly documented and secured — and neither of them had done this before.

The financing gap gets complicated

Our team was retained to prepare the sale agreement and the vendor take-back documents. The basic shape was straightforward: an asset purchase agreement transferring the business's equipment, inventory, customer contracts and goodwill to Genevieve, a promissory note for the roughly $55,000 balance, and a general security agreement giving Keisha and Winston a registered claim against the business assets if Genevieve stopped paying. In Ontario, that kind of security interest in business assets — equipment, inventory, receivables — is registered under the Personal Property Security Act, which sets out how competing claims against the same assets rank against each other, usually in the order they were registered.

That ranking order is exactly where the deal got complicated. Once Genevieve's bank finished its due diligence and moved to finalize her loan, it sent terms requiring that its own security interest in the business assets rank ahead of any other claim — including the sellers' VTB note. Banks routinely insist on this: if the business ever failed and the assets had to be sold to cover debts, the bank wanted to be paid first, in full, before Keisha and Winston saw a cent of what they were still owed. The bank's lawyer sent over a subordination agreement — a document that would formally place the sellers' security interest behind the bank's — and asked Keisha and Winston to sign it as a condition of the loan closing.

Signing a subordination agreement without reading it closely is one of the more common mistakes sellers make in this position. Some versions go well beyond simple priority ranking: they can restrict the seller's right to demand payment even after a genuine default, require the seller to give the bank lengthy advance notice before taking any enforcement action, or let the bank amend its own loan terms later without the seller's consent — all while the seller's note sits in the background, unsecured in practical terms, for years. Keisha and Winston were being asked to give up their cash price and accept a promise instead; if that promise turned out to be worth little because the subordination language gave the bank too much room, the deal would look very different from what they thought they were agreeing to.

What we did

1. Reviewed the bank's proposed subordination agreement line by line. The first draft gave the bank open-ended discretion to increase its own loan amount in the future and have that increased amount still rank ahead of the sellers' note — a common overreach that would let the buyer's future borrowing quietly erode the value of the sellers' security. We flagged this and several similarly broad clauses before agreeing to anything.
2. Negotiated a cap on the bank's priority. Instead of open-ended priority, we secured a fixed dollar cap tied to the bank's actual approved loan amount, so any future increase to that loan would not automatically leapfrog the sellers' note without their agreement.
3. Preserved the sellers' right to be notified and to act. The subordination agreement was revised to require the bank to give Keisha and Winston written notice if the buyer defaulted on the bank loan, along with a reasonable period to cure the default or take their own steps to protect their position, rather than being frozen out entirely while the bank acted unilaterally.
4. Added a personal guarantee from Genevieve on the VTB note. Because the note itself would sit behind the bank in a straight asset sale, we made Genevieve personally liable for the VTB balance regardless of what happened to the business assets, giving Keisha and Winston a second source of recovery that wasn't affected by the subordination at all.
5. Structured the payment schedule around the bank loan's term. We set the VTB note's monthly payments and interest rate so they wouldn't strain Genevieve's cash flow on top of her bank loan payments, reducing the practical risk of an early default that would trigger the subordination provisions in the first place.
6. Registered the security interest properly and confirmed the bank's registration. Once terms were agreed, we registered Keisha and Winston's security interest against the business assets and confirmed the priority ranking matched what the subordination agreement actually said, so there was no gap between the paperwork and reality.

The outcome

The sale closed on schedule. Genevieve's bank loan, secured with first-ranking priority, and her own cash contribution together covered roughly $95,000 of the price at closing, and the remaining roughly $55,000 was carried as a VTB note payable to them over three years with interest. The subordination agreement went ahead, as it almost always must when a buyer needs bank financing to complete a purchase — but on terms that capped the bank's priority, guaranteed notice before any enforcement action, and backed the note with Genevieve personally rather than leaving it entirely dependent on the value of the business assets.

Two years in, Genevieve's payments have stayed current, and the arrangement has worked as intended for everyone. Keisha and Winston were able to move on from the business with a fair price rather than a discounted one to avoid vendor financing altogether, Genevieve got the deal financed without needing a larger bank loan than she could support, and the bank got the priority position it required to lend. None of that would have changed if the subordination terms had gone wrong — but the risk sitting behind them, in the event something did go wrong, would have looked very different.

What you can learn from this