Type of Security a Vendor might Request
The vendor should make sure that it is adequately protected in the event that the buyer is unable to meet the repayment schedule deadlines and defaults. Security may include things like a:
- mortgage covering particular business or real estate assets;
- a registered charge over the assets of the buyer’s company.
It is also a good idea to have the buyer (and its directors) provide personal guarantees so that you are not relying solely on the buyer. Make sure that any potential security has enough equity in case it needs to be used by the vendor.
Other Requirements of the Buyer
On the sale of a business, the vendor might require the buyer to do any of the following:
- enter into adeed of priority, which would give the seller priority against third party lenders. This means the vendor is “first in line” in terms of debt repayment;
- have a certified accountant draft a statement of assets and liabilities so that the securities attached to the vendor finance loan agreement can be verified;
- limit their ability to share the business’ profits until the seller has received full repayment under the repayment schedule of the agreement; and
- grant power of attorney to the vendor in the event of a default. This will allow the vendor to regain control over any licences for the business, which the buyer will need to lawfully operate the business.
Under any company charge (when one party has an interest in another party’s assets), a fundamental right of secured creditors is the ability to appoint a receiver.
Obtaining directors’ guarantees allows the vendor to pursue the directors personally if there has been a default. The seller can only rely on a director’s personal guarantee when they have assets to service the debt.