A Vendor Take-Back (VTB) is a form of seller financing in which the seller agrees to receive a portion of the purchase price as a secured promissory note paid by the buyer over a period of years instead of receiving all cash at closing. In Canadian SMB acquisitions, VTB financing is extremely common — typically 10 to 30 percent of the total purchase price at an interest rate of prime plus 1 to 3 percent, repaid over 3 to 7 years. VTBs benefit buyers by reducing the cash equity required at closing and are often subordinated to senior bank debt (BDC or chartered bank). They benefit sellers because they signal confidence in the business's ongoing performance, may provide a tax deferral on capital gains, and often make the deal feasible for buyers who otherwise could not close. The VTB note is documented in the purchase agreement and sometimes in a separate promissory note with a general security agreement (GSA) or a specific lien on assets. Buyers often negotiate a right of set-off — the ability to withhold VTB payments if the seller breaches a warranty in the purchase agreement.
A buyer purchases a Langley HVAC company for $1.2 million. The financing stack is: $400,000 buyer cash, $600,000 BDC acquisition loan, and $200,000 VTB at 7% over 5 years. The seller agrees to the VTB because it allows them to close a deal they otherwise could not finance. The buyer's monthly VTB payment is approximately $3,960.
Ali has direct relationships with BDC, BMO, and TD acquisition desks. Understanding this concept is the foundation of building the right financing stack for your deal.