Glossary
Vendor loan
Crédit vendeur
A vendor loan is the part of the sale price that the seller agrees to receive later, which reduces the financing the buyer must raise at closing.
Definition
A vendor loan (crédit vendeur) is the mechanism by which the seller of a business receives part of the price at closing and agrees to be paid the rest later. In an LBO, it complements the senior or unitranche debt and the equity contributed to the acquisition holding company. It takes the form of a loan from the seller to the holding company, or of a deferred payment of the price written into the sale agreement. For the buyer, it reduces the bank or private debt to be raised and the amount of equity to be contributed. It signals to lenders that the seller keeps an interest in the success of the business after the sale. Senior lenders require its subordination in an intercreditor agreement: the vendor loan is repaid after the senior debt. The intercreditor agreement blocks its payments in the event of a default on the senior debt. A vendor loan differs from an earn-out, whose amount depends on future performance. For you as buyer, the points to negotiate are the maturity, set after that of the senior debt, the interest rate and how it is paid, any security, and the possibility of setting the loan off against the sums due under the warranty and indemnity (garantie d’actif et de passif).
Worked example
A holding company buys an industrial SME for €120m. The financing combines €50m of equity, €60m of unitranche debt and a €10m vendor loan repayable in one instalment after six and a half years, six months after the unitranche matures. The interest of 5% is capitalised and brings the amount due to around €13.7m at maturity.
Points to check
- The maturity of the vendor loan, later than that of the senior debt.
- The interest rate and the choice between interest paid in cash and capitalised interest.
- The subordination set out in the intercreditor agreement.
- Set-off against the warranty and indemnity.
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