Our German Desk
As the third instalment in a series of articles looking at the generational wealth transition and its impacts on business succession in New Zealand, Ben Hickson (partner, Corporate & Commercial) and John Kirkwood (partner, Commercial & Private Wealth) take a look specifically at vendor finance and its use as a tool in facilitating business succession planning.
Often, the greatest challenge in executing a business succession plan is funding a deal. With New Zealand officially dipping into recession in Q1 2025 and as banks continue to keep a tight hold on purse strings in the present lending environment, this has never been more true. So how does the next generation looking to buy into a business raise funding – particularly in New Zealand where many of the 30-50 age group already find themselves heavily mortgaged with home loans? For the more fortunate purchasers who have supportive and enthusiastic vendors, the answer often lies either wholly or partly in vendor finance arrangements.
Vendor finance is a tool commonly used to allow a gradual sell down of the business, particularly where a traditional bank lender may not be willing to provide the requisite funding to a purchaser. Hesketh Henry has been involved in many business succession transactions recently where vendor finance has been deployed. Often we see these financing arrangements used in the sale and transfer of a business between generations within a family, or management buyouts – where employees or management teams acquire a business from the owners.
For owners who have worked their life to build a business, a decision to provide vendor finance needs to be considered carefully. Although it may facilitate a deal in the short term, inevitably it involves a deferment of the receipt of value. We have put together a short list of matters to consider when a business owner is considering granting a purchaser vendor finance:
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- Assess your Purchaser’s suitability as a borrower
As a default position, the Purchaser should be sourcing their own funding to acquire a Vendor’s business. Therefore a prudent vendor should ask at the outset why a Purchaser cannot raise their own finance? There may be legitimate reasons (including as alluded to above, where debt on the family home means a purchaser struggles to raise further funding in a tight lending environment). If they cannot raise finance now, how do they plan to do so in the future? Are they relying on the business to help finance the purchase? A business owner will not be overly interested in how an employee spends his/her paycheck but this will change where that employee is buying in with funding from the vendor. This can change workplace dynamics and all parties must be mindful of this. Where there is an intra-family transfer there may be a less rigorous assessment of a borrower’s ability to pay a loan. Equally, where expectations of repayment do not go to plan within a family, this can lead to breakdown in family relationships. All parties need to consider the risks of default and the impact on relationships between vendor and purchaser.
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- Structure the Loan properly
Who will take the loan and from what entity? What are the interest rates charged, and whether there are performance or KPI based repayment metrics. Where the Vendor’s Trust is the lender and the Purchaser is a child of the Vendor (and beneficiary of the Vendor’s Trust), consider whether there may be an opportunity to distribute an amount to pay off the debt at a later stage. In this way, tax and estate planning considerations may become relevant for certain parts of the lending considerations.
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- Retain contractual controls over business
It is normal for vendor approval to be required over certain material decisions around how the business is run, at least for so long as funds remain outstanding under the vendor finance arrangement. Where a Vendor has not sold outright, there may be a shareholders’ agreement between the vendor and purchaser. Where vendor finance is involved it is common to see obligations on a borrower to direct their dividend to repayment of vendor loans.
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- Take security
Although intra-family succession plans often do not have the rigorous security requirements that we see between unrelated parties, we still recommend the vendor takes security. Security might often take the form of a mortgage over land, or a security over the assets of the business or shares. Security should not be overlooked even in close family situations.
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- Seek tax advice
It is crucial that both of the vendor and purchaser each obtain tax advice to avoid unexpected tax consequences.
Well considered vendor finance arrangements which are executed properly and with rigorous documentation can pave the way for a transition that would not otherwise be possible. As with all parts of a successful execution of a business transition, a planning phase for consideration of all the above aspects is critical.
Over the next few months, we will continue to look at legal structures and other considerations which feature regularly as part of business succession planning.
Hesketh Henry regularly assists family business owners with legal aspects of business succession planning and execution. If you would like to discuss, please get in touch with Ben Hickson or John Kirkwood at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.
