What is a VTB and Why You Need One!



Let’s face it, buying a financial advisory book or practice is a bit of a gamble unless you have already worked with the business with access to confidential information. Why? Because until you own a business and peel back its layers like an onion, you won’t actually know exactly what you are buying.

Also, there are opposing dynamics at play in most business acquisitions:

· The buyer is usually doing this for the first time, so they may lack the skill-set to conduct proper due diligence.

· The buyer is excited by the prospect of substantially increasing their business volume overnight and may be wearing rose-coloured glasses.

· The buyer wants to save money and doesn’t hire impartial expertise to evaluate the business.

· The vendor wants to obtain the highest price for their book/practice and isn’t motivated to tell you about its warts! While some vendors may see the sale as a cooperative venture – many don’t.

So how can a buyer try to protect themselves from buying a house of cards? Two ways:

1. By conducting thorough due diligence, which could include hiring a business valuator.

2. By making sure that their Letter of Intent and Purchase & Sale Agreement includes a Vendor Take-back to ensure that the vendor has skin in the game of the buyer’s future success.

What’s a Vendor Take-back?

Also, known simply as Vendor Financing, a Vendor Take-back or VTB is a loan from a vendor to a buyer for part of the purchase price. These loans typically take the form of a Note Payable and loan repayment is subject to the terms and conditions outlined in the Purchase & Sale Agreement

Note if a loan is involved in the purchase:

Because lenders also understand the importance of vendors having skin in the game of a successful business purchase, most lenders will require a VTB of about 15-25%. The VTB should be spelled out in any Letter of Intent, making sure that the repayment terms are “subject to any financing approval from a lender”. Why? Because while a buyer may calculate that you can afford the VTB repayment, most lenders will require you to subordinate* the vendor's note payable and postpone VTB payments to their loan payments so they can dictate the terms under which you may or may not make VTB payments each year that the loan is in place. *Subordinate: Means that the debt to the vendor is ranked behind the debt to the lender for secuirty purposes.

What provisions should a VTB include? This list is not exhaustive but a VTB could include:

· Discounts for client or revenue attrition beyond mutually agreed levels and time frames.

· Description of the type (meetings, phone calls, events) and amount (days/hours) and duration of vendor’s support of the business, post sale.

· Non-compete and Non-solicit terms to protect the buyer from loss of clients or staff to the vendor for a given duration.

· Agreements for dealing with compliance issues, legal claims, liabilities and commission claw-backs originating prior to the sale.


Lastly, if the book purchase is sizable and if the vendor doesn’t want to commit to a VTB…

Run for the hills!


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