Vendor loan (seller financing)

Definition

In Benelux MBOs below €15m EV the typical financing stack is: 30% management equity + 50% bank loan + 20% vendor loan. Banks finance up to 3-4x EBITDA leverage; anything above goes via mezzanine or vendor loan. For the seller this is rarely a voluntary choice but a commercial reality: without a vendor loan many MBOs wouldn't be financeable, and the seller would either have to walk away from the transaction or accept a materially lower price.

The economic logic for the seller is two-fold. First, the loan earns interest. A €1.5m vendor loan over 5 years at 6% generates €450k of interest income (effectively tax-charged at ~30% in Belgian context including municipal tax, so ~€315k net). Second, without a vendor loan the headline price would typically be 10-20% lower, because the buyer would cover the financing gap via more expensive mezzanine capital. The vendor loan is therefore implicitly a price optimisation.

The legal structure has five standard features worth negotiating explicitly. First, subordination — the vendor loan ranks behind the bank loan. On default the bank gets paid first, then the seller. Almost always unavoidable; banks demand it. Second, amortisation schedule — is the principal repaid linearly, annuity-style, or as a bullet payment? Bullet (all at end) maximises seller interest but maximises credit risk. Linear (equal annual payments) is the Benelux standard. Third, interest rate — 4 to 7% above Euribor is market; below 4% is economically unattractive for sellers against risk-discounting. Fourth, covenants — what the buyer cannot do during the term: no dividends above a threshold, no new debt without consent, no material asset sales. Fifth, security — typically a second-rank pledge on shares or assets, subordinated to the bank loan.

Credit risk is significant and often underestimated by sellers. Benelux MBO statistics (2018-2024) show roughly 12-18% of vendor loans below €5m undergo restructuring or partial write-down, particularly in cyclical sectors. For sellers this means: treat a vendor loan as an investment with €X-avoidable-default-probability, not as guaranteed cash flow. We see sellers who understand this negotiate for (a) higher interest to compensate risk, (b) accelerated amortisation if financial ratios deteriorate, or (c) a convertible component (vendor note convertible into shares on default).

Worked example

A Ghent family manufacturing business with €11m EV was sold to management via MBO. Financing: management equity €1.5m (14%), bank loan €5.5m (50%), vendor loan €4m (36%) over 6 years linear, interest Euribor + 5.5%, with second-rank pledge on shares subordinated to the bank loan. Seller received €7m cash at closing and €4m spread over 6 years plus interest. Three years later, after a sector recession, management asked for restructuring: 1 year of principal deferment and rate down to 4%. Seller agreed (alternative was default) — net loss versus original deal: roughly €280k of interest + 1 year of time value. Lesson: negotiate acceleration clauses on deteriorating ratios, don't wait for default.

When it matters

In most Benelux MBOs below €15m EV and in family successions where the buyer lacks full cash. Three questions every seller should answer before signing: (1) what is my worst-case scenario if the loan is not repaid, (2) is the interest proportional to credit risk (4-7% above Euribor is market; lower must be justified), (3) which covenants and acceleration clauses force early action on deterioration?

Frequently asked

How much interest should I charge on a vendor loan?

4 to 7% above Euribor (so 6-9% all-in at current rates). Below 4% above Euribor is economically unattractive for sellers against bank deposit rates plus risk-discounting. Above 7% above Euribor often gets rejected by buyers — the mezzanine market offers cheaper capital then.

How large is the credit risk on a vendor loan?

Significant. Benelux MBO statistics (2018-2024) show 12-18% restructuring or partial write-down of vendor loans below €5m, particularly in cyclical sectors. Treat a vendor loan as an investment with risk, not as guaranteed cash flow. Negotiate security, covenants, and acceleration clauses.

What are typical covenants in a vendor loan?

Standard: (1) no dividends above €X per year, (2) no new debt without vendor-loan-holder consent, (3) no material asset sales, (4) financial ratios (typically interest coverage > 1.5x, debt/EBITDA < 4x). Breach triggers default and can include principal acceleration.

Can I combine vendor loan and escrow?

Yes and it's common. The vendor loan is deferred consideration with compensation (interest); the escrow holds for R&W claims. Both structures coexist. Practical: not more than roughly 50% of the price in deferred or escrowed forms, otherwise the transaction becomes too risky for the seller.