Capittal's view: the buyer wants me to finance part of the price

Quick answer

Capittal's view is that financing part of the price for the buyer is common in the Spanish mid-market, but it turns the seller into the cheapest bank in the deal. Deferring price is only acceptable if the amount is secured by something enforceable, paid a market rate of interest and protected by acceleration events you can trigger. A vendor loan with no security, no interest and subordinated to everything is not price: it is a discount paid in instalments.

What exactly is a vendor loan, and how does it differ from an earn-out?

A vendor loan is a loan the seller grants the buyer to pay part of the price later. The price is fixed on signing day. The only open question is when you get paid, and whether you get paid. An earn-out is a different thing: a portion of the price whose amount is not fixed and depends on the future results of the business.

• Vendor loan: collection risk. The amount is settled. What can go wrong is the buyer's solvency.
• Earn-out: performance risk. The amount is not settled. What can go wrong is the business.

The defences differ. Performance risk is fought with the earn-out formula; collection risk, with security and acceleration.

Why is the buyer asking me to finance part of the price?

There are three real reasons, and it is worth knowing which is yours.

• They cannot raise all the bank debt. The bank funds part of the acquisition and requires the buyer to put in the rest as equity. The vendor loan plugs the gap between the two figures.
• They want you aligned. If you remain exposed to the business after selling, the buyer reads that as a signal you have hidden nothing and will help in the transition.
• They are closing a price gap. You ask 100 and they offer 80. By deferring 20 they sign your number without paying it out. This is the most frequent reason and the most dangerous: they are buying your headline price, not your price.

As a normal market pattern, the deferred tranche runs between 10% and 30% of the price, over two to four years. If you are asked to finance half the price, you are not selling the company, you are handing it over on credit.

What has to be in writing before I accept deferred payment?

Deferred payment without its own loan agreement is a promise. These points must be written down.

• Amount. A fixed figure in euros, not a percentage still subject to completion adjustments.
• Term and schedule. Specific repayment dates. Avoid a single bullet payment at the end: every interim instalment is an early test of solvency.
• Interest. An explicit rate, fixed or referenced to Euribor plus a margin, and whether it is paid in cash or capitalised. Zero interest means you are lending free of charge to the person who bought you out.
• Ranking. If the loan is subordinated to the bank debt, to what extent and until when.
• Form of the document. A Spanish public deed or a policy witnessed by a notary. It turns your claim into a directly enforceable instrument.
• Regular information. Annual accounts and interim statements while any balance is outstanding.

What security is available, and which types are actually worth having?

Not all security is equivalent. From most to least useful in Spain:

• On-demand bank guarantee. The best: you are paid by the bank without arguing with the buyer. They will refuse it first: it uses up their credit lines.
• Pledge over the shares sold. Common and effective: if you are not paid, you enforce and take the company back. It must be granted by public deed, recorded in the shareholder register and must deal expressly with voting rights while in force.
• Joint and several guarantee from the buyer's parent company. Worth whatever that parent's balance sheet is worth. Ask for its accounts and insist the guarantee is on demand, not secondary.
• Holding back a block of shares. You do not sell 100% until the final payment. Powerful, but it leaves you a minority shareholder: negotiate minority protections.
• Personal guarantee from the buying shareholder. Useful against individual buyers and search funds. Without a verifiable statement of assets it is a gesture, not security.

Security is worth what enforcing it is worth. Ask your lawyer how many months it would take to get paid holding that document. If the answer is vague, the security is decorative.

What is subordination, and why is it the clause that costs the most money?

If the buyer funds the purchase with bank debt, the bank will require your loan to rank behind theirs. Subordination means you are paid after the bank, and only if the bank allows it. That clause arrives in a separate document, the intercreditor agreement, and that is where the money is lost.

• Payment blockage. If the buyer breaches a covenant, your instalments stop. They do not have to default on the bank: one broken ratio is enough.
• Standstill on enforcement. Even with an instalment overdue, you cannot claim during a waiting period of months or years.
• Capitalised interest. You receive no interest in cash: it rolls up into principal and you collect it at the end, if anything is left.

Negotiate hard limits: a maximum number of blockages, a maximum length for each, and that a blockage does not stop interest accruing. If you accept subordination, charge for it in the interest rate.

Which acceleration events should I insist on?

Acceleration is the only lever you will have when something goes wrong.

• Non-payment. Of any instalment of principal or interest, with a short cure period measured in days, not months.
• Change of control of the buyer. If they onsell the company or a new controlling shareholder comes in, your loan falls due. Without this you end up the creditor of a stranger.
• Disposal of core assets. Including the properties and trademarks of the company that bought you.
• Insolvency proceedings. Including pre-insolvency filings, and generalised non-payment of wages or tax debt.
• Dividends and shareholder payments. A ban on paying dividends, repaying shareholder loans or raising directors' pay while they owe you money.
• Failure to report. If the agreed accounts are not delivered, the loan falls due.

An acceleration clause triggered only by non-payment arrives too late. By the time they stop paying, there is nothing left to attach.

Can I end up paying tax before I have collected the deferred price?

Yes, and it is the most expensive mistake in this structure. Under Spain's personal income tax (IRPF), a capital gain is allocated to the tax year of the transfer, when the change in net worth occurs, even if payment arrives years later.

Spain's Personal Income Tax Act does provide a special timing rule for instalment or deferred-price transactions, allowing the gain to be allocated in proportion to payments as they fall due. It is an election by the taxpayer, requires more than one year between delivery and the final instalment, and is exercised in the tax return.

• Decide before signing. The payment schedule you accept determines whether you can use that rule.
• Interest is treated separately. Loan interest is taxed as investment income, not as a capital gain.
• If the seller is a company. The framework is Spanish corporate income tax and the timing rules are different.

Take the payment schedule to your tax adviser first. A badly timed deferral can force you to borrow to pay tax on money you have not yet seen.

What signs tell me this buyer should not be getting my money?

• They cannot explain where the money will come from at maturity. If the answer is your own company's future cash, you are financing your sale with the company you are selling.
• They buy through an empty vehicle with no parent guarantee. Your debtor is a shell.
• They refuse to grant a pledge over the shares. It is the most natural security in a vendor loan. Refusing it without an alternative is the clearest warning.
• They demand full subordination with no time limit. They are asking you for equity, not for a loan.
• They raise the price precisely when they propose deferring it. That increase is the price of a risk you are carrying.
• They provide no financial information of their own. They have reviewed you for months in due diligence and will not let you see their balance sheet.

Faced with these signs, the answer is not to walk away. It is to cut the deferred tranche and raise the security.

What is the next step if I am asked to finance part of the price?

Do three things before answering. First, split the offer into three figures: cash at closing, vendor loan and earn-out; compare offers on the cash, not on the total. Second, ask in writing for the security and the ranking before discussing the interest rate: without enforceable security and without limits on subordination, the rate is irrelevant. Third, take the payment schedule to your tax adviser before accepting it.

At Capittal Transacciones we negotiate the deferred tranche, its security and its ranking as part of the price itself on the sale mandates we run. We are a mid-market M&A boutique operating in the approximate range of 3 to 250 million euros, with eight offices in Spain (Barcelona as headquarters, Madrid, Girona, Lleida, Tarragona, Palma, Zaragoza and Valencia) and we are part of the NRRO group. The partner handles each mandate directly, including the conversation about how much of the price you are prepared to finance and on what security.

Keep reading

• Guide: every decision you face when selling your company
• From headline price to bank account: what you actually take home
• The buyer cuts the price after due diligence

Structure the deferred price without giving away value: talk to Capittal