Insights

Vendor finance is a common tool in business sales across Western Australia. With tighter lending conditions and buyers often struggling to secure full bank finance, many sellers are asked to “carry” part of the purchase price. While vendor finance can help the sale proceed faster, it also exposes the seller to financial and legal risk if not structured properly.

At West Perth Legal, we regularly act for business owners selling using vendor finance in a range of industries including cafés, restaurants, retail stores, childcare centres, gyms, tradie businesses and professional practices. We see firsthand what protects sellers, and what leads to problems down the track. This article explains, in a simple yet professional way, how to protect yourself as a vendor when offering vendor finance in a business sale transaction in WA.

In a business sale, vendor finance means that the buyer takes over the business at settlement. Instead of paying the full purchase price upfront, the buyer pays a portion of the purchase price upfront at settlement, with the remaining paid over time. The deferred payment is structured as a loan from the seller to the buyer, so the seller becomes a lender, similar to a bank.

Understanding the Risks for Sellers Stepping into the Lender’s Role

For the seller, this carries risks, such as:

• How well the buyer operates the business
• Whether they manage cash flow responsibly
• Whether they keep paying on time

Because the buyer takes over control of the business immediately, strong protections are essential for the seller.

Sign a Vendor Finance Agreement

There are multiple ways of mitigating vendor finance risks for sellers. One of them is a written and signed Vendor Finance Agreement between the buyer and seller. A Vendor Finance Agreement clearly outlines the terms of payment between the seller and buyer, ensuring mutual understanding. A verbal agreement or template contract may not give you the protection you expect.

A Vendor Finance Agreement for a business sale should clearly set out:

• Business details
• Total amount financed
• Repayment schedule (weekly/fortnightly/monthly)
• Interest rate and late fees
• Security provided by the buyer
• What happens if the buyer defaults
• When you can take back the business or assets
• Insurance and risk responsibilities
• Reporting obligations

At West Perth Legal, we prepare professional vendor finance documents tailored to the particular transaction with consideration of your business type, vendor finance structure and risk appetite.  We also assist with vendor finance transactions associated with share sales. Contact us for an obligation free quote.

Take Security over Assets and/or Request Buyer’s Personal Guarantees

Secure Your Position with PPSR Registration

In a business sale, one of the most important protections for a seller offering vendor finance is security over the business assets.

The PPSR (Personal Property Securities Register) allows you to register security over the business assets such as:

• Plant and equipment
• Stock
• Vehicles
• Intellectual property

Without a PPSR registration, this can result in the loss of priority, the vesting of the security interest in the grantor upon insolvency, and the inability to enforce the security interest against third parties. A PPSR registration strengthens the seller position as a secured creditor. This is critical in any vendor finance arrangement involving business assets.

Consider a Personal Guarantee from the Buyer and/or Take Security over Buyer’s personal asset

If the buyer is a company or trust, the seller should consider a personal guarantee from the shareholders, directors and/or beneficiaries. This makes the individuals personally responsible for the debt.

In addition, the parties may agree for the seller to take security over the buyer’s personal asset, such as a house. This provides additional protection for a seller in the event of default.

Maintain a Right to Monitor the Business

Because the businesses’ performance impacts the seller’s chances of being paid, the agreement should ideally allow you to:

• Review BAS statements
• Review P&L reports
• Request evidence of insurance
• Confirm lease obligations are met
• Inspect stock levels if needed
• Require the buyer to keep key licences active

These monitoring rights allow early detection of financial issues – before they become a default.

Include Strong Default Protections

A default clause must be clear, strict, and enforceable. It should cover:

• Missed payments
• Breach of any other key documents, such as the lease
• An insolvency event
• Any other breach of the Vendor Finance Agreement by the buyer

Your rights on default should include:

• Charging interest and penalty fees
• Calling in the entire remaining balance
• Repossessing secured assets
• Taking over the business again
• Recovering legal enforcement costs

At West Perth Legal, we ensure default provisions are strong and tailored for the particular business.

Get Tailored Legal Advice Before Agreeing to provide Vendor Finance

Business vendor finance can be safe, if done properly. Every business, buyer and industry carries different risks. Legal advice ensures:

• Proper security
• Proper enforcement rights
• Proper protection against default
• Consistency across legal documents

A short legal consultation at the beginning can prevent a lengthy dispute in the future.

If you are selling a business in WA and considering vendor finance, contact West Perth Legal. We can help document the arrangement properly, secure your position with PPSR registrations where appropriate, and guide you through the transaction from the outset.

Disclaimer: the content of this article is provided as general information only and does not constitute legal or other advice on any specific matter and should not be relied upon as such. If you are seeking or require legal advice, please contact our lawyers.