Skyrocketing vendor financing seen as sign of times

AUCKLAND: Vendor financing has helped close the deal in one out of 10 business sales over the past year, compared with about one in 100 deals the year earlier.

ABC Business Sales managing director Chris Small said that it was a sign of the times, and vendor financing was helping to bridge the gap between asking and selling prices, and was especially popular with younger buyers needing finance to buy their own business.

‘‘A large portion of our new purchasers are younger buyers who don’t have the financial ability to buy these businesses outright, and many of our listings are ‘boomerowned businesses’ where the vendors are highly motivated to sell and also have the capacity and flexibility to make the deal work,’’ Mr Small said.

‘‘This method is also a very positive signal to the buyer of the vendor’s confidence in the business.’’

Established business owners viewed vendor finance as an acceptable investment, and standard interest rates were in the region of 12%14%, he said.

Vendor financing was also influenced by high interest rates, as well as caps on how much banks would lend on business purchases — in a range of 30% to 60% of the total value of the business — leaving a gap for vendor financing.

Vendors had more knowledge about the risks in their business and were therefore more comfortable than banks in offering financing, he said.

Also, the financing option made it easier to close a deal when there was a gap between what vendors were prepared to accept and what purchasers were prepared to pay, he said.

While there was still a high volume of wouldbe buyers, asking prices were under pressure given the economic downturn and high interest rates, Mr Small said.

‘‘In the last 12 months we’ve had almost 20,000 sign confidentiality agreements across New Zealand. It’s 50% higher than the year before,’’ he said, adding that the number of signed confidentiality agreements was a key measure of interested buyers.

‘‘So there’s certainly a lot of buyers but they’re very conservative and they’re cautious given everything they read about the economy.’’

Despite the downturn prices were holding up, though sales volumes were down about 5%7% in the year to March 2024 over 2022, which was its best ever, he said. — RNZ