Vendor Finance Negotiation Checklist for Buying a Business in Australia

The Vendor Finance Negotiation Checklist

Use this checklist across five phases — from first conversations with the vendor through to settlement and post-settlement obligations. Tick each item only when it's confirmed in writing, not just verbally agreed.

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Phase 1: Pre-Negotiation Preparation

Before you ask for vendor finance, make sure you understand what you're asking for and whether the vendor is actually positioned to offer it.

• Confirm the vendor's motivation. Why are they selling? A vendor who needs a clean break (health, family, retirement urgency) is unlikely to want ongoing financial exposure. Vendor finance suits vendors who want income, not liquidity.
• Estimate the vendor's tax position. Interest income from vendor finance is assessable income for the vendor. If they're already in a high tax bracket, a large interest-bearing loan may not appeal. Ask whether their accountant has considered the tax implications.
• Calculate the maximum vendor finance amount. A common starting point is 20-30% of the purchase price. More than 30% and some banks will view the deal as under-capitalised. Know your number before you open the conversation.
• Assess the business's debt-servicing capacity. Run the numbers: can the business comfortably service both bank debt (if any) and vendor finance repayments from its operating cash flow? Use a 1.3x debt service coverage ratio as a minimum — i.e. EBITDA should be at least 1.3x total annual debt repayments.
• Check whether any bank funder knows about the vendor finance. Some lenders require disclosure of all finance arrangements on the deal. Don't structure vendor finance as "informal" to avoid disclosure — this can void loan conditions.
• Understand the vendor's current financial position. If the vendor has their own liabilities secured against the business, a vendor finance arrangement may conflict. Do they have the capacity to extend credit?

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Phase 2: Core Terms to Negotiate

These are the terms that belong in the loan agreement or the SPA. Every one of these should be agreed in writing before you sign heads of agreement.

• Loan amount: Exact dollar amount of vendor finance (e.g. $150,000)
• Interest rate: Annual percentage rate, stated clearly (e.g. 8% per annum). Confirm whether this is fixed for the term or variable, and if variable, what it's indexed to.
• Repayment schedule: Monthly or quarterly. Confirm whether interest-only is available for an initial period.
• Loan term: Total duration of the vendor finance arrangement (typically 2-5 years for small business deals)
• Balloon payment: Is the full outstanding balance due at the end of the term in a lump sum, or does the loan fully amortise over the repayment schedule?
• Repayment holiday: Negotiate for a 1-3 month period at the start where no repayments are due. This gives you breathing room during the transition.
• Prepayment rights: Can you repay the loan early without penalty? (You want this; the vendor may not want to concede it if they're relying on interest income.)
• Step-up or step-down repayments: If cash flow is expected to grow, consider negotiating lower repayments in year one and higher repayments in years two and three.
• Currency and payment method: How will payments be made? Direct bank transfer is standard. Confirm account details in writing.

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Phase 3: Security and Protection

The vendor is extending you credit. They'll want security. Here's what to expect and how to negotiate it.

• Nature of security required: Confirm whether the vendor wants a registered charge over business assets (PPSR), a personal guarantee from the buyer, a combination, or no security beyond the SPA warranties. Each has different implications.
• PPSR registration: If a charge over business assets is agreed, confirm who is responsible for registration costs and the form of the security agreement. The vendor's solicitor will typically prepare this.
• Priority of the vendor's security: If bank debt is also in place, confirm the ranking of the vendor's security relative to the bank's security. Banks will typically require their charge to rank first — get the vendor's consent to subordination in writing.
• Personal guarantee scope: If a personal guarantee is required, negotiate the limit (cap it at the outstanding loan balance, not the original loan amount), duration (should expire with the loan), and whether it's joint or several if there are multiple buyers.
• Life insurance or key person insurance: Some vendors require the buyer to hold life insurance with the vendor noted as beneficiary for the outstanding loan amount. Understand the cost implications before agreeing.
• Business insurance maintained: Confirm the SPA or loan agreement requires you to maintain adequate business insurance throughout the vendor finance term.

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Phase 4: Default, Dispute, and Exit Provisions

This is the section no one wants to negotiate — but it's the one that matters most if things go wrong.

• Definition of default: What events constitute a default? Missed payment? Insolvency? Change of control? Get a precise definition — vague default provisions are exploited in disputes.
• Notice and cure period: Before the vendor can exercise remedies, how long do you get to fix the default? A 14-30 day cure period after written notice is standard and reasonable to request.
• Remedies on default: What can the vendor do? Options include calling in the full loan, taking security, suspending any ongoing obligations under the SPA, or seeking a court order. Know what's agreed before it's relevant.
• Dispute resolution: Confirm the process for disputes (negotiation first, then mediation, then arbitration or litigation). Nominate the jurisdiction (which state's courts govern the agreement).
• Acceleration clause: Can the vendor call the entire outstanding balance immediately on a specific event (e.g. you sell the business)? If so, confirm whether you have a right to refinance and repay before any acceleration.
• Change of control: If you want to sell the business during the vendor finance term, what approval (if any) does the vendor require? Negotiate for a right to sell provided the new buyer assumes the vendor finance or repays it at settlement.

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Phase 5: Post-Settlement Obligations

Vendor finance often comes with ongoing obligations to the vendor. Know what you're agreeing to.

• Financial reporting: What financial information must you provide to the vendor during the loan term? Monthly management accounts? Annual tax returns? Quarterly BAS? Agree the scope, format, and timing in writing.
• Notification obligations: What events must you notify the vendor about — deterioration in trading, key staff departures, material customer losses, legal proceedings?
• Vendor's inspection rights: Does the vendor retain any right to inspect the business's records or premises during the loan term? If so, what notice is required and how frequently?
• Non-compete or restraint of trade: Check whether the SPA includes a restraint that prevents the vendor from competing. Confirm the restraint survives regardless of the vendor finance status (some vendors try to tie these together).
• Transition support: Is the vendor providing ongoing support or consulting during the loan term? If so, confirm this is documented separately from the vendor finance arrangement to avoid ambiguity about whether non-performance affects repayment obligations.
• Final repayment confirmation: Document the process for confirming full repayment — a formal discharge letter, PPSR deregistration, and release of any personal guarantee. Confirm who covers the cost of these.

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Reference: Common Vendor Finance Structures in Australian Small Business Deals

Structure	Typical Use	Pros	Watch-outs
10-20% vendor finance, 3-year term	Bridging a bank funding gap	Simple, low vendor exposure	Bank may require disclosure and priority
30% vendor finance, 5-year step-up	Vendor needs income, buyer needs cashflow	Aligns interests	Vendor has significant ongoing exposure
Interest-only first year, then P&I	Unstable first year cash flow anticipated	Reduces early pressure	Higher total interest cost over term
Vendor finance + earn-out	Revenue or profit uncertainty in deal price	Price discovery	Complex documentation, two agreements

For the earn-out comparison, see the earn-out agreement guide.

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What to take to your solicitor

Once you've worked through this checklist verbally with the vendor, take the following to your solicitor before heads of agreement is signed:

1. Agreed loan amount, interest rate, term, and repayment schedule
2. Agreed security structure (PPSR, personal guarantee, or none)
3. Agreed default definition and cure period
4. Agreed reporting obligations
5. Any change of control provisions agreed

Your solicitor will draft this either as a clause within the SPA or as a separate loan agreement. Both are common — separate agreements are cleaner when the vendor finance has complex terms.