Definition - What does Assignment mean?
An assignment is the transfer of an individual's rights or property to another person or business. Banks will normally ask for assignment and postponement of any vendor take back (VTB) included as consideration in the sale of a business. This means that in the event of default on any loans owing to the bank, they can not only postpone any repayments of the vendor take back but can also take the full amount owing on the VTB.
Divestopedia explains Assignment
A vendor take back carries significant risk with an assignment to a bank, especially in the case of a leveraged buyout where a large amount of financing is used to close the deal. A vendor should seek to understand these risks and attempt to mitigate them where possible. Although it is unlikely that the bank will remove the necessity for a postponement, but they may remove the condition for an assignment. It never hurts to ask. Another mechanism to mitigate the risk is to negotiate interest payments on the VTB to compensate for some of the risk taken by the seller.
A vendor should also recognize that a vendor take back is a mechanism to bridge valuation expectations or facilitate financing for a buyer that does not have the necessary capital to complete the transaction (i.e. management buyout). It is important to weight the risk taken on a VTB that includes an assignment to the bank versus the possibility of not closing the deal in the absence of such a requirement.
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