What Does
Vendor Take Back Mean?
A vendor take back is a type of non consideration often used by buyers to finance the total purchase price of a company. It provides a buyer with a source of financing without having to access the external debt market and pay fees. For the seller, it is a good alternative to receiving cash or stock in the buyer depending on how favorable the interest and terms of the vendor take back are.
Vendor take backs are either unsecured or secured but subordinated to senior debt. This makes the debt more risky, which allows it to command a higher interest rate or other premium terms such as equity kickers. While terms can vary, a typical vendor take back will pay interest only for a period of time with principal repayments being made out of the company’s free cash flow before any dividends are paid.
Divestopedia Explains Vendor Take Back
Vendor take backs are more commonly used in companies that do not have a significant asset base to borrow senior financing against. The company generates good free cash flow, but banks may be willing to lend only up to a certain percentage of the asset base leaving the buyer short. The vendor take back is then used to bridge the gap between financeable assets via traditional asset backed lending and the company’s enterprise value.
Sellers must scrutinize vendor take backs closely to ensure the interest rate is high enough to match with the debt’s risk. Sophisticated buyers may pay a lower interest rate that may be higher than the going market rate, but could be too low given the company’s unique risk profile and volatility of its future cash flow.