If you are scanning listings for a small business for sale in London, or hearing about an off market business for sale through a friend, you will see three letters come up again and again: VTB. Vendor take back financing is not exotic. It is a practical tool that helps deals close, especially in Southwestern Ontario where owner operated companies change hands quietly and banks prefer predictable collateral.
I work with buyers and sellers across London and the surrounding counties. Most profitable companies priced under 5 million in enterprise value end up with some form of vendor financing in the structure. It can bridge a valuation gap, keep bank leverage in check, and align the seller with the future of the business. It can also create headaches if you gloss over the details. The difference lives in the fine print.
This guide walks through what a VTB looks like in Ontario practice, how banks and lawyers treat it, the tax angles sellers weigh, and what a buyer in London should negotiate to stay safe.
What a VTB Actually Is
A vendor take back is a loan from the seller to the buyer, usually secured against the shares or assets being sold. Instead of the buyer paying 100 percent of the purchase price at closing, part of it is paid over time with interest. It often sits behind senior bank financing, and it can be blended with an earn out or a holdback for working capital or customer concentration risks.
In London, I most often see VTBs in the range of 10 to 40 percent of the purchase price. A typical small business for sale London Ontario, say a commercial HVAC company with 1.2 million of normalized EBITDA, might sell for 4 to 5 times EBITDA. If the purchase price lands at 5 million, the final stack could look like 3.2 million from a bank term loan and line, 1.2 million as a VTB, and 0.6 million in buyer equity. Real numbers vary with collateral, lender appetite, and the stability of cash flow.
Share deal or asset deal
VTBs can be used in both share and asset transactions. In a share sale, the security is usually a pledge of the acquired shares, a general security agreement under Ontario’s Personal Property Security Act, and a personal guarantee from the buyer. In an asset sale, security attaches to the assets transferred - equipment, inventory, receivables, and sometimes intellectual property.
Ontario lenders, like RBC, TD, and BDC, are comfortable with a subordinated VTB that does not demand payments ahead of the bank. In most cases they will require a subordination and postponement agreement, sometimes called an intercreditor agreement. You need to plan for that early. A seller who insists on pari passu rights with the bank will drive the bank away.
Why London sees more VTBs than you might expect
London’s market has a mix of industrial services, light manufacturing, multi unit home services, and professional practices. Many businesses run lean and have steady yet unspectacular growth. They throw off cash but may not own much real estate. Without hard assets like a plant or a fleet of new trucks, bank advance rates tighten. A VTB fills the gap that unsecured cash flows alone cannot fund at a friendly interest rate.
The other reason is human. Sellers in London and nearby towns often built their companies over decades. They know their team and their customers. A VTB lets them pass the torch to a capable buyer who may not have seven figures sitting in a chequing account. It also shows confidence to the bank and keeps the seller financially engaged for a period after closing.
I once worked on a sale of a specialty packaging company east of the city. The seller had two big customers and a talented plant manager. The buyer had operations experience but only 500 thousand to invest. A VTB of 1.1 million with interest only for 18 months let the bank underwrite a larger term loan while the buyer stabilized the customer mix. Without the VTB, the deal would have died on the valuation gap.
Typical economics in Ontario
Every deal is its own animal, but there are ranges that show up repeatedly.
- Size. Often 10 to 40 percent of purchase price. If it is higher than 50 percent, expect a bank to balk unless collateral is exceptional or the VTB is interest only for a while. Interest rate. Commonly 6 to 10 percent in the last couple of years. When prime moves, so do expectations. Some sellers accept a lower rate if they get a higher price, or if they still own the building and will collect rent. Amortization and term. Three to five years is common, sometimes with a balloon payment. When combined with a senior lender, you might see the VTB fully amortize by year five or carry a balloon in year four or five that the buyer plans to refinance. Payment deferral. Interest only for 6 to 18 months can help early cash flow. Banks prefer that seller payments sit behind bank principal and interest for the first year. Some require a hard standstill until the buyer meets a minimum debt service coverage ratio. Security. Second position general security agreement, share pledge, and personal guarantee. Some sellers also ask for a collateral assignment of key person life insurance for the buyer.
These are not rules, they are starting points. A strong company with recurring revenue in a resilient niche will command better terms.
The bank’s view
When you apply for financing to buy a business in London Ontario, senior lenders underwrite to cash flow and collateral. Debt service coverage ratio matters more than any single feature. If your deal shows DSCR below 1.25 times on a conservative forecast, lenders will likely ask you to increase equity or stretch the VTB. Lenders also care about payment hierarchy. They do not want cash bleeding out to the seller before the bank gets paid.
Expect the bank to require:
- A fully executed subordination agreement where the seller postpones its security to the bank and agrees not to enforce without notice. A cap on VTB payments or a deferral mechanism tied to DSCR tests. No acceleration of VTB upon minor covenant breaches. Acceleration only upon insolvency or prolonged default.
BDC is often more flexible on cash flow based lending, especially if the business has a moat like robust service contracts. Chartered banks, when combined with BDC, will ask for cleaner intercreditor language. Get your broker and lawyer aligned early.
Tax and legal angles for sellers in Ontario
Sellers do not offer a VTB out of kindness. They trade timing for economics and tax planning. Two items usually drive their calculus.
First, capital gains treatment on a share sale. Half of the capital gain is taxable. Many owners of qualified small business corporation shares can use the lifetime capital gains exemption, which shelters a large portion of the gain if they meet the tests. A VTB on a share deal does not change that core treatment, but the installment sale provisions can allow a seller to defer recognition over time, subject to limits and elections. The cash flow from the VTB payments also includes interest, which is fully taxable to the seller at their marginal rate.
Second, asset deals. When the business is sold as assets, the seller corporation may face recapture on depreciable assets, capital gains on goodwill, and HST collection on tangible assets unless exemptions apply. A VTB here means the buyer pays the HST on the closing cash amounts and still owes HST on future payments as set out in the purchase agreement, unless the deal qualifies for the election to have no HST on the transfer of substantially all of a business. Your accountant will design the flow. Buyers in London often prefer asset deals to step up the tax basis, but landlords and customer assignment clauses sometimes push everyone back to a share deal.
From a legal standpoint, the VTB will be documented in a promissory note, a security agreement, and subordination paperwork. Remedies for default, notice periods, cure rights, and access to financial statements sit inside those agreements. Ontario’s PPSA filing will perfect the seller’s security in personal property. For share sales, a share pledge gives the seller the right to seize and sell the shares upon major default. That sounds scary to buyers, but it is standard.
Anatomy of a VTB term sheet
A clean VTB term sheet puts landmines on the table early so lawyer time is well spent. Here are the points I insist on addressing before the first draft flies around.
- Principal amount, rate, and whether the rate is fixed or variable. Amortization schedule, any interest only period, and balloon. Payment priority relative to the bank and any DSCR based deferrals. Security package, personal guarantees, and any life insurance assignment. Covenants. Reporting frequency, minimum working capital, limits on dividends and capital expenditures. Events of default and cure periods. Avoid hair trigger defaults for minor misses. Prepayment rights and penalties. A small premium is common if prepaid in the first year. Rights upon sale of the business. Most sellers want the VTB repaid on a resale. Intercreditor expectations. Acknowledge subordination terms to be negotiated with the lender.
When both sides see a crisp summary, you save weeks and thousands in fees.
Where VTBs fit among holdbacks and earn outs
Buyers sometimes confuse a VTB with a holdback or an earn out. They live in the same family but do different jobs.
- A VTB is financing. It is owed regardless of performance, except where deferrals or defaults apply. A holdback is a contingent payment, usually parked in trust for 3 to 12 months against reps and warranties. If a tax lien shows up, the buyer has recourse. An earn out ties payment to performance. Revenue holds, margin targets, or customer retention can trigger payments in year one or two. They are not guaranteed.
I helped a buyer acquire a niche IT managed service provider in London. The seller believed a particular client contract would expand within six months. Rather than inflate the VTB, we split it into a modest VTB and a two year earn out capped at 500 thousand linked to gross margin from that client. The bank liked the structure, the seller kept upside, and the buyer avoided a bigger fixed obligation.
What a buyer in London should check before leaning on a VTB
The strength of a VTB rests on the business cash flows you are buying, not the piece of paper you sign. If EBITDA is inflated or working capital is tight, the VTB becomes a brick on your chest. Before you negotiate percentages and rates, test the foundation.
- Quality of earnings. Have an independent accountant run a quality of earnings review. In smaller deals, at least get a CPA to normalize EBITDA, adjust for owner compensation, and tie it to T2 filings. Watch for COVID era subsidies that no longer exist. Working capital peg. Agree on a target net working capital at closing. Many buyers get squeezed because they forget they must fund receivables while they wait to collect. A fair peg avoids a day one cash hole that makes VTB payments feel heavy. Customer concentration. If two customers are 60 percent of revenue, a VTB with flexible or deferred payments is safer than a rigid schedule. Consider an earn out overlay. Lease assignments and landlord consent. In London, landlord consent can take time, especially in older industrial parks. If you cannot secure consent before closing, set a condition or escrow tied to the lease. Management handover. A month of training is rarely enough. Bake in a real transition plan, even if the seller is moving away. A VTB seller who stays reachable is an asset.
How brokers in London approach VTBs
A good business broker London Ontario will know which lenders are active and where a VTB fits. You will hear names like business brokers London Ontario, and you may even get tipped on a quiet deal at companies for sale London that never hit the public portals. Whether you work with Liquid Sunset Business Brokers, Sunset Business Brokers, or a solo intermediary down the road, insist that they map out funding sources early. If a listing for a business for sale in London Ontario does not disclose whether the seller will consider a VTB, ask before you invest weeks in diligence.
Brokers worth their salt also manage seller expectations on tax. If a seller insists on a short term VTB with a high coupon and monthly payments that wreck DSCR, a broker can explain why banks will not play. That saves everyone time.
Negotiation touchpoints that matter more than price
Purchase price gets the headlines. Survival gets decided inside the terms you carry into year one and two. These are the items that, in my experience, move the needle most.
- Payment timing. Monthly payments are standard, but quarterly can be negotiated if the bank allows it. Smoother payments help your cash flow during seasonal swings. Financial reporting. Reasonable quarterly reporting of financial statements to the seller is fine. Weekly cash flow spreadsheets are not. Cure periods. A five day cure for a late payment is too short. Fifteen to thirty days is customary. Standstill. In a real rough patch, the seller should agree not to enforce for a period while you work with the bank. Write it down, not just a handshake. Personal guarantees. Cap the guarantee at the VTB amount and try to limit it to you, not your spouse. Some sellers ask for joint and several guarantees from all principals. Push back to match your equity split.
I have watched buyers accept harsh defaults and then live to regret it when a seasonal dip turns a calendar into a weapon. You can still be fair to the seller without making your first winter unbearable.
A simple London case study
A buyer with logistics management experience wanted to buy a courier and final mile business serving London and St. Thomas. Revenue was 3.8 million, EBITDA averaged 520 thousand after normalizing owner perks and adding back one time fuel rebates. The owner asked 2.6 million for shares. The business leased its depot and had an aging vehicle fleet owned personally by the seller.
We built a funding plan: 1.6 million senior term loan and line, 700 thousand VTB, and 300 thousand buyer equity. The VTB had 7.5 percent interest, interest only for 12 months, then a three year amortization, balloon at month 48. Security sat second behind the bank. A holdback of 100 thousand sat in trust for six months to cover any CRA surprises.
Key negotiations:
- We tied VTB payments to a DSCR test. If, on a trailing three month basis, DSCR dipped below 1.1 times, VTB principal would defer automatically while interest accrued. The bank signed off. The seller stayed on as a paid consultant for six months at a modest fee. The consulting agreement included ten hours per month in year two for free to handle legacy customer issues. We agreed on a working capital peg of 350 thousand based on average net working capital over the trailing twelve months. At closing, the peg came in short by 42 thousand, which reduced the VTB principal.
Eighteen months later, fuel volatility pinched margins, but the DSCR trigger gave the buyer breathing room for two quarters. No default notices, no late night panic. By month 20, margins stabilized and VTB amortization resumed. That is a VTB doing its job.
How VTBs affect valuation and offers in a competitive process
If you are competing for a business for sale London Ontario and at least two buyers are circling, a seller will care about certainty of close over the last two points of price. A strong VTB offer can make your bid more attractive if it means fewer financing outs and faster closing. That said, sellers also compare the present value of offers. A 100 thousand higher price with a five year VTB at a low rate may be worth less than a slightly lower price with more cash up front.
When I submit offers on businesses for sale in London Ontario with multiple bidders, I write two versions. One with higher cash and a smaller VTB, one with a higher price and a mid sized VTB at a market rate with quick diligence. The seller can react to the trade offs instead of guessing.
Safeguards for sellers who agree to a VTB
Sellers accept credit risk when they carry paper. They are, in a small way, becoming a lender. Protecting themselves is fair. The best seller safeguards are transparent and do not choke the business.
- Security with proper PPSA filings and a share pledge for share deals. Regular financial reporting, quarterly is fine, with annual CPA prepared statements if the size justifies it. Notice, not veto, on material changes to operations. Reasonable covenants around dividends, asset sales, and extraordinary capital expenditures. Allow the buyer to reinvest up to a cap without seeking consent. Insurance. Ask for evidence of continuing business insurance and, if the buyer is central to operations, a collateral assignment of key person life insurance for the VTB amount. A personal guarantee with a practical cap. If the buyer’s equity is spread across partners, make sure guarantees reflect that.
A seller who overreaches on controls will find fewer bidders and a discount applied to the rest of their terms. Balance gets deals done.
Common pitfalls I see in London deals that include a VTB
The mistakes are predictable. They do not need to be repeated.
- No working capital peg, which leads to a day one cash shortage and immediate stress on debt service. Unrealistic add backs. If the business relied on the owner working six days a week, replacing that with a salaried general manager changes EBITDA. Do not finance fantasy. Ignoring landlord consent. Some older leases in London require head office approval that takes weeks, sometimes months. Build time into your conditions. Vague subordination terms. Leaving intercreditor details to closing is a recipe for delay. Outline payment deferrals and enforcement standstill upfront. Forgetting HST mechanics on asset deals. Cash flow planning must account for HST on closing and on deferred payments, or you will scramble for working capital.
How to use a broker wisely when a VTB is on the table
A broker can keep a VTB from becoming a tug of war. Whether you are approaching a business for sale in London, Ontario through a known intermediary like Sunset Business Brokers or a quieter shop that specializes in off market business for sale leads, tell them clearly what you can and cannot accept on VTB terms. Ask them early how the seller views vendor financing. Some sellers use VTB as a last resort. Others expect it as part of a fair deal.
If you are selling, choose a broker who can field buyer questions with specifics. Generic promises like the seller will consider a VTB signal inexperience. A thoughtful range of size, rate, and term shows seriousness and sets the stage for bank conversations.
A compact buyer checklist for a safe VTB in London
- Confirm DSCR under realistic assumptions, including market rent for any related party real estate. Lock a working capital peg and specify the calculation in the purchase agreement. Get the bank’s intercreditor template early and share it with the seller’s counsel. Define deferral triggers and cure periods in the VTB note. Avoid automatic acceleration for minor covenant misses. Align tax advisors on share versus asset structure and map HST or elections before drafting.
Final thoughts from the trenches
Vendor take back financing is a tool, not a trick. Used well, it can bridge a sensible gap between what a business is worth and what a bank will fund today. Used carelessly, it becomes an anchor that drags a new owner into rough water.
London’s market rewards buyers who prepare, who build relationships with lenders, and who respect the seller’s need for security without starving the company of oxygen. Whether you find your next opportunity through business brokers London Ontario, a banker’s whisper about businesses for sale London Ontario, or a neighbor ready to retire, do the work. Read the covenants. Model the cash flows. Make the VTB serve the business, not the other way around.
If you keep that discipline, you will put yourself near the front of the line when the right small business for sale London crosses your path, and you will give your lender, your seller, and your future self a deal that holds together when the first curveball arrives.
Liquid Sunset Business Brokers
478 Central Ave Unit 1,
London, ON N6B 2G1, Canada
+12262890444