Let’s recall the definition of vendor credit: the deferred or staggered payment of the price, when buying a company. An operation which also has tax consequences. Explanation.
What is vendor credit?
Vendor credit: definition
The seller’s credit, in the case of a business transfer, is a transaction in which the seller grants a loan to the buyer, who repays the amount of the company in several monthly payments. This means that the seller receives only a part of the transfer price in cash and credits the buyer for the balance.
The seller’s loan must be drawn up in the form of a notarial deed
before a notary. The document must indicate the amount of the loan, the interest rate, the duration of the loan and the related fees. All these criteria are freely determined by both parties. Also the interest rate can be set at zero. Finally, it is customary for the notary to take out a guarantee on the property sold, in the form of a “privilege of the money lender”. The seller’s credit is spread over a fairly short period – 3 years on average – and represents 30 to 50% of the sale price.
Read also: How to evaluate the value of a company?
Advantages for the seller… and for the buyer
The seller, in order to cover the risks linked to the vendor credit, can request several guarantees. In addition, by granting this credit, the seller has the power to negotiate a higher sale price. Finally, this leeway allows him to select the buyer of his choice, the one in whom he has the most confidence to ensure the future of the company. Even if the buyer does not currently have the necessary funds to take over the company.
This flexibility also offers the buyer many advantages. He can devote part of his financing to relaunching the company’s activities: new products, development of the target market, recruitment, etc. Finally, a seller’s credit creates a climate of trust between all parties involved. Whether it is the suppliers or the employees, all are thus assured that the seller chooses the best person for the future.
Read also: The audacity of taking over a company without any contribution
Tax consequences of vendor credit
By spreading out the payment, the buyer can also request a deferral of the income tax payment related to the long-term capital gain realized at the time of this transfer. The repayment is made at the rate of the payments made by the buyer, for a maximum period of 5 years.
Since January
1er 2019, this staggering is allowed to all small businesses, individual or corporate, with less than 50 employees and whose total balance sheet or turnover does not exceed €10M.
To benefit from this staggering, 2 conditions:
- In the case of a transfer of a company, the transaction must involve the majority of the capital.
- At the end of the transfer, the company must be effectively controlled by the transferee, without the intervention of the seller.
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