Module IV· Sources & UsesAdvanced
Question
What is a vendor loan (seller's loan) and how is it structured in the S&U?
Answer
Mechanics
A vendor loan is a loan the SELLER grants to the buyer (NewCo) to bridge the gap between available bank financing and the purchase price. Common in middle-market family buyouts.
Deep diveShow more details
Example
The founding family sells Industrial Manufacturing Co for $285m of equity. Structuring:
| Sources item | Value |
|---|---|
| Senior Debt | $200m |
| Existing cash | $15m |
| Sponsor Equity | $50m |
| Vendor loan (subordinated) | $30m |
| Rollover equity | $30m |
| Total Sources | $325m (= Total Uses excluding bank fees, etc.) |
Consequence
A vendor loan is typically:
- Subordinated to bank financing
- Interest-bearing (5–8% PIK common)
- 3–7 year term, repaid at the end ('bullet')
From the seller's view: a higher total sale price (through interest), possible tax deferral. From the buyer's view: less sponsor equity needed, but additional interest burden.
Pitch tip
Common pitfall — many junior analysts forget that the vendor loan sits between Senior Debt and Sponsor Equity in the capital structure. It counts toward the interest deductibility limit calculation. In insolvency it behaves like mezzanine.