Vendor Loan Agreement in Dutch Acquisitions

Interest, repayment, security, subordination and set-off should align with the SPA

A vendor loan agreement is the loan agreement under which the seller in an acquisition leaves part of the purchase price outstanding as a loan to the buyer after closing.

The commercial deal is often agreed in the LOI or SPA: part of the purchase price will not be paid immediately at closing, but will be financed by the seller. The actual risk allocation is then set out in the vendor loan agreement. It determines when the seller is paid, what interest applies, whether security is granted, whether the loan is subordinated and whether the buyer may set off claims.

This article is not a general explanation of vendor loans. For that, see Vendor Loans and Deferred Consideration in Dutch Acquisitions. This article focuses on the documentation and negotiation of the vendor loan agreement in Dutch acquisitions.

This article is part of the M&A Insights series on Dutch deal practice and is relevant for buyers, sellers, investors and international counsel involved in Dutch acquisitions.

The vendor loan agreement is not just ancillary documentation

In transactions, the vendor loan agreement is sometimes treated as practical closing documentation. That is risky. For the seller, the vendor loan may represent a significant part of the purchase price. For the buyer, it is part of the acquisition financing structure.

The vendor loan agreement should therefore not be drafted only at the end of the process. The main points should already be reflected in the LOI and SPA. If the parties only start negotiating interest, subordination, security or set-off shortly before closing, a transaction that appears agreed may still come under pressure.

Principal amount and maturity

The first question is what amount remains outstanding as a vendor loan. That amount should align with the purchase price provisions in the SPA and the funds flow at closing.

The maturity should also be clear. Is the loan repaid in full on a final maturity date, or in instalments? Are there scheduled repayment dates? Can the buyer prepay? Does a prepayment fee or make-whole apply?

Sellers usually prefer a shorter maturity. Buyers may need a longer maturity to preserve liquidity in the business after closing.

Interest and payment

The interest rate should reflect the risk carried by the seller. An unsecured, subordinated vendor loan with a long maturity is not economically the same as a short, secured loan.

The agreement should state whether interest is paid periodically, capitalised or paid only at final repayment. It should also address late payment and default interest.

Where senior financing is involved, the senior lender may restrict interest and repayment payments to the seller.

Security

For sellers, security is a key issue. Without security, the seller is effectively an unsecured creditor of the buyer. That may be acceptable in some deals, but it should be a conscious decision.

Possible security may include pledges over shares, receivables, bank accounts or assets, guarantees from group companies or other credit support. In private equity or bank-financed transactions, the scope for seller security may be limited because senior lenders want priority.

The vendor loan agreement and related security documents should make clear what security is granted, when it can be enforced and how it ranks against other creditors.

Subordination

Subordination is often heavily negotiated. If the vendor loan is subordinated to bank debt, private credit or other acquisition debt, the seller may be restricted from receiving interest or repayment while certain conditions apply.

The seller should understand what subordination means in practice. Are payments fully blocked on a default under the senior facilities? Can interest be paid if no event of default exists? Does the seller have information rights or cure rights? Is the subordination documented in an intercreditor agreement or only in the vendor loan agreement?

Subordination is not boilerplate. It determines the seller’s real recovery position after closing.

Events of default

The vendor loan agreement should specify when the loan becomes due and payable. Typical events of default include non-payment, breach of financial obligations, insolvency, change of control of the buyer, disposal of material assets, breach of information obligations or default under senior financing.

For buyers, the default regime should remain workable. Overly broad defaults may unnecessarily restrict post-closing operations. For sellers, the regime should provide sufficient protection if the buyer’s credit risk deteriorates.

Set-off against SPA claims

One of the most important links between the SPA and the vendor loan is set-off. Buyers often want to set off warranty claims, indemnity claims or purchase price adjustments against amounts payable under the vendor loan.

For sellers, this can be risky. If even disputed claims suspend repayment, the buyer may use the vendor loan as leverage in a post-closing dispute.

The documents should therefore clearly state whether set-off is allowed only for admitted claims, finally determined claims or also disputed claims. They should also explain how caps, thresholds, limitation periods and disclosure interact with the vendor loan.

Information and protective rights

Because the seller carries buyer credit risk after closing, the seller may require information. This may include annual accounts, management accounts, covenant certificates or information about repayment capacity.

Buyers will want to avoid giving the seller excessive influence over the business after closing. Information rights should therefore be limited and commercially justified.

In some cases, negative covenants may also be agreed, such as restrictions on dividends, additional debt, asset disposals or related party transactions while the vendor loan remains outstanding.

Interaction with closing documentation

The vendor loan agreement should align with the SPA, closing agenda, funds flow, security documents, any intercreditor agreement and any escrow or earn-out arrangements.

If these documents do not align, post-closing disputes may arise about payment, ranking, set-off and remedies.

A good closing set makes clear which amount is paid at closing, which amount remains outstanding as a loan, which documents are signed and which conditions apply to post-closing payment.

Practical conclusion

A vendor loan agreement determines whether deferred payment is acceptable for the seller and workable for the buyer.

For sellers, the key issues are interest, maturity, security, subordination, default protection, information and set-off. For buyers, the vendor loan must fit within the acquisition financing structure and avoid unworkable restrictions after closing.

The vendor loan agreement should not be treated as a minor annex. It is a material part of the purchase price and financing structure of the transaction.

FAQ

What is a vendor loan agreement?

A vendor loan agreement is the loan agreement documenting that the seller leaves part of the purchase price outstanding as a loan to the buyer after closing.

Is a vendor loan the same as deferred consideration?

A vendor loan is a specific form of deferred consideration documented as debt.

Does a vendor loan require security?

Not always. But without security, the seller carries buyer credit risk. Any security must be coordinated with senior financing.

Can the buyer set off warranty claims against the vendor loan?

Only if the SPA and vendor loan agreement allow this. The drafting should clarify whether set-off applies to disputed claims or only admitted or finally determined claims.

When should the vendor loan agreement be negotiated?

The main points should be addressed in the LOI or SPA. At closing, the vendor loan agreement must align with the funds flow and other closing documents.

About Dirk de Waard

Dirk de Waard is a Dutch corporate and M&A lawyer, partner at Venture Lawyers in Amsterdam, and advises entrepreneurs, sellers, buyers, investors and M&A advisers on Dutch acquisitions, vendor loans, SPAs, purchase price mechanics, security, subordination, set-off and closing documentation.

Aligning a vendor loan agreement with the SPA?

A vendor loan agreement determines how protected the seller is for the deferred part of the purchase price and how much flexibility the buyer retains after closing. Interest, repayment, security, subordination and set-off should be addressed before signing.

Dirk de Waard advises buyers, sellers and M&A advisers on vendor loan agreements in Dutch acquisitions. Contact Dirk de Waard at dirk.dewaard@viottalaw.com to align the vendor loan, SPA and closing documentation before execution.