Vendor Loan Notes
Debt instruments issued to the seller as part of the purchase price, representing deferred payment obligations.
Full Definition
Vendor Loan Notes (VLNs) are debt instruments issued by the buyer (or acquisition vehicle) to the seller as part of the purchase consideration. They represent a promise to pay a portion of the purchase price over time.
Typical VLN terms:
- Principal: Portion of purchase price (10-30% common)
- Interest: Fixed rate (often 5-10% per annum)
- Term: 2-5 years
- Repayment: Bullet, amortising, or PIK (payment in kind)
- Security: Often unsecured or subordinated
- Transferability: Usually restricted
Why use VLNs: Buyer benefits:
- Reduces upfront cash requirement
- Demonstrates seller confidence
- Aligns seller with business performance
- May be subordinated to bank debt
Seller benefits:
- Tax deferral (CGT deferred until notes redeemed)
- Higher total consideration than all-cash
- Interest income stream
- Maintains stake in success
Risks for sellers:
- Subordination to other creditors
- Buyer default risk
- Illiquid investment
- Interest rate risk
UK tax treatment: VLNs can be structured as "qualifying corporate bonds" (QCBs) for CGT deferral, subject to specific conditions. Professional tax advice is essential.
Related Terms
Deferred Consideration
Part of the purchase price paid after completion, often tied to future business performance or time-based milestones.
Purchase Price
The total consideration paid by the buyer to acquire the target business or its shares.
Earn-out
Contingent payments to the seller based on the business achieving specified future performance targets.
Private Equity
Investment funds that acquire equity stakes in private companies, typically seeking value creation and exit within 3-7 years.