A vendor take-back note, or VTB note, is a loan the seller of a business extends to the buyer for part of the purchase price, so the seller effectively finances its own sale and collects the balance over time instead of receiving it all at closing.
A VTB is a fixed debt obligation the buyer owes regardless of how the business performs afterward — the opposite of an earn-out, which only pays out if agreed targets are hit. Deavo, a Canadian business-marketplace platform, frames the typical shape of one in its own market commentary as running “10–20% [of price] over 3–5 years,” a description of illustrative deal practice rather than a published statistic, and Treadstone Law's guidance for sellers stresses that “what happens next depends heavily on whether the note is secured, and by what” — options include a general security agreement under the Personal Property Security Act, a pledge of the buyer's shares, a personal guarantee, or a mortgage on real property.
Default under a VTB note is defined broadly, not just as a missed payment. The same guidance notes it can include “a breach of any covenants in the note or security agreement, the buyer's insolvency or bankruptcy, and sometimes a sale or further encumbrance of the secured assets,” and a seller facing default typically has to choose among giving notice, accelerating the full balance, enforcing whatever security was taken, or negotiating a forbearance arrangement instead.
Because the balance is genuinely payable over future years, the deferred gain qualifies for the same capital gains reserve mechanics as an earn-out. The ordinary maximum under ITA s. 40(1)(a)(iii) is five years; a VTB used specifically in a sale to the seller's child, in an intergenerational business transfer meeting the s. 84.1(2.31)/(2.32) tests, or in a sale to an employee ownership trust can instead use the extended ten-year reserve under s. 40(1.1)–(1.3) — an ordinary VTB to an outside buyer cannot.
A retiring owner sells her business to a management buyout group for $2,000,000: $1,400,000 in cash at closing and a $600,000 VTB note carrying the balance, secured by a general security agreement over the target's assets and a personal guarantee from the buyer. Because the $600,000 is payable over the following four years, she claims a capital gains reserve under s. 40(1)(a)(iii) on that outstanding portion, recognizing the deferred gain as the note is paid down instead of all at once in the year of sale.
See also: Earn-out · Section 85 rollover · Share purchase agreement.
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