Key points
- A seller note is a loan from you to the buyer, often about 10 to 25 percent of the price.
- An earnout ties part of the price to future results and shifts risk to you.
- Get security, clear definitions and written remedies if the buyer stops paying.
- Ask whether the price still works if the deferred part never arrives.
Two ways to defer part of the price
A seller note is a loan you make to the buyer, repaid in installments with interest. An earnout pays extra later only if the business hits agreed results.
Both widen the pool of buyers, because the buyer needs less cash and less bank money at closing. Both also leave your money at risk.
Seller notes
A seller note commonly covers roughly 10 to 25 percent of the price. It is often secured by a lien on the assets, and it may sit behind an SBA loan.
Ask about the interest rate, the payment schedule, what happens if a payment is late and whether the buyer has guaranteed the note personally.
Earnouts
Earnouts often appear where the risk is real, such as customer concentration or an owner who holds key relationships. They are less friendly to sellers, because the buyer controls the business that produces the result.
Insist on a precise definition of the measure, what costs can be subtracted and what the buyer may not change during the earnout period.
Protections to ask for
- Security on the assets and a clear default clause
- Personal guarantees from the buyer or the buyer's owners
- Limits on what the buyer can do that would cut the payout
- Reports you can audit each quarter
When to say no
If the cash at closing alone is not a number you can live with, a deferred promise will not fix it. A buyer who insists on a large note and has little cash at risk is a warning sign.
Brokers also notice buyers who claim bank financing and then switch to a seller note late. Ask for proof of funds early.
Check the whole picture
Deferred payments change timing and tax, so ask your CPA to model them before you sign. A broker can show how offers compare once you request a value estimate.
Related reading: letter of intent terms every seller should read.