Why buyers ask for it
Buyers use these arrangements for two reasons. They may not have enough money or bank finance to pay the full price. Or they aren't sure the profit will hold up once you leave, so they want you to share that risk. Neither reason is unreasonable. But you should understand what you are agreeing to.
What is an earn-out?
An earn-out is where you get an amount at settlement, plus more later if the business hits agreed targets, such as a level of profit over the next two or three years. The tax office describes it as a way of dealing with uncertainty about what the business is worth.
Here is the catch for a retiring owner. Once you sell, you no longer run the business. The new owner makes the decisions: who to hire, what to spend, how to price, how to keep the books. Each of those can change whether the target is met. You carry the risk without the control.
Earn-outs can also lead to arguments over how the profit was measured. If you agree to one, your lawyer and accountant should make sure the targets and the accounting rules are written down in detail.
What is vendor finance?
Vendor finance is where you, the seller, lend the buyer part of the price. They pay you back over time, usually with interest, out of the business's profits.
It can help a sale happen, especially a sale to staff or to a first-time buyer. But it means you become the buyer's bank in your retirement. If the business struggles under them, your payments can stop. Getting the business back after it has been run down is rarely a happy outcome.
If you do offer it, ask your lawyer about security (what you can claim if they don't pay), personal guarantees from the buyer, and what happens if they miss a payment.
Questions to ask about any offer
- How much do I receive in cash on settlement day?
- What exactly has to happen for me to receive the rest, and who decides if it did?
- What happens if the business is sold again, or the buyer gets into trouble?
- How is the buyer funding the purchase, and is that funding in place?
- Could the price be renegotiated after due diligence (the checking stage before the sale is final)?
A lower price paid in full at settlement can be worth more to you than a higher headline price with a large part paid later.
Tax
Earn-outs have their own tax rules, and later payments can be treated differently from the upfront amount. The ATO explains the rules on its earnout arrangements page. Ask your accountant before you sign, not after. This is general information, not tax advice.
How we pay
We pay cash at settlement wherever we can. We generally don't rely on deferred payments or earn-outs, as they rarely build trust or fairly reward the seller. If a situation arises where they make sense, the reasoning will be clear and agreed with you. Otherwise, we keep it simple with cash at settlement.
When Peter Bourke sold CMR Recycling to us, it was mostly cash at settlement.
We finalise the deal on the terms we agreed, with no revisions or renegotiations. We don't come back late in the process looking to change terms or create leverage. Within two weeks of our first conversation, you'll have our offer in writing, with a clear price. You can see our process, step by step.