Earn-Outs and Seller Financing: Deal Structure Explained

You have finally found a buyer.

They love your business. They see the vision. You have had the coffee meetings, you have shared the financials, and everything feels right.

Then, the offer letter comes in.

It is about 30% lower than you expected. Or maybe the price is right, but the buyer says, “I don’t have that much cash upfront.”

Your gut reaction might be to walk away. You think, “If they can’t afford it, they aren’t serious.”

But here is the hard truth about selling a business: Almost nobody pays 100% cash at closing.

Unless you are selling to a massive private equity firm or a public company, your buyer likely relies on bank loans (like SBA loans) and their own savings. And there is almost always a gap between what you think the business is worth and what the bank is willing to lend.

This is the “Valuation Gap.” And if you don’t know how to bridge it, your deal dies here.

The bridge consists of two powerful, often misunderstood tools: Seller Financing and Earn-Outs.

These aren’t just financial terms. They are the grease that makes the gears of the deal turn. They allow you to get your price, and they allow the buyer to afford the business. But if you structure them wrong, they can turn your exit into a nightmare.

Let’s break down how to structure a deal that gets you paid without keeping you up at night.

Deep Dive: The Two Bridges

To understand these tools, you have to stop thinking like a seller and start thinking like a banker.

1. Seller Financing (The “Seller Note”)

In this scenario, you act as the bank. This is very similar to “owner financing” in real estate if you were selling a home.

The buyer pays you a down payment (say, 70% of the price), and you agree to be paid the remaining 30% over time, usually with interest.

• Why Buyers Love It: It signals that you believe in the business. If you are willing to wait for your money, you must be confident the business won’t collapse next month. It also helps them qualify for bank loans because the bank sees your “skin in the game.”
• Why Sellers Do It: It is often the only way to get the full asking price. Plus, you earn interest (usually 6% to 8%), which is better than a savings account.

2. The Earn-Out (The “Performance Bonus”)

This is used when you and the buyer disagree on the future.

You say: “This business will grow 20% next year!” The buyer says: “Maybe. But I’m not paying for that growth until I see it.”

An Earn-Out says: “Okay, I will pay you $X upfront. If the business hits $Y revenue next year, I will pay you an extra bonus.”

• The Risk: You are tying your payout to a business you no longer control. If the new owner ruins the business, you miss your earn-out.

Solutions: How to Structure the Deal Safely

You should never enter these agreements on a handshake. You need ironclad terms to protect your nest egg.

Structuring Seller Financing

Don’t just say “pay me later.” Treat it like a formal loan.

• The Term: Typically 3 to 5 years.
• The Interest Rate: It should be reasonable but higher than a standard mortgage. Current market rates are often 6% to 10%.
• The Collateral: This is critical. If the buyer stops paying, what do you get? Ideally, you get a lien on the business assets. If they default, you get the business back.
• Balloon Payments: To keep monthly payments low for the buyer, you might structure it as a 10-year amortization schedule with a “balloon” (full payoff) due in 5 years.

Structuring the Earn-Out

This is where lawsuits happen. Complexity is the enemy here.

• Base it on Revenue, Not Profit: This is the #1 rule. A buyer can easily manipulate “Profit” (EBITDA) by buying a new company car or hiring their cousin. It is much harder to hide “Revenue.”
• Keep the Timeline Short: 1 to 2 years max. Beyond that, the market changes too much to attribute success solely to your past efforts.
• Define “Success” Clearly: Don’t say “if sales go up.” Say “If Gross Revenue exceeds $2M in the fiscal year 2026.”

Actionable Tips for Negotiating

1. Secure Your Position (UCC-1 Filing) If you offer seller financing, file a UCC-1 financing statement. This is a public notice that you have an interest in the business assets. It puts you in line to get paid if things go south. It’s essentially putting a mortgage on the business assets.

2. The “Acceleration Clause” Make sure your note has an acceleration clause. This means if the buyer sells the business to someone else before paying you off, they have to pay you the full remaining balance immediately. You don’t want your loan transferred to a stranger you didn’t vet.

3. Stay Involved (If You Have an Earn-Out) If a significant chunk of your money depends on future performance, negotiate a consulting role or a board seat during the earn-out period. You need visibility. You can’t steer the ship, but you should be able to see the iceberg.

4. Check the Buyer’s Credit It sounds obvious, but many sellers skip this. You are extending credit. Run a background check. Ask for a personal financial statement. If they have a history of defaulting on loans, do not offer seller financing.

The FAQ Section

Q: What is a typical ratio for a deal? A: A common structure for small business sales is:

• 70% to 80% Cash at Closing (Bank Loan + Buyer Equity)
• 10% to 20% Seller Note
• 0% to 10% Earn-Out

Q: Can I sell the Seller Note later? A: Yes, there is a secondary market for promissory notes, but you will sell it at a steep discount (often 70 to 80 cents on the dollar). It is better to hold it if you can.

Q: What happens if the buyer goes bankrupt? A: If you have a secured position (collateral), you get the assets back. However, the bank (SBA lender) usually has the “first position,” meaning they get paid first. You get what’s left. This is the risk you take for the higher sale price.

The Bottom Line

Earn-outs and seller financing are tools of compromise. They bridge the gap between “what I want” and “what they can pay.”

They require trust. You are effectively entering a partnership with the buyer for a few years after the sale. If you don’t trust the buyer’s character or competence, do not offer terms. Take a lower all-cash offer instead.

But if you trust the buyer and structure the deal with protection, these tools can be the difference between listing your business and actually selling it.

Ready to determine your asking price? Before you structure the deal, you need to know the baseline value. Check out our guide on business valuation basics to ensure your starting number is realistic. Also, ensure you have all your essential business documents organized, as any buyer will demand to see them before agreeing to these terms.