Not every business sale is a cash-on-settlement transaction. The larger the deal, the more likely a buyer will propose paying part of the price over time — through an earn-out, vendor finance, deferred consideration, or some combination of the three.
These structures can be entirely fair, entirely unfair, or somewhere in between. Here's how to read the difference.
Why buyers ask for them
Three common reasons:
- Bank funding falls short. The bank will lend on tangible security; the goodwill component often has to come from somewhere else.
- Risk sharing. The buyer wants reassurance that the earnings the business is being valued on will actually continue under their ownership.
- Owner transition. The buyer wants the seller engaged through the handover — and few things engage a seller like a future payment.
None of these are unreasonable on their face. The question is always: how much, on what terms, with what protection.
Earn-outs
An earn-out makes part of the purchase price contingent on the business hitting agreed performance targets — usually EBITDA or revenue — over an agreed period after settlement.
A reasonable earn-out:
- Is no more than 15–25% of total consideration
- Runs for 12 months, occasionally 24, almost never longer
- Is tied to a metric you can clearly measure (audited EBITDA, not "buyer satisfaction")
- Protects you from the buyer running the business into the ground to avoid the payment — through covenants on capex, marketing spend, accounting policies and related-party transactions
- Pays out as a sliding scale, not a cliff — so a near-miss still pays most of the earn-out
Warning signs:
- More than 30% of the price is at risk
- The target period is longer than two years
- The metric is "adjusted" using definitions controlled by the buyer
- There's no obligation on the buyer to operate the business in its ordinary course
- You'll have no role and no visibility into the numbers during the earn-out
Vendor finance
Vendor finance is a loan from you to the buyer for part of the purchase price, repaid with interest over an agreed term.
A reasonable vendor finance arrangement:
- Is documented as a formal loan with a registered security interest
- Carries an interest rate at least comparable to a bank business loan
- Is secured against the business and ideally a personal guarantee from the buyer
- Sits behind the bank in priority but ahead of dividends to the buyer
- Has clear default triggers and remedies
Warning signs:
- Unsecured, or secured only over assets the bank already controls
- Interest rate at or below the bank's rate (you're taking more risk than the bank — you should be paid for it)
- No personal guarantee
- Term beyond five years for an SME
Deferred consideration
Sometimes part of the price is simply deferred — payable on a fixed date, with no performance condition. This is the cleanest of the three structures. Treat it like vendor finance: document it as a formal debt, secure it, and price it for the time-value of money.
Tax considerations
These structures interact with tax in ways generic advice can't anticipate. Three things to discuss with your accountant before signing:
- Timing of CGT-equivalent treatment for earn-out payments under current IRD interpretation
- Treatment of interest on vendor finance, particularly for trusts and LTCs
- Goods and Services Tax treatment, especially where the business is sold as a going concern
Don't accept the buyer's tax view of the structure — get your own.
Escrow and restraint of trade
Two protections worth pushing for regardless of structure:
- Escrow for at least the warranty period — a portion of the price held by a third party as security against undisclosed liabilities surfacing post-settlement.
- Mutual restraint of trade — you agree not to compete for a defined period and geography; the buyer agrees not to use your departure as a pretext to renegotiate.
The transition period
Almost every sale includes a handover. Define it precisely:
- Hours per week
- Duration in months
- What's included (introductions, training, documentation) and what's not (operational decisions, personal availability outside hours)
- Whether it's paid, and if so, how
Vague transition arrangements end in either resentment or scope creep. Sometimes both.
The simple test
If a proposed structure makes you feel the buyer is sharing risk fairly, it probably is. If it makes you feel you're effectively still running the business but without ownership, it isn't.
The right structure is the one that lets you walk away from settlement confident the rest of the price is going to land — without you having to fight for it.
If you're evaluating an offer with deferred elements, we'd welcome a confidential conversation before you sign.