Can a buyer’s lender block an earned earn-out payment?

BDC lists an earn-out alongside vendor financing as ways a seller can stay involved after a sale. BDC’s acquisition financing page likewise describes structures that combine a loan with seller financing. Both leave the seller waiting for money while the buyer also owes a lender. An earn-out differs from a note in one respect: the amount is not fixed at closing, so a seller can reach the day it is earned and find the buyer cannot pay it freely. Whether that happens turns on contracts the seller may never have seen.

Where a restriction can come from

The first place is the purchase agreement itself, which may say the earn-out is subordinate to the buyer’s senior debt or payable only if the buyer’s loan covenants allow it. The second is a separate subordination, postponement or intercreditor agreement the lender asks you to sign. The third is the buyer’s own loan agreement, to which you are not a party. A restriction there can still leave the buyer unable to pay you without breaching it, so ask to see the relevant terms before you agree to an earn-out.

What the security statutes cover

Ontario’s Personal Property Security Act says a secured party may subordinate its security interest to any other security interest, effective according to its terms (s.38). That provision is about security interests. If your earn-out is unsecured, you hold no security interest to subordinate, and the contract terms decide what you can collect and when. If you took security, the registration order and any subordination you signed matter, as the Act’s priority rule in s.30(1) shows. Other provinces have their own statutes.

Questions worth putting in the agreement

• If the earn-out is earned but a lender restriction applies, is the amount deferred, and does it carry interest?
• Must the buyer tell you promptly that a restriction applies?
• Does a deferred amount stay payable once the restriction lifts?
• Can you see the buyer’s financial statements that show the earn-out calculation?

Our comparison of an earn-out and a holdback sets out how the two structures differ, and our answer on a missed earn-out target covers the other way an earn-out can pay nothing.