What is the difference between an earn-out, a holdback and a vendor note?

A sale price is not always paid in one cheque at closing. Part of it can be deferred, and three ways of deferring it work quite differently. BDC’s guidance for buyers and sellers describes all three, and each one changes what you are owed, when you are owed it, and what could reduce it. Check how your own agreement defines each term rather than relying on the label.

An earn-out

BDC defines earnouts as contractual clauses in a business sale where part of the purchase price is paid to the seller after the deal closes. Because that money arrives later, the clause decides what you actually receive. BDC also notes that vendor financing can come with strings attached, such as earnouts. Read how the amount is worked out, and ask who runs the business while it is being measured and what happens if the buyer changes how the business operates.

A holdback

BDC says the parties decide in negotiations how much of the price is paid at closing and how much is held back in escrow or made subject to conditions. In its guidance for buyers, BDC describes a holdback as security so that funds are available if the buyer has a claim against the vendor. BDC also lists holdbacks and funds in trust among the adjustments that can follow findings in due diligence. For a seller, a holdback is money that stays out of reach until the agreement releases it.

A vendor note

BDC describes vendor financing, also known as vendor take-back or VTB, as acquisition debt that lets the buyer hold back a portion of the purchase price as a debt to the vendor. In other words, you become a lender to the buyer. The agreement that creates the note should say how it is repaid, so ask what security you would hold, whether another lender would be paid before you, and what happens if a payment is missed.

• Earn-out: what is measured, over what period, and who controls the decisions that affect the result.
• Holdback: which claims it covers, who holds the money, and the date it is released.
• Vendor note: repayment terms, security and your rights if the buyer defaults.

For a closer look at two of these, see earn-out vs holdback. For the roles of the lawyer and accountant, see who does what in a business sale.