Not every dollar of a purchase price arrives at closing. Seller notes and earnouts are two of the most common ways buyers bridge a valuation gap, finance part of the purchase price, or share risk with a seller — and for sellers, both structures deserve far more scrutiny than the number attached to them.
Why buyers use deferred consideration at all
Buyers turn to seller notes and earnouts for a few overlapping reasons: to reduce the cash needed at closing, particularly when combined with SBA or other acquisition financing; to bridge a gap between what a buyer is willing to pay today and what a seller believes the business is worth; and to align incentives, particularly when a seller is staying on for a transition period and the buyer wants that seller financially motivated to help the business succeed post-closing.
Seller notes: financing you're extending, not a check you've cashed
A seller note is, functionally, a loan from the seller to the buyer, repaid over an agreed term with interest. From a seller's perspective, the key questions are not just the interest rate and maturity date, but where the note sits in the buyer's capital structure. Seller notes are almost always subordinated to the buyer's senior lender, meaning that if the business struggles, the senior lender gets paid first — sometimes leaving little or nothing for the seller. Sellers should pay close attention to subordination terms, standstill periods, default provisions, and whether the note accelerates if the buyer sells the business again before it's paid off.
Earnouts: the number is only half the negotiation
An earnout ties a portion of the purchase price to the business's performance after closing — commonly revenue or EBITDA targets measured over one to three years. The appeal is obvious: sellers who believe in the business's trajectory can capture more of that upside than a buyer is willing to pay for up front. The risk is just as real: once the buyer owns and controls the business, the seller's ability to influence — or even observe — whether earnout targets are met is limited.
Earnouts are among the most frequently disputed terms in M&A, not because sellers don't trust buyers, but because "performance" is rarely as objective as it sounds once someone else is running the company.
Protections worth negotiating
A well-drafted earnout does far more than state a target and a payout percentage. Sellers should push for a clear, unambiguous definition of the metric being measured and how it will be calculated; covenants that prevent the buyer from operating the business in a way designed to suppress the metric — for example, diverting sales, cutting marketing spend, or folding the business into a larger unit in a way that obscures its standalone performance; audit or inspection rights to verify the buyer's calculations; and acceleration provisions that pay out the full earnout if the buyer sells the business, or terminates the seller without cause, before the measurement period ends.
The bottom line
Seller notes and earnouts can be a reasonable way to bridge a valuation gap or share risk on a deal that otherwise makes sense for both sides — but they shift real risk onto the seller, often for a year or more after closing. Sellers who negotiate the protections around these structures as carefully as the headline number are the ones most likely to actually collect what they were promised.
