In M&A deals, there are two common forms of deferred payments for sellers: earnouts and carrybacks. While both involve payments to the seller after closing, they are structured differently. Here’s a quick breakdown:
馃挼 Seller Carryback:
路聽聽The seller holds a promissory note for a portion of the purchase price
路聽聽The buyer makes regular payments over time, with interest.
路聽聽Typically secured by a personal guaranty and a security agreement tied to business assets.
馃挼 Earnouts
路聽A portion of the purchase price is paid after closing and is tied to the business鈥檚 future performance.
路聽The seller “earns” the remainder of the purchase price based on specific metrics like revenue, profit or even customer retention.
We generally see both carrybacks and earnouts in the 20-30% range, but this can vary depending on the industry and parties’ objectives. From a seller’s perspective, any deferred payment comes with risk. The buyer may default on the seller carryback note, or the business may underperform under new ownership, affecting the earnout. But on the upside, these structures can give a seller access to a broader pool of buyers as well as create the potential for a higher overall sale price. For buyers, the advantages include a lower up front cash requirement and an opportunity to keep the seller engaged for post-sale support.
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