Vendor Note
The seller receives part of the consideration over time under agreed repayment, pricing and security terms.
CAPITAL EFFICIENCY
Purchase price and cash-at-close are not the same thing.
Seller financing can reduce the amount of buyer capital required at closing while giving the seller continued economic participation in the performance of the business. Used correctly, it can bridge valuation gaps and improve alignment.
The key is structure. Deferred consideration, vendor notes and earn-outs should reflect the target’s cash-generating capacity, the seller’s confidence in future performance and the buyer’s need to preserve liquidity for operations and growth.
STRUCTURING TOOLS
Different mechanisms solve different problems.
Deferred Consideration
A defined portion of the purchase price is paid later, reducing immediate cash requirements.
Earn-Out
Future payments depend on agreed performance metrics, helping bridge differing views of future value.
Rollover Equity
The seller retains equity participation, preserving alignment and potentially reducing upfront cash consideration.
RISK ALLOCATION
Capital efficiency should not create hidden fragility.
Seller-financed structures need clear subordination, repayment mechanics, default provisions, security, information rights and treatment in a future refinancing or sale. Earn-outs require particularly precise definitions of the accounting and operating metrics that determine payment.
The strongest structures reduce cash burden while keeping incentives aligned and preserving enough operating flexibility for the acquired business to perform.
