Deferred Consideration in Australian Business Sales: Earnouts vs Vendor Loans

In a business sale, the headline price is not the same as value actually received. One of the fastest ways a deal can go sideways is when the buyer says: “We’ll pay part of it later.” That “later” might be structured as an earnout, a vendor loan (seller note), retention, escrow, or a mix of all three. Each structure shifts risk between buyer and seller in different ways.

This article is a seller-focused, practical guide to deferred consideration in Australian business sales: how earnouts and vendor loans work, what you should negotiate, where disputes arise, and how to reduce the chance you spend the next two years arguing about numbers instead of enjoying your exit.

Important: This is general information only and not legal, financial, tax, or accounting advice. Deal terms should be tailored to your circumstances and documented by qualified advisors.

What Is “Deferred Consideration”?

Deferred consideration simply means that part of the purchase price is paid after completion. It is common in private M&A and small-to-mid market business sales, especially where:

• the buyer wants to manage cashflow and funding constraints,
• there is uncertainty about future performance (growth, churn, margin, key staff),
• the business relies on the seller’s relationships and a transition period is needed,
• the buyer is paying for “potential” (and wants proof), or
• there is a gap between seller expectations and buyer valuation.

Deferred consideration is not automatically “bad” for sellers. But it must be priced and structured properly. If you accept it without guardrails, you are effectively providing finance and taking operational risk after you no longer control the business.

The Two Most Common Structures

1) Earnouts (Performance-Based Deferred Consideration)

An earnout is when the seller receives additional payments only if the business hits agreed performance targets over an earnout period (often 12–36 months).

Targets are commonly based on:

• Revenue (easier to verify, but can be manipulated via pricing/discounting and timing),
• Gross profit (better than revenue if COGS can swing),
• EBITDA (closer to value, but requires strong definition and accounting policy control),
• Customer retention / churn,
• New contracts / specific milestones (e.g., signed supplier agreement, product release),
• Units sold (common in product-based businesses).

Earnouts are useful when there is genuine upside and both parties want to share risk. They are also used (sometimes aggressively) when the buyer wants the seller to “prove” future results but is not willing to pay today.

2) Vendor Loans (Seller Notes / Vendor Finance)

A vendor loan (also called a seller note) is when the seller lends the buyer part of the purchase price. The buyer then repays the seller over time, usually with interest.

Vendor loans are typically documented via:

• a loan agreement (principal, interest, repayment schedule, events of default),
• security arrangements (if any),
• subordination terms if the buyer has bank funding, and
• sometimes personal guarantees (depending on leverage and bargaining power).

Vendor loans can be attractive to sellers because they are not directly tied to performance metrics. But they carry credit risk: if the buyer can’t or won’t pay, you may need to enforce the debt.

For a deeper dive on seller finance generally, see: Vendor Finance in Australian Business Sales.

Earnout vs Vendor Loan: A Seller’s Comparison

How Sellers Get Hurt: The “Control vs Payment” Problem

The core issue with deferred consideration is simple:

You no longer control the business, but your money depends on what happens next.

That creates the classic earnout dispute. The buyer may make perfectly reasonable commercial decisions (new hire, new premises, marketing spend, product investment) that reduce short-term earnings. The seller sees it as “earning out my money.” The buyer sees it as “running the business.”

Vendor loans avoid performance disputes, but sellers can still get hurt through:

• poor security (or no security),
• subordination to the bank (meaning you’re last in line),
• aggressive buyer leverage and thin cash buffers,
• missed repayments leading to long, expensive recovery.

Negotiation Checklist: Earnouts (What to Nail Down)

1) Define the metric like a lawyer and an accountant

If the earnout is based on EBITDA or profit, insist on:

• a precise definition (what is included/excluded),
• the accounting standards/policies to apply (and whether they can change),
• how one-off items are treated (legal fees, integration costs, redundancy, bad debts),
• treatment of related-party transactions and management fees,
• rules for revenue recognition and timing.

Sellers often agree to “EBITDA as per accounts” and later discover the buyer changed accounting policies post-completion (or simply allocated group overheads) and crushed the earnout.

2) Keep the earnout period as short as possible

Long earnouts increase the chance of disputes. Where feasible, use 12 months, or break it into defined milestones. If it must be 24–36 months, negotiate:

• interim reporting and review rights,
• partial payments (not one big “true-up” at the end),
• clear dispute resolution steps and timeframes.

3) Conduct covenants: the buyer’s “rules of the road”

Earnouts live or die on buyer conduct. Sellers should negotiate covenants such as:

• no deliberate actions to avoid the earnout (a “good faith” / “no frustration” covenant),
• limits on management fees, group overhead allocations, or related-party charges,
• restrictions on moving revenue/costs between entities,
• requirements to operate the business in the ordinary course,
• approval rights (or consultation rights) for certain decisions during the earnout period (e.g., pricing policy changes, large capex, opening/closing locations).

Be careful: sellers rarely get broad veto rights. But you can often negotiate information rights and guardrails around obvious manipulation.

4) Treatment of acquisitions, new product lines, or divestments

What happens if the buyer folds another business into yours? Or moves part of the operation elsewhere? If the earnout is based on consolidated numbers, acquisitions can distort results (and disputes). Clarify:

• whether the earnout is calculated on a standalone basis,
• how transfer pricing is handled,
• whether new product lines count,
• how divested/discontinued lines are treated.

5) Payment mechanics, reporting, and audit rights

Sellers should push for:

• monthly management reporting (P&L, balance sheet, KPIs),
• a clear timetable for the earnout statement (e.g., within 30 days of period end),
• a dispute window (e.g., 20–30 business days) and a defined process for resolution,
• independent expert determination for accounting disputes, with costs allocated fairly.

6) Cap, floor, and “catch-up” structures

Earnouts can be structured to reduce risk:

• Cap: a maximum earnout amount.
• Floor / minimum payment: rare, but sometimes negotiated where the buyer’s valuation depends heavily on optimistic assumptions.
• Catch-up: if Year 1 misses slightly but Year 2 exceeds, the seller can catch up some amount.
• Accelerators: higher % payout above stretch targets.

A well-designed earnout is less about “gotcha” metrics and more about a transparent risk-sharing mechanism.

Negotiation Checklist: Vendor Loans (What to Nail Down)

1) Interest rate and repayment schedule

Vendor loans should be priced like the risk they carry. Negotiate:

• interest rate (fixed vs floating),
• repayment timing (monthly/quarterly),
• whether there is an initial interest-only period,
• prepayment rights and penalties (if any).

If repayments depend on cashflow, consider a cash-sweep structure (e.g., fixed minimum repayment plus % of excess cash).

2) Security (or you’re unsecured)

Ask a blunt question: “If the buyer stops paying, what exactly can I enforce?”

Vendor loans can be secured or unsecured. Options include:

• security over shares/units being sold (so you can step back in, subject to legal advice),
• security over business assets (often complicated if the bank holds first ranking security),
• personal guarantees (common in smaller deals; sensitivity varies),
• bank guarantees (rare, but strong for sellers).

Security and priority are deal-specific. Also consider registration on the PPSR where applicable (again, with advice).

3) Subordination and intercreditor terms

If the buyer has senior debt, the bank may require your vendor loan to be subordinated. Subordination can mean:

• you cannot enforce until the bank is paid in full,
• you cannot receive repayments if the buyer is in default to the bank,
• your security (if any) ranks behind the bank.

Subordination is not automatically unacceptable—but it must be understood and priced. Sellers sometimes agree to “standard intercreditor” documents without realising it can effectively turn their vendor loan into a high-risk, equity-like instrument.

4) Events of default and enforcement process

Ensure the vendor loan has clear default triggers, for example:

• missed payment (with short cure period),
• insolvency events,
• breach of financial covenants (if included),
• sale of the business (change of control) without repaying the vendor loan.

Then ensure remedies are practical: acceleration of the debt, enforcement of security, and a dispute pathway that doesn’t let the buyer delay indefinitely.

Practical Example: Same Deal, Two Different Outcomes

Imagine a $5.0m enterprise value deal for a services business:

• $3.5m paid at completion
• $1.5m deferred

Option A: $1.5m Earnout over 24 months

• Earnout based on EBITDA targets
• Paid annually after accounts are finalised

Seller risk: buyer hires a senior sales leader, increases marketing spend, and changes pricing. EBITDA is down in Year 1, then up in Year 2. Seller receives only part of the earnout, and disputes arise over “add-backs” and overhead allocations.

Option B: $1.5m Vendor Loan over 24 months at 9% p.a.

• Fixed repayments plus interest
• Security: second-ranking security behind bank; seller receives monthly reporting

Seller risk: buyer’s bank tightens covenants, cashflow is squeezed, repayments pause under intercreditor terms. Seller’s position depends heavily on business resilience and security priority.

The point is not that one is “better”. The point is that each structure has a different risk profile—and sellers should either (a) be paid for that risk via a higher overall price/interest rate, or (b) reduce the risk via better terms.

Where These Terms Usually Get Agreed: LOI / Heads of Terms

Deferred consideration should be addressed early in the deal, typically at the Letter of Intent (LOI) / Heads of Terms stage. If it’s left vague, the buyer may later “tighten” the mechanics in the long-form agreement when you’re already committed to momentum.

See also: Letters of Intent vs Heads of Terms.

Drafting Tips to Reduce Disputes (Seller-Friendly)

• Prefer objective, auditable metrics over subjective ones.
• Use clear examples in the schedule: a worked calculation based on sample numbers.
• Limit accounting policy changes or specify consistency with historical accounts.
• Specify access rights: systems, data, and management accounts during the earnout period.
• Use independent expert determination for accounting disputes (not court first).
• Be realistic about control: if you won’t have operational control post-sale, avoid metrics that can be easily influenced by discretionary spending.

Tax, Accounting, and Practical Reality (A Quick Note)

Deferred consideration can have tax and accounting implications depending on structure (asset sale vs share sale, timing of CGT events, whether amounts are contingent, and how payments are characterised). These matters are technical. Build a coordinated plan between your legal and tax advisors early—especially if you are seeking to optimise outcomes under the small business CGT concessions (see: CGT Concessions Explained).

When to Say “No” (Red Flags)

Sellers should be cautious if:

• the buyer proposes a large earnout but refuses meaningful reporting and dispute rights,
• the earnout metric is EBITDA but the business will be integrated into a broader group,
• the buyer wants to control accounting policies with no consistency requirement,
• the buyer offers a vendor loan but resists any security and insists on deep subordination,
• the buyer’s funding plan looks thin (high leverage, little buffer, optimistic forecasts).

Deferred consideration should not be used to “paper over” a valuation gap without a credible path to payment.

Frequently Asked Questions

Is an earnout the same as retention or escrow?

No. A retention or escrow is usually a portion of price held back to cover warranty/indemnity claims. An earnout is contingent on performance. They can coexist, but they address different risks.

Can I have both an earnout and a vendor loan?

Yes. Many deals use a blend: a fixed deferred amount via vendor loan plus an upside earnout. The key is to avoid “stacking” seller risk without being compensated.

How big should deferred consideration be?

There’s no universal rule. In smaller private deals, it’s common to see 10–30% deferred. Above that, sellers should be extremely focused on terms, security, and control, because you’re effectively partnering with the buyer post-sale.

Next Steps

If a buyer proposes deferred consideration, treat it like its own mini-deal: price the risk, document the mechanics, and ensure you have enforceable rights. The goal is not to “win” the negotiation—it’s to reduce the chance your exit turns into a long dispute about what the deal meant.

If you’re preparing to sell and want a structured approach to terms, timing, and risk allocation, explore our Business Sale Readiness Assessment or review more deal structuring articles in the Succession Advisory blog.

Last updated: March 8, 2026