Seller Financing Pros & Cons: Seller Note vs. Earnout

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by a searcher from University College London, University of London
in London, UK

4yrs ago

Seller Financing Pros & Cons: Seller Note vs. Earnout

To me, Seller Note is debt with no tie to performance, Earnout is deferred performance-based payment.

How does Seller Note reduce risk of buying a bad company? Is Earnout always better (if available)?

1 Like

865 Views

reply by a searcher 3yrs ago
from Northwestern University in Longmeadow, MA, USA

^redacted‌ Hi Ben - I'll message you our LOI which has some language you can "borrow"

reply by a professional 3yrs ago
from Hobart and William Smith Colleges in Chicago, IL, USA

From a legal perspective, a seller note is a locked-in amount, which requires very little assessment of what is owed on the note. However, an earnout gives the buyer some "flexibility" over what is owed, and also some control (practically speaking) over when the earnout payments are due. In other words, a bad company could mean one with bad book-keeping or simply bad books.