Earn-outs and vendor loans: the same price, a different risk

Two instruments with different mechanics

An earn-out can bridge differing expectations about future trading. Part of the price may depend on future revenue or earnings, leaving the amount and payment conditional until the agreed requirements are met.

With a vendor loan, part of the agreed consideration remains outstanding as a receivable. Repayment, maturity and interest are contractual matters. A fixed nominal amount does not make the claim secure: the debtor's ability to pay and the wider funding structure remain important.

Three million can be paid in very different ways

Offer A provides CHF 3’000’000 at completion. Offer B also quotes up to CHF 3’000’000, but comprises CHF 2’000’000 upfront, a CHF 600’000 loan over three years and a maximum CHF 400’000 earn-out. Immediate proceeds under B are CHF 1’000’000 lower in this illustrative example.

This comparison excludes interest, costs, taxes and discounting. It is not a fair-value comparison of the offers. That would require an assessment of timing, conditions, security and credit risk. Its purpose is to distinguish a nominal maximum from available cash.

Agree how the earn-out will be measured

The word EBITDA alone does not define the future calculation. Which expenses are allocated? How will investment, group charges or changes in business policy affect the measure? Who can inspect the figures and how will disagreements be resolved? These matters require professional drafting.

Your role after the sale also matters. If you no longer control key decisions, understand how they affect the variable price. Reporting and review rights should therefore be discussed specifically with the legal advisers.

• Metric, measurement period, thresholds and cap
• Accounting policies and permitted adjustments
• Information rights and dispute resolution

Assess repayment and ranking together

Identify the debtor, the source of repayment and creditors with priority. A subordinated loan may carry different risk from a senior secured claim. Security also needs to be valuable and enforceable in the particular circumstances.

An initial conversation with Joel can clarify commercial priorities: minimum completion proceeds, acceptable deferral and your desired exit from responsibility. Contract, security and tax questions are addressed with the appropriate professionals. The calculator compares payment structures; it does not estimate a probability of default.