The Deal Structure Spectrum
Most field-service business sales fall somewhere along a spectrum of deal structures. On one end: all cash at closing. On the other: a heavily contingent deal where most of the "purchase price" depends on the future performance of the business under new ownership.
What Is a Seller Note?
A seller note, also called seller financing or a vendor take-back note, is a loan from you, the seller, to the buyer. Instead of paying the full purchase price at closing, the buyer pays a portion at close and the remainder under a defined repayment schedule with negotiated interest.
Any proposed note should be modeled using the actual purchase price, principal, interest, repayment schedule, collateral, default rights, and tax advice applicable to the transaction. Do not rely on an illustrative payment example.
When seller notes are acceptable:
- The buyer is creditworthy and has demonstrated financial strength
- The note is structured as a senior secured obligation against business assets
- Interest rate, collateral, and repayment terms are appropriate for the risk
- The size and priority of the note are acceptable to the seller
- Default provisions, remedies, and any guarantees are clearly defined
When to push back on seller notes:
- The buyer is a PE firm or well-capitalized strategic; they should be able to finance the full purchase
- The note is larger or more exposed than the seller can accept
- The buyer won't provide personal guarantees or collateral
- The interest rate is below market
What Is an Earnout?
An earnout is a contingent payment that the buyer makes to the seller if the business hits defined financial targets after closing. Unlike a seller note (which is a fixed obligation), an earnout is variable: you only receive it if the business performs.
Any earnout should identify the metric, measurement period, accounting rules, access to records, dispute process, and the buyer's operating obligations. Do not assume a contingent amount will be paid.
The fundamental problem with earnouts:
After closing, you're no longer in control of the business. The buyer makes operational decisions. If they cut marketing, change pricing, lose a key employee, or simply don't prioritize the business you sold them, the revenue targets may not be met through no fault of the business you handed over. Sellers frequently receive less than the full earnout.
When earnouts appear:
Earnouts may be proposed when the parties differ on value or when future performance, contract renewal, or a projection needs to be tested. They shift risk to a contingent payment and require carefully drafted protections.
How to negotiate earnouts:
- Minimize the earnout as a percentage of total deal value
- Define metrics clearly: revenue is simpler than EBITDA, which a buyer can influence through expense decisions
- Include provisions protecting against buyer actions that deliberately suppress the metric
- Set a measurement period and reporting process that the seller understands
- Consider a retention role with salary if you'll be needed to drive the performance
Equity Rollover: A Third Option
In some acquisitions, a buyer may offer a seller the option to reinvest or retain an interest in the continuing business. The amount, rights, liquidity, governance, and tax treatment are negotiated and require independent advice.
The appeal: if the PE firm executes well and ultimately sells the platform at a higher multiple, your rolled equity can be worth significantly more than the value at your closing. The risk: if the platform struggles, your rolled equity may lose value or become illiquid. Equity rollover is a sophisticated decision that warrants legal and tax counsel specific to your situation.
Sources & Further Reading
The following authoritative sources inform content on this page. These organizations do not endorse We Buy Septic Companies.
- IRS Publication 537: Installment Sales. IRS guidance on reporting installment sale income, seller financing, and related tax treatment.