Vendor credit and Earn-out: Two levers to facilitate an M&A transaction
When acquiring or selling a business, finding common ground on price is often one of the main challenges. Differences in perception between seller and buyer as to the value of the business can slow down or even jeopardize a transaction. Solutions to overcome these differences include seller’s credit and earn-out. These two mechanisms, although pursuing different objectives, can be complementary and facilitate successful negotiations. AKCEAN can help you set them up and negotiate them to maximize your project’s chances of success. Vendor credit: structured financing to facilitate acquisition Vendor credit is a financing arrangement in which the seller agrees to defer payment of part of the sale price by granting a loan to the buyer. In other words, the buyer does not immediately pay the full amount agreed: a fraction of the price is repaid progressively, according to a negotiated schedule including an interest rate and, in some cases, guarantees for the seller. This mechanism is particularly useful for buyers seeking to optimize their financing, by enabling them to reduce their initial capital outlay, to supplement or limit their recourse to bank loans, and to access conditions that are often more flexible than those offered by financial institutions. In practice, the vendor loan can represent a significant proportion of the sale price, with repayment generally spread over two to five years. Its interest rate, often lower than that of bank financing, makes it attractive to the buyer. Although it involves a deferred payment, the seller’s credit differs from a simple instalment plan in that it is structured. Unlike a traditional deferred payment, which is based solely on an agreement to pay in several instalments, a vendor credit formalizes a financial debt with a defined interest rate, and may include guarantees (pledge, surety). It thus offers the seller greater protection in the event of difficulties on the part of the buyer. Vendor credit is particularly relevant in management buy-outs, where employees take over the company. Since they do not always have the funds to finance the acquisition immediately, they can use the company’s future profits to gradually repay the vendor loan. While vendor credit facilitates the transaction, it is not without risks for the seller, particularly if the buyer encounters difficulties in honoring its commitments. It is therefore important to assess the buyer’s solvency and financial prospects, while providing solid guarantees. Earn-out: a price supplement based on future performance An earn-out is a mechanism whereby the purchaser pays a price supplement conditional on achieving a certain level of performance after the sale. The criteria, defined in advance, may be financial (sales, profitability) or non-financial (retention of strategic customers, maintenance of key contracts, etc.). This mechanism is particularly useful when the seller and buyer find it difficult to agree on a fixed price, notably due to uncertainties about the company’s future performance, or when the seller feels that the growth potential has not yet been fully reflected in past results. In concrete terms, an initial price is determined, with a possible top-up paid according to the objectives achieved. This mechanism reduces the buyer’s risk, while enabling the seller to obtain a higher valuation if performance follows. It is often structured on the basis of the results achieved in the year of sale, particularly during the period of support for the seller. However, its implementation requires particular care. Performance criteria must be precisely defined, and calculation methods fully transparent. Failing this, ambiguities can lead to disputes, particularly if the seller is no longer involved in the management of the company after the sale. Vendor credit and earn-out: complementary These two mechanisms, far from being exclusive, can be used in conjunction to meet the buyer’s financing constraints, while ensuring that the seller receives a fair valuation for his business. For example, a transaction may involve an upfront payment, supplemented by a vendor loan spread over several years, and an earn-out based on future performance. This combination offers greater flexibility in negotiations, and aligns the interests of seller and buyer with the company’s long-term viability and growth. Are you considering a sale or acquisition and would like to explore these mechanisms? Contact our team for a personalized analysis to optimize and secure your transaction.
