Three ways to structure the price.
When a buyer and seller cannot fully agree on value, or the buyer wants the seller to stay committed to the result, the price can be structured rather than paid in a single sum on completion.
Earnouts, retentions and vendor finance.
An earnout entitles the seller to further payments if the business meets agreed financial targets after settlement. The risk for a seller, especially one no longer running the business, is that the buyer manages the numbers so the targets are not met, or not seen to be met, so earnouts are usually backed by requirements for the buyer to provide audited figures at intervals. A retention holds back part of the price to secure an obligation of the seller, such as remaining with the business for a handover, carrying out repairs on equipment, or keeping key clients, and is released when the obligation is met. Vendor finance is where the seller leaves part of the price outstanding, in effect lending it to the buyer, usually with security and interest, which is attractive to a buyer short of funds but leaves the seller exposed to the buyer's performance.
Why drafting and tax both matter.
Each of these shifts risk between the parties, and each depends on precise drafting to work, particularly the triggers, the security and what happens on default. They also carry tax consequences that should be confirmed with your accountant, because the timing and character of the payments can matter. We structure and document earnouts, retentions and vendor finance through our business sale and purchase service.
An earnout is only as good as the protections around it. Without a right to audited figures, a seller can be left arguing about numbers they cannot verify, and with vendor finance the seller carries the buyer's performance risk until the balance is paid.