Earn-out vs vendor loan: which deferred payment should you choose to sell your SME?

Financing gap or valuation disagreement: two problems, two tools.

Introduction: earn-out or vendor loan, which deferred payment mechanism should you choose to sell an SME?

Selling an SME often runs into a simple obstacle: the buyer does not always have the capacity, or the willingness, to fund the full price at closing. Two mechanisms allow part of the payment to be spread out or made conditional without derailing the deal, the earn-out and the vendor loan, but they rest on radically different logic and solve two distinct problems.

The vendor loan is, according to Bpifrance Création, the French public body for business financing, an offer of deferred payment of part of the sale price made by the seller: for a fraction of the price, the seller effectively becomes the lender to their own buyer. An earn-out, by contrast, does not relate to an amount already fixed but to a price adjustment whose payment, and sometimes its very existence, depends on the future performance of the company sold.

"A price adjustment received by the seller under such a clause is taxable in the year it is received.", French Directorate General of Public Finances, Bulletin officiel des finances publiques (BOFiP).

Three converging trends make this choice increasingly structural in 2026. First, banks are tightening acquisition financing conditions for SMEs in the 2 to 500 MCHF range, pushing more sellers to accept deferred payment to get deals done. Second, the generational wave of business transfers across France and Switzerland is multiplying deals where the buyer, often a manager or executive, lacks sufficient equity without seller financing. Third, post-closing earn-out disputes are rising, with the definition of the target EBITDA becoming a central friction point between seller and buyer once the accounts close.

This article covers the definition, origin, construction and typical use of earn-outs and vendor loans, compares their advantages, limits and the most frequent mistakes, illustrates each mechanism with a worked case in France and Switzerland, and answers the ten questions most frequently asked by owners and buyers on the topic.

Earn-out: deferred price adjustment, conditional on the future performance of the company sold (EBITDA, revenue).
Vendor loan: instalment payment of part of a fixed price, granted by the seller to the buyer, akin to a loan.
Price adjustment: the French tax concept (complément de prix) that characterises an earn-out, taxed in the year it is received (article 150-0 A of the CGI).
Closing: the legal completion date of the sale, the starting point for vendor loan instalments and earn-out measurement periods.

Secure the financial structuring of your next sale or acquisition

Before going into the detail of earn-outs and vendor loans, talk to Hectelion's teams about the payment structure suited to your transaction. Book a first 30-minute call to discuss the context of your sale or acquisition, the profile of the buyer or seller, and the room to negotiate on price and how it is paid.

Acontos: estimate the value of your company online for free

Before negotiating an earn-out or a vendor loan, you first need a reliable order of magnitude for the value of the company being sold or acquired. Hectelion has developed Acontos, an online audit, due diligence and business valuation tool, powered by Anthropic's Claude Sonnet 5 artificial intelligence and calibrated on Hectelion's methodology. Based on your accounts, it produces a first estimate of the value of your shares within minutes, free of charge and without retaining any document. Launch the valuation simulator to get an order of magnitude, then keep reading to understand what drives it.

Definition: what is an earn-out and what is a vendor loan?

An earn-out is a contractual clause under which the sale price splits into two parts: a fixed amount paid at closing, and a price adjustment whose payment depends on performance indicators measured after the sale, most commonly EBITDA or revenue, over a period of one to three years. Legally, this adjustment is treated as part of the sale price itself, not as compensation for services or a dividend, which entirely conditions its tax treatment. The seller retains an economic interest in the company they sold without retaining control, which creates a structural tension: they depend on the buyer's management decisions to collect what is owed to them.

A vendor loan, by contrast, relates to an amount fully determined at closing. The seller agrees to be paid a fraction of the price by the buyer, typically between 30% and 50% of the sale price according to the practice observed by Bpifrance Création, with a repayment period commonly of one to three years and a freely negotiated interest rate. It is not an uncertain adjustment but a deferred payment of a fixed amount: the risk carried by the seller is not a risk on the company's future performance, but a counterparty risk, that of the buyer being unable to repay.

Quick definition: the earn-out in one sentence

An earn-out is a sale price adjustment, uncertain in amount and sometimes in principle, whose payment is indexed to the future performance of the company sold and recognised in the year it is actually received.

Quick definition: the vendor loan in one sentence

A vendor loan is an instalment payment of a fixed amount of the sale price, granted by the seller to the buyer in the manner of a loan, generally subordinated to senior bank financing.

Origin: where do earn-outs and vendor loans come from?

The vendor loan traces back to the old French practice of selling a fonds de commerce (a business's goodwill and assets), where the seller, often the only natural lender to their buyer, granted instalment payment for lack of available bank financing for small craft and retail transfers. This practice later extended to SME sales, and was progressively secured by public authorities, in particular through Bpifrance's guarantee schemes, which today allow a bank itself to be guaranteed against the risk it takes when backing a vendor loan.

The earn-out, by contrast, is an import from North American business law. It appeared in the 1970s and 1980s in the United States for the sale of technology or high-growth companies whose valuation was subject to too wide a disagreement between seller and buyer, and progressively spread to European transactions from the 1990s onward, driven by Anglo-Saxon M&A law firms and private equity funds. Structuring an earn-out remains a field where contractual practice runs well ahead of case law, which explains how frequently its execution ends up disputed.

Is an earn-out clause always legally valid?

The validity of an earn-out is not a given under French law: a sale price must be fixed or determinable at the time the contract is concluded, without depending on the will of one party alone, under articles 1163 and 1104 of the Code civil, which respectively require a determinable subject matter and good-faith performance. The French Supreme Court (Cour de cassation) validated the principle in a landmark ruling, Cass. com., 10 March 1998, n°96-10.168, holding that the criteria used to determine the price adjustment, in that case the evolution of results and the real value of the company, were objective and independent of the parties' unilateral will, with an independent expert able to be appointed to fix the price absent agreement.

This requirement for an objective criterion has a direct practical consequence for how the clause is drafted: an earn-out whose trigger or calculation remains subject to the buyer's discretionary judgment, with no verifiable indicator or mechanism for resolving disagreements, risks not just a dispute over its execution, but a challenge to its validity itself. This is precisely what the rigorous definition of the performance indicator, described further below, is meant to prevent.

Earn-out vs vendor loan: what is the fundamental difference?

The difference is not the length of the deferred payment, which can be comparable in both cases, but the nature of the disagreement each mechanism resolves. A vendor loan solves a financing problem: seller and buyer agree on a price, but the buyer cannot raise the full amount in bank debt or equity at closing. An earn-out solves a valuation problem: seller and buyer do not agree on the price itself, often because the company is growing fast, has just changed its business model, or is going through a period that is hard to value with certainty using a classic business valuation approach.

This distinction has a direct consequence on the risk carried by the seller. In a vendor loan, the risk is a classic credit risk: the amount is known, only the execution of the repayment is uncertain. In an earn-out, the risk is an operational and governance risk: the amount itself is not guaranteed, and depends on management decisions made by a buyer whose interests no longer fully align with the seller's once the deal closes, for example on investment, commercial policy or executive compensation.

This difference shows up directly in the acquisition's financing plan: the vendor loan appears in it as an explicit resource, on the same footing as equity or bank debt, because its amount is known and certain from closing. An earn-out, by contrast, never appears in that financing plan: it is a contingent obligation owed by the buyer to the seller, which mobilises no resource on the day of the deal and should therefore never be presented as a way of financing the acquisition.

Why use a deferred payment mechanism in an SME sale?

A deferred payment mechanism allows transactions to close that would otherwise fail for lack of sufficient bank financing, in particular for buyouts by an internal manager with limited personal equity.
It allows a valuation disagreement to be overcome without breaking off the negotiation, by deferring to the future the verification of the performance assumptions underlying the price requested by the seller.
It aligns the interests of seller and buyer during a transition period, the former remaining incentivised to facilitate the handover and the latter often benefiting from the seller's continued involvement.
It reduces the amount that needs to be financed immediately through senior debt or equity, improving the initial financial structure of the deal.
For the seller, a properly priced vendor loan can act as a financial investment at a rate above the bond market, in exchange for the counterparty risk accepted.

How is an earn-out built?

Choose the performance indicator, most commonly normalised EBITDA, sometimes revenue or an operating indicator specific to the sector.
Set the measurement period, typically between one and three years from closing.
Precisely define the method for calculating the indicator, anticipating possible restatements linked to a change in accounting policy, investment or the buyer's compensation, a vendor due diligence carried out before the sale significantly reducing this risk of disagreement over normalised EBITDA.
Determine the payment formula, linear, tiered or capped, and the maximum ceiling of the price adjustment.
Frame the governance of the earn-out period through buyer commitments, for example maintaining the scope of activity or refraining from management decisions that would artificially reduce the chosen indicator.
Anticipate the possibility of a change of control of the buyer during the measurement period, by providing for a clause transferring the obligation or accelerating payment if the company is resold before the earn-out ends.
Provide for an independent expert or arbitration clause in the event of disagreement over the final calculation of the indicator.

How is a vendor loan built?

Determine the amount of the vendor loan, generally between 30% and 50% of the sale price according to market practice.
Set the repayment period, most often between one and three years, and the amortisation profile, bullet or amortising.
Negotiate the interest rate, freely set between the parties but capped by the usury rate published by the Banque de France.
Articulate the vendor loan with senior debt from the bank: subordinating the vendor loan's repayment to the bank's is not a legal default but a negotiated clause, one the bank asks for in practice but that the seller can seek to limit in time or in amount.
Secure the vendor loan with guarantees, a pledge over the shares sold, a personal or bank guarantee, an acceleration clause in the event of default.
Check eligibility for a Bpifrance guarantee, which can cover up to 60% of the bank that agrees to guarantee the vendor loan.

When should you choose an earn-out over a vendor loan?

Criterion	Earn-out	Vendor loan
Problem addressed	Valuation disagreement	Insufficient financing
Amount at closing	Uncertain, capped	Fixed at signing
Risk carried by the seller	Operational and governance risk	Classic counterparty risk
Typical situation	High growth or activity hard to value	Buyout by a manager with limited borrowing capacity
Available guarantee	Specialised earn-out insurance	Bpifrance bank guarantee up to 60%

The two mechanisms are not mutually exclusive: the same transaction can combine a vendor loan on part of the fixed price with an earn-out on an adjustment conditional on performance.

Who should you turn to for structuring this deferred payment?

Three criteria help select the right adviser. First, experience structuring deals for SMEs of comparable size, to calibrate a realistic amount and duration. Second, the ability to build financial models and normalise EBITDA, a prerequisite for drafting an earn-out clause that holds up over time. Third, economic independence from traditional financial intermediaries, to objectively advise on the choice between a vendor loan, an earn-out or a combination of both, free of any bias linked to a bank intermediation fee.

Hectelion works on these structurings as part of its financial structuring practice, drawing on dual French and Swiss expertise and a methodology aligned with IVSC standards for normalising the performance indicators used in an earn-out. Hectelion also supports the financial due diligence conducted upfront, which objectifies the buyer's repayment capacity before a vendor loan is granted, as well as M&A advisory for negotiating the overall payment terms of the price. The cost of this advisory, often structured as a retainer plus a success fee, is covered in a dedicated article on sell-side M&A mandate fees.

Advantages: aligned interests, easier financing, negotiation flexibility

The advantage common to both mechanisms is enabling deals to close that would otherwise fail, by bridging a financing or valuation gap without breaking off the negotiation.
The advantage specific to the earn-out is the alignment of interests it creates between seller and buyer during the transition period, the former remaining incentivised to hand over their business network and know-how so that the company meets the targets set.
The advantage specific to the vendor loan is the flexibility it brings to the overall financing structure of the deal, by reducing the share of senior bank debt required and therefore the covenants weighing on the acquired company.
For the seller, both mechanisms can carry a tax advantage, the vendor loan by spreading receipt of the price, the earn-out by deferring taxation of the adjustment to the year it is actually received.

Limits: disputes, counterparty risk, contractual complexity

The main limit of an earn-out is the risk of post-closing disputes, as the definition of the chosen performance indicator often leaves room for interpretation that the buyer, once in control, may be tempted to exploit to reduce the amount owed; the most underestimated risk is in fact not the dispute itself, but the deterioration of the relationship between seller and buyer that it causes throughout the follow-up period.
The main limit of a vendor loan is counterparty risk: the seller remains exposed to the buyer's future solvency over a period of one to three years, without always having sufficient guarantees to protect against default.
Both mechanisms significantly add to the contractual complexity of the sale, as earn-outs and vendor loans each require detailed calculation, governance and guarantee clauses that lengthen negotiations and increase legal and financial advisory fees.

The 5 mistakes to avoid

Mistake 1: Failing to precisely define the earn-out's target EBITDA

An earn-out clause that simply targets "EBITDA" without specifying the permitted restatements, the consolidation scope or the treatment of the buyer's investments leaves room for diverging interpretations at calculation time, and is the leading cause of dispute observed in practice.

Mistake 2: Granting a vendor loan without guarantees or covenants

Granting deferred payment without a pledge over the shares sold, a guarantee or an acceleration clause exposes the seller to losing the entire outstanding balance in the event of buyer default, even though guarantee schemes, including public ones via Bpifrance, exist precisely to cover this risk.

Mistake 3: Confusing an earn-out with a fixed, instalment price adjustment

A deferred payment whose amount is already fixed at signing, even if split across several instalments, is a vendor loan, not an earn-out: confusing the two has direct tax consequences, as a price adjustment within the meaning of article 150-0 A of the CGI requires a genuinely uncertain character at the date of the sale.

Mistake 4: Neglecting post-closing governance during the earn-out period

Leaving the buyer free of any management constraint during the earn-out period, without a contractual commitment to run the business in a reasonable manner, leaves the seller with no recourse if management choices, legitimate from the buyer's point of view, mechanically reduce the indicator underlying the price adjustment. The same neglect applies to the often-overlooked case of a change of control of the buyer before the earn-out ends: without a transfer or acceleration clause, the seller can end up depending on the decisions of a third-party acquirer with whom they never contracted.

Mistake 5: Overlooking the tax and social treatment of the price adjustment

Structuring an earn-out without anticipating its tax treatment, taxed in the year it is received rather than the year of the sale, or without confirming it qualifies as a price adjustment rather than compensation, exposes the seller to a materially less favourable tax outcome than expected.

Case 1: vendor loan for a French industrial SME worth €6.2 million

An owner sells their industrial subcontracting SME, valued at €6.2 million, to a former group executive who has €0.6 million of personal equity. The financing plan combines €0.6 million of buyer equity, 10% of the price, €3.5 million of acquisition bank debt, 56% of the price, and a €2.1 million vendor loan, 34% of the price, within the 30% to 50% range observed in practice. The vendor loan is granted over three years, at a 3% rate, repayable as a bullet, and subordinated to repayment of the senior bank loan. The acquisition bank agrees to guarantee the vendor loan, a guarantee itself backed 50% by Bpifrance's Fonds de Garantie Transmission, securing the seller on half of the outstanding balance in the event of buyer default during the repayment period.

Case 2: earn-out for a Swiss technology SME worth CHF 10 million

A Swiss digital services SME is sold to an industrial group for a fixed price at closing of CHF 8.0 million, supplemented by an earn-out capped at CHF 2.0 million over two years, indexed to normalised EBITDA, for a total potential price of CHF 10.0 million, 20% of which depends on future performance. In year one, the target EBITDA of CHF 1.2 million is only reached at CHF 1.08 million, a 90% achievement rate, triggering a payment of CHF 0.9 million against an annual cap of CHF 1.0 million. In year two, the target EBITDA of CHF 1.3 million is fully met, triggering payment of the full annual cap of CHF 1.0 million. The seller therefore collects a total of 8.0 + 0.9 + 1.0, or CHF 9.9 million, 99% of the total potential price, the CHF 0.1 million gap being entirely explained by year one's underperformance.

Word from the CEO

"Vendor loans and earn-outs are often presented as interchangeable deferred payment tools, when in fact they answer different questions: can we finance the deal, and do we agree on what it is worth."

"In our French and Swiss practice, most of the structuring work is not about choosing between the two mechanisms, but about precisely defining the indicator used for the earn-out and the guarantees attached to the vendor loan, because that is where nearly all the post-closing disputes we see are concentrated."

"A well-structured deal does not remove the risk of deferred payment, it makes it explicit, measurable and knowingly shared between the parties.", Aristide Ruot, Ph.D., Founder and Chief Executive Officer, Hectelion SA.

FAQ: the 10 essential questions on earn-outs and vendor loans

Introduction: what to know before the questions

The questions below cover the most frequent concerns Hectelion hears from owners, sellers and buyers about these two deferred payment mechanisms, complementing the definitions and comparison detailed above.

Q1: What is an earn-out and how does it work?

An earn-out is a sale price adjustment whose payment is conditional on meeting performance targets, most commonly a target EBITDA, measured over a period of one to three years after closing, and paid according to a formula and cap set out in the contract.

Q2: What is a vendor loan and how does it work?

A vendor loan is an instalment payment of part of the sale price, typically between 30% and 50%, that the seller grants to the buyer in the manner of a loan, repayable over one to three years with interest, and most often subordinated to senior bank debt.

Q3: Can an earn-out and a vendor loan be combined in the same sale?

Yes, the two mechanisms are not mutually exclusive: a deal can include a vendor loan on part of the fixed price to ease financing, and an earn-out on an adjustment conditional on performance to cover a valuation disagreement.

Q4: How is an earn-out taxed in France?

The price adjustment is taxed in the year it is actually received, not the year of the sale, under the capital gains regime of article 150-0 A of the CGI, provided its amount is genuinely uncertain at the date of the sale.

Q5: How can a vendor loan be secured against the risk of buyer default?

The seller can require a pledge over the shares sold, a personal or bank guarantee, an acceleration clause in the event of non-payment, and check whether the deal is eligible for the Bpifrance guarantee, which can cover up to 60% of the bank that guarantees the vendor loan.

Q6: What is the typical duration of an earn-out?

According to data from SRS Acquiom on private deals outside the life sciences sector, the median earn-out period is twenty-four months, for a median adjustment representing roughly a third of the amount paid at closing.

Q7: What percentage of the sale price does a vendor loan typically represent?

In practice, a vendor loan covers an amount between 30% and 50% of the sale price, with no legal cap, the percentage chosen depending on the buyer's bank borrowing capacity and the seller's level of confidence in the business's durability.

Q8: What happens in the event of a dispute over the earn-out calculation?

The earn-out clause generally provides for recourse to an independent accountant or arbitrator to settle a disagreement over the calculation of the chosen indicator, failing which the dispute falls under the jurisdiction designated in the contract, with the risk of a long and costly procedure for both parties.

Q9: Is a vendor loan guaranteed by Bpifrance?

The vendor loan itself is not directly guaranteed by Bpifrance, but the bank guarantee the seller requires in return can be, as Bpifrance can cover up to 60% of the bank that agrees to guarantee the vendor loan on behalf of the seller.

Q10: What is the difference between an earn-out and representations and warranties?

An earn-out relates to a price adjustment tied to the company's future performance after the sale, whereas representations and warranties protect the buyer against liabilities or overstated assets that predate the sale but are revealed afterwards: the two mechanisms are complementary and cover different periods and different risks, as detailed in our article on warranty and indemnity (W&I) insurance.

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Conclusion: earn-outs and vendor loans, two answers to different problems

Earn-outs and vendor loans are often presented as two variants of the same deferred payment tool, when in fact they answer two distinct problems that can, moreover, coexist in the same deal. A vendor loan bridges a financing gap when the buyer cannot raise the full price at closing, in exchange for a counterparty risk that guarantees, including public ones via Bpifrance, help limit. An earn-out bridges a valuation gap when seller and buyer disagree on price, in exchange for an operational and governance risk that demands a rigorous contractual definition of the chosen indicator.

The choice between the two, or their combination, is therefore not a matter of general preference but of an accurate diagnosis of the nature of the obstacle preventing the deal from closing on terms acceptable to both parties. A seller facing a solvent buyer who disagrees on valuation gains nothing from offering a vendor loan, which will not resolve the price disagreement; symmetrically, a buyer with limited financing capacity but no real dispute over valuation does not need an earn-out, which will not bridge their financing gap.

In both cases, the quality of the contractual structuring, the precise normalisation of the financial indicators used, and securing the deal with appropriate guarantees largely determine whether the chosen mechanism facilitates the transaction or becomes, a few months after closing, the source of a dispute that more rigorous upfront drafting could have avoided.

Summary

Vendor loans and earn-outs are two mechanisms for deferring payment of an SME's sale price, but they answer different problems: the former bridges the buyer's financing need, the latter a valuation disagreement between seller and buyer. A vendor loan covers a fixed amount, generally between 30% and 50% of the price, repayable over one to three years and securable through guarantees including Bpifrance's public scheme. An earn-out covers an uncertain amount, indexed to the company's future performance, most often over a period of one to three years, and requires a precise contractual definition of the chosen indicator to avoid post-closing disputes.

The two worked cases illustrate typical uses, a €2.1 million vendor loan over three years to ease the buyout of a French industrial SME by a manager with limited equity, and an earn-out capped at CHF 2.0 million over two years to bridge a valuation disagreement on a growing Swiss technology SME. The two mechanisms are frequently combined within the same deal rather than mutually exclusive.

Hectelion supports the structuring of these mechanisms as part of its financial structuring, business valuation and financial due diligence engagements, with particular attention to defining performance indicators and putting in place guarantees suited to each party's risk profile.