Seller-Financed Earnout Acquisition
Acquire a business by combining upfront cash with payments funded by future performance.
- Difficulty
- Advanced
- Time to result
- ~months to results
- Steps
- 7
- Confidence
- 99%
Locate a profitable business whose owner needs an exit but lacks an obvious successor. After rigorous due diligence, agree on a market-supported value and disclose how much cash is actually available at closing. Negotiate the remainder as scheduled seller-financed payments, an earnout tied to performance, or both. The acquired company's future cash flow can fund part of the price, while performance incentives may justify a higher total payout to the seller. Because the seller assumes buyer and operating risk, credibility, references, covenants, reporting, and clear default remedies are essential. The buyer must model debt service conservatively and retain enough working capital to operate the company. Successful repayment creates third-party verification that can make subsequent acquisitions easier to structure.
Origin
Herjavec describes buying an approximately $600,000 business with $100,000 at closing, staged payments, and an earnout after a bank declined to lend him the full amount. Extracted from BigDeal.
Core principles
- 01A lack of cash does not automatically prevent a sound acquisition.
- 02An owner without a successor may value a credible exit path.
- 03Deferred payments align the deal with future business performance.
- 04Trust and an established payment record improve later negotiations.
- 05The seller may accept a higher total price in exchange for deferred risk.
How to run it
- 1
Find a Succession Opportunity
Target a stable business whose owner wants to retire or exit and has no family member or internal successor ready to take over.
- 2
Verify Transferable Cash Flow
Examine earnings, customer retention, working capital, liabilities, owner dependence, and the cash available after normal operating needs.
- 3
Agree on Value Before Structure
Establish a defensible purchase price, then separate the economic value from the timing and conditions of payment.
- 4
Disclose the Funding Constraint
State the amount available at closing and ask the seller to consider alternatives for the balance.
- 5
Design the Payment Stack
Combine closing cash, scheduled installments, seller financing, and performance-based earnout payments that the business can reasonably support.
- 6
Document Risk and Control
Use qualified legal, tax, and financial advisers to define calculations, security, reporting, transition duties, disputes, and default remedies.
- 7
Build a Repayment Record
Pay as agreed, report transparently, and obtain permission to use satisfied sellers as references in future transactions.
In the wild
After agreeing to buy a small company for about $600,000, Herjavec discovered that a bank would not provide the money. He offered $100,000 at closing, another $100,000 in 60 days, a third $100,000 by year-end, and the balance over two years. Performance could increase the seller's eventual proceeds.
→ He acquired the company using a mixture of his cash and future business cash flow, then used the successful seller as proof in later deals.
A retiring service-business owner has no family successor. A capable manager offers a modest closing payment, monthly seller-financed installments, and an additional earnout if retained customers exceed an agreed threshold. Independent diligence confirms that conservative cash flow can cover the payments.
→ The seller receives an orderly paid exit while the buyer acquires the operation without paying the entire price at closing.
Common mistakes
Skipping Due Diligence
Deferred payment does not protect a buyer from hidden liabilities, weak customers, or unsustainable earnings.
Overloading the Cash Flow
Payments that consume necessary working capital can damage the business funding the acquisition.
Leaving Earnout Terms Vague
Undefined metrics, accounting policies, and control rights can turn aligned incentives into a dispute.
Is it for you?
Best for
It is best for cash-generating small businesses with retiring owners, transferable customers, and buyers capable of operating them.
Not ideal for
It is not ideal for distressed, fraudulent, highly volatile, or founder-dependent businesses whose future cash flow cannot safely support payments.
From the transcript
“And that's how I bought the first business on earnout.”
“So basically, I used half my money and half the business's money in order to buy that actual business.”
“People will always believe more what others say about you than what you say about yourself.”
From the episode
The Mindset Shift That Made Me Millions