An earn-out makes part of the price conditional on the business hitting agreed targets (usually EBITDA or revenue) after completion. It bridges the gap between a seller who believes in the future numbers and a buyer who wants to pay for proven performance. Define the metric precisely and protect it in the contract, because the buyer controls the business afterwards.

Is an earn-out taxed the same way in Australia?

No. Australia has 'look-through' earn-out rules that can treat a genuine, performance-based earn-out so each payment is taxed as it is received rather than all upfront, and fixed deferred amounts are generally taxed at completion. The conditions are specific — confirm the current treatment with a registered tax agent.

Vendor Finance & Earn-Outs in a Business Sale: A Seller’s Guide (AU & UK)

Q: What is vendor finance in a business sale?

Vendor finance (or seller financing) is where the seller lets the buyer pay part of the price over time — typically from the business's future cash flow — rather than all upfront. It can take the form of deferred consideration, an earn-out tied to performance, or loan notes. It widens the buyer pool and can bridge a valuation gap, but it leaves the seller carrying risk until they're paid.

Q: How do I protect myself when offering vendor finance?

Treat the deferred amount like a loan you're underwriting: take security (a charge over assets), seek personal guarantees, keep the term short (2–3 years), use an escrow or holdback for warranties, add acceleration clauses on default, and define earn-out metrics precisely with anti-manipulation protections. Have a solicitor draft it.

Q: How is vendor finance taxed in the UK?

Ascertainable deferred consideration (a fixed sum paid later) is generally taxed in full in the year of sale. An unascertainable earn-out is treated as a separate CGT asset (Marren v Ingles), so receipts are taxed separately and usually do not qualify for BADR. Loan notes with a section 169Q/R election can crystallise the gain in year one to preserve BADR, and an instalment election (s.280) can spread the tax. Take specialist advice.

Most SME deals aren’t 100% cash on day one. When a buyer can’t — or won’t — fund the whole price upfront, deferring part of it can be the difference between a deal and no deal. The art is structuring it so you actually get paid.

What is vendor finance?

Vendor finance (or seller financing) is where you, the seller, let the buyer pay part of the price over time — usually out of the business’s own future cash flow — rather than all at completion. It widens your pool of buyers, can lift the headline price, and signals confidence in the business. The trade-off: until you’re paid, you’re carrying risk.

The three structures

1. Deferred consideration (instalments)

A fixed sum paid later — e.g. 70% at completion, 30% over two years. The amount is certain; only the timing is deferred.

2. Earn-out (performance-based)

Part of the price is conditional on the business hitting agreed targets (usually EBITDA or revenue) after completion. It bridges the gap between your view of the future and the buyer’s willingness to pay for proven results.

3. Loan notes

Formal debt instruments the buyer issues for the deferred amount — common in UK share sales. They can carry interest and security, and the type of note (QCB vs non-QCB) changes the tax and default treatment.

The seller’s real risk — and how to manage it

Once you hand over the keys, the buyer runs the business. If they mismanage it, over-leverage it, or simply default, your deferred money is at risk — and you may rank behind the bank. Treat the deferred amount like a loan you’re underwriting:

Take security. A charge over the business’s assets (or shares) so you’re a secured creditor, not an unsecured one.
Personal guarantees from the buyer where you can get them.
Keep the term short — 2–3 years. The longer the tail, the more can go wrong.
Escrow / holdback for warranty claims, released on a schedule.
Acceleration clauses — the whole balance falls due on default or a sale of the business.
Earn-out protections: define the metric precisely (EBITDA is more defensible than revenue, which can be timed), agree the accounting policies, add a floor/cap, restrict the buyer from actions that suppress the number, and set a dispute-resolution mechanism.

Earn-outs fail on definitions, not intentions. The buyer controls the business during the earn-out period, so every term — how EBITDA is calculated, what costs can be allocated to the business, what counts as “revenue” — must be nailed down in the contract. Get a specialist M&A solicitor to draft it.

How it’s taxed — UK

The CGT timing depends on whether the deferred amount is certain or contingent:

Ascertainable deferred consideration (a fixed sum) is generally taxed in full in the year of sale — even though you receive it later.
Unascertainable earn-out is treated as a separate CGT asset (the Marren v Ingles principle). You’re taxed on the value of the right when created, then again on the receipts — and those later receipts usually don’t qualify for BADR.
Loan notes + a section 169Q/R election can crystallise the whole gain at completion so BADR applies to the full consideration. Note QCB vs non-QCB differ: a non-QCB can reduce the deferred gain if the buyer later defaults, which can favour the seller.
Instalment election (s.280): where consideration is paid over more than 18 months, HMRC may let you spread the tax over up to 8 years.
If an earn-out later pays less than expected, loss carry-back relief (ss.279A–279C) may recover overpaid CGT.

See our full BADR guide for the qualifying conditions and current rates.

How it’s taxed — Australia

Australia’s rules differ:

Fixed deferred amounts are generally brought to account at completion on their face value.
Australia’s look-through earn-out rules can treat a genuine, performance-based earn-out so each payment is taxed as it is received rather than all upfront — and the small business CGT concessions may apply to the receipts. The conditions are specific.

Australian earn-out treatment is technical and condition-dependent — and some broader CGT settings are proposed to change from 2027 (not yet law). Confirm the current position with a registered tax agent. See our Australian CGT guide.

Model the structure before you commit

BuyBuildSell’s deal room and Earn-out Helper model vendor finance, deferred payments and earn-out ratchets — showing the total-consideration band and whether the business can actually service the debt. So you negotiate from numbers, not hope.

I’m selling → I’m a buyer →

Frequently asked questions

What is vendor finance in a business sale?

It’s where the seller lets the buyer pay part of the price over time (from future cash flow) rather than all upfront — via deferred consideration, an earn-out, or loan notes. It widens the buyer pool but leaves the seller carrying risk until paid.

What is an earn-out?

Part of the price made conditional on the business hitting agreed targets (usually EBITDA or revenue) after completion. Define the metric precisely — the buyer controls the business afterwards.

How do I protect myself when offering vendor finance?

Take security over assets, seek personal guarantees, keep the term short (2–3 years), use escrow/holdbacks, add acceleration clauses on default, and define earn-out metrics tightly. Have a solicitor draft it.

How is vendor finance taxed in the UK?

Ascertainable deferred consideration is taxed in full in year one; unascertainable earn-outs are a separate CGT asset (Marren v Ingles) and usually don’t get BADR; loan notes with a s.169Q/R election can preserve BADR; a s.280 instalment election can spread the tax. Take advice.

Is an earn-out taxed the same in Australia?

No — Australia’s look-through earn-out rules can tax each payment as received, and fixed deferred amounts are generally taxed at completion. Conditions are specific; confirm with a registered tax agent.

Vendor finance & earn-outs, without getting burned