Selling an SME: Earn-out or Vendor Loan, How Do You Actually Get Paid?

Earn-out, vendor loan, cash payment: understanding payment structures in the sale of an SME

Selling your business is often the culmination of an entire professional life. Yet many owners discover — sometimes too late — that the sale price quoted during negotiations does not necessarily match the amount actually received on closing day. In French-speaking Switzerland as elsewhere, the financial structuring of an SME sale is a complex subject that deserves particular attention.

Earn-out, vendor loan, deferred payment, price supplement: so many mechanisms that allow the transaction to be adapted to the buyer's financial reality, while seeking to protect the seller's interests. Understanding these tools, their advantages, their risks and their tax treatment is essential to approach any business transfer negotiation with confidence.

Why full cash payment remains the exception in SME sales

Ideally, every seller dreams of full payment in cash on signing the sale agreement. The reality of the business transfer market in French-speaking Switzerland is often quite different.

Buyers — whether external, employees or family members — rarely have all the necessary financing from the outset. Banks, for their part, rarely finance 100% of the company's value. They generally require the buyer to contribute between 20% and 30% in equity and cover the balance with a conventional bank loan.

It is to bridge this financing gap, but also to align the interests of both parties over time, that alternative payment structures have been developed.

Cash payment: the benchmark not to be overlooked

Although rare, full payment at closing remains the most secure option for the seller. No risk of non-payment, no dependence on future performance, no additional tax complexity.

It is particularly feasible in the following cases:

• The buyer has a substantial personal contribution
• The company has a moderate value (typically below CHF 1 to 2 million)
• A financial investor or a large industrial group is behind the acquisition
• The SME is highly profitable and generates enough cash flow to repay the bank debt quickly

In other cases, the seller will often have to accept a mixed payment structure, combining an initial payment with various complementary mechanisms.

The vendor loan: when the seller becomes a lender

Definition and how it works

A vendor loan (also known as vendor financing) is a mechanism whereby the seller agrees to finance part of the sale price themselves. In practice, instead of receiving the full price at closing, they grant a loan to the buyer, which the buyer repays over several years, generally with interest.

In French-speaking Switzerland, this type of financing often represents between 10% and 30% of the sale price, with repayment periods ranging from 3 to 7 years.

The advantages of a vendor loan

• Facilitates the transaction: it makes it possible to complete a financing package that the bank would not have granted alone
• Demonstrates the seller's confidence in the future of their business
• Generates additional income through the interest received
• Can be tax-efficient by spreading income over time

The risks not to be underestimated

The main risk is obvious: if the buyer runs into difficulties, the seller may not be repaid. It is therefore essential to:

• Formalise the loan through a notarised deed or a robust acknowledgement of debt agreement
• Obtain personal guarantees or security over the company's assets
• Provide for early repayment clauses in the event of a resale
• Check the subordination of the vendor loan to the senior bank debt

Please note: banks often require the vendor loan to be subordinated to their own loan, which means that in the event of difficulties the seller will only be repaid once the bank has been repaid in full.

The earn-out: linking part of the price to future performance

What is an earn-out?

An earn-out is a conditional price supplement mechanism. The seller receives part of the price immediately, and the other part — the earn-out supplement — is paid only if the company achieves certain predefined targets after the sale.

These targets may be financial (revenue, EBITDA, net profit) or operational (number of customers, retention rate, development of a new product).

In which situations is an earn-out appropriate?

An earn-out is particularly suitable when:

• There is a disagreement over the valuation between seller and buyer
• The company is going through a period of strong growth and the buyer wants to share the risk
• The SME's value rests largely on intangible elements (customer network, key know-how)
• The seller remains involved in the business during a transition period

Points to watch with an earn-out

An earn-out is technically appealing, but it is a source of many disputes if it is not drafted impeccably. The seller must pay particular attention to:

• The precise definition of the indicators used (who calculates them, under which accounting standard?)
• The audit rights granted to the seller to verify the results
• The management decisions the buyer may take that could artificially reduce the results
• The length of the earn-out period (generally 2 to 5 years)
• The dispute resolution mechanisms (arbitration, independent expert determination)

One essential piece of advice: never negotiate an earn-out without the assistance of a business transfer adviser and a lawyer specialising in business law. The financial stakes can be considerable.

Deferred payment: a simpler variant

Not to be confused with an earn-out, a deferred payment is a portion of the sale price whose amount is fixed and certain, but whose payment is postponed. There is no performance condition: the buyer must pay this sum, whatever happens.

This mechanism is simpler and less risky for the seller than an earn-out, but it still requires solid guarantees to ensure that payment is actually made when due.

Tax aspects in French-speaking Switzerland: what every seller should know

The chosen payment structure has direct tax implications for the seller. In Switzerland, the taxation of business transfers has important specific features.

Capital gains for individuals

As a general rule, the gain realised on the sale of shareholdings in an SME is exempt from direct federal tax for individuals holding the shares as private assets. This exemption is a considerable advantage of the Swiss tax system.

However, be careful about how certain payments are classified:

• An earn-out linked to the seller's future activity (paid non-compete clause, consulting) may be reclassified as taxable income
• Interest received under a vendor loan is taxable as income from movable assets
• The liquidation of reserves or undistributed profits may be subject to withholding tax

The importance of a prior tax analysis

Each French-speaking canton (Vaud, Geneva, Fribourg, Valais, Neuchâtel, Jura) has its own rules on wealth and income taxation. A personalised tax analysis carried out ahead of the transaction is absolutely essential to optimise the payment structure and avoid unpleasant surprises.

How to choose the right payment structure?

There is no one-size-fits-all solution. The choice depends on many factors specific to each situation:

• The buyer's profile: their financial capacity, the guarantees available to them, their experience
• The nature of the business: its stability, its dependence on the seller, its level of risk
• The seller's objectives: immediate need for liquidity, tax optimisation, post-sale involvement
• The negotiation context: urgency, competition between buyers, market conditions

In practice, most SME transactions in French-speaking Switzerland combine several mechanisms: a significant cash payment at closing, a medium-term vendor loan and, in some cases, a time-limited earn-out.

Conclusion: genuinely securing the proceeds of your sale

Understanding the payment structures in the sale of an SME means, above all, understanding that the quoted sale price and the price actually received can be very different. Each mechanism — earn-out, vendor loan, deferred payment — carries its own advantages, specific risks and tax implications.

For any SME owner in French-speaking Switzerland considering the transfer of their business, support from professionals specialising in business transfers is not only recommended but genuinely essential. An experienced adviser will help you structure a transaction that truly protects your interests, optimises your tax position and maximises your chances of actually receiving the full agreed price.

Are you considering selling your SME in French-speaking Switzerland? Contact us for an initial confidential, no-obligation discussion. Together, let us work out the best sale structure for your situation.

To go further: read our Seller's Guide to prepare each step of your sale, or find out how Vendre-Entreprise.ch acquires SMEs directly in French-speaking Switzerland, with no intermediary and no commission.