Vendor Take-Back & Earn-Out Calculator
Split a purchase price into closing cash, bank debt, a vendor take-back, an earn-out and a holdback. See what the seller receives and when, and whether the business can carry the payments.
Example deal: replace with your numbers. Rates are example inputs only.
Price and funding
Who pays what at closing.
Bank loan
Fully amortizing. Rates are example inputs only.
Vendor take-back note
The part of the price the seller finances.
When the note comes due.
If the term is shorter than the amortization, a balloon is due at the end of the term.
Months at the start with interest only.
Earn-out and holdback
Contingent money on top of the price, and money kept back at closing.
On top of the fixed price.
Paid in equal instalments at the end of each year.
5.0% of the fixed price, withheld from the closing payment.
Base case: released in full.
Business earnings
Used to test whether the business can carry the debt.
If the buyer will work in the business.
Expected total receipts
$1,101,437
$750,000 in cash at closing; the rest arrives over time.
Deferred or at risk = (VTB + holdback + expected earn-out) / (fixed price + expected earn-out). Nominal dollars; nothing is discounted for time or the risk of non-payment.
- Closing cash
- Holdback release
- VTB payments
- Expected earn-out
Receipts are grouped by year after closing.
View as a table
| When | Closing cash | Holdback release | VTB payments | Expected earn-out | Total |
|---|---|---|---|---|---|
| Closing | $750,000 | $0 | $0 | $0 | $750,000 |
| Year 1 | $0 | $50,000 | $46,399 | $37,500 | $133,899 |
| Year 2 | $0 | $0 | $46,399 | $37,500 | $83,899 |
| Year 3 | $0 | $0 | $133,639 | $0 | $133,639 |
Debt service coverage
1.44×
Around what many lenders look for
Cash available = earnings, less the buyer's salary, less maintenance capex. Earn-out payments are a separate cash obligation and are not in the ratio.
Balloon: refinance or pay $87,241 in year 3.
Note: This is a general illustration, not legal, tax or financial advice, and it does not predict outcomes. Real terms, security, lender requirements and tax treatment depend on your deal. Speak with a lawyer and an accountant before agreeing to a structure.
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Free ConsultationLegal Guide
How seller financing and earn-outs work
The headline price is only part of the story. How the deferred money is secured, ranked and defined decides whether it is actually paid.
What a vendor take-back is
A vendor take-back (VTB) is a loan from the seller to the buyer for part of the purchase price. The buyer signs a promissory note and pays the seller interest and principal over time, instead of paying everything at closing. It often sits alongside bank financing and the buyer's own cash.
How a VTB is secured
The note is usually backed by a general security agreement, perfected by registration under Ontario's Personal Property Security Act (PPSA), a personal guarantee from the buyer's principals, and sometimes a pledge of the purchased shares. Without that security, the seller may be an unsecured creditor if the buyer runs into trouble.
Postponement and subordination
A bank lender will often require the seller to postpone the VTB to the bank's loan and agree to a standstill. That can limit when and how the seller can enforce on default, so the postponement terms deserve as much attention as the interest rate.
Default and acceleration
The note should say what counts as a default (a missed payment, a breach of covenants, a sale of the business), what notice and cure period applies, and when the full balance becomes due. Clear terms matter most when the deal is under stress.
Earn-outs
An earn-out makes part of the price contingent on future performance. Define the metric precisely (revenue or EBITDA), the accounting principles, the buyer's operating covenants, the seller's information and audit rights, how disputes are resolved, and whether payment accelerates if the buyer resells the business.
Holdbacks, escrow and set-off
A holdback keeps part of the closing payment back for a set period, often to cover indemnity claims. It may be held by the buyer, by the lawyers or in escrow. Whether the buyer can set off claims against the holdback or the VTB payments is a negotiated term worth settling early.
Debt service coverage (DSCR)
DSCR compares the cash the business can produce for debt payments with the payments due. Here it is earnings, less the buyer's own salary and maintenance capex, divided by year-one bank and VTB payments. Earn-out payments are shown separately, because they are a further cash demand on the buyer.
Tax on deferred payments
Deferred and contingent payments have tax consequences for both sides. A capital gains reserve may let a seller spread recognition of a gain over generally up to five years when part of the price is paid later. Speak with an accountant before settling the structure.
What is a vendor take-back (VTB) in Canada?
A vendor take-back is a loan from the seller of a business to the buyer for part of the purchase price. The buyer signs a promissory note and repays the seller with interest over an agreed term, instead of paying the full price at closing. It is common where the buyer's bank financing and cash do not cover the whole price.
How is a vendor take-back secured?
Commonly through a promissory note, a general security agreement perfected by registration under Ontario's Personal Property Security Act, and a personal guarantee from the buyer's principals. Sometimes the seller also takes a pledge of the purchased shares. A bank may require the seller to postpone the VTB to the bank's loan, which can limit the seller's remedies on default.
What is an earn-out and why do they cause disputes?
An earn-out is extra purchase price paid only if the business hits agreed targets after closing. Disputes usually arise because the buyer controls the business after closing while the seller's payment depends on the results. Precise metric definitions, accounting principles, operating covenants, information and audit rights and a dispute process reduce that risk.
What is a holdback in a business purchase?
A holdback is part of the purchase price withheld at closing and released later, usually after a set period, if no claims have arisen. It gives the buyer a source of recovery for breaches of the representations in the agreement. The agreement should say who holds the money, when it is released and whether the buyer can set off claims against it.
What debt service coverage ratio do lenders look for?
Many lenders look for roughly 1.25 times or more, meaning cash available for debt payments is at least 1.25 times the payments due. The figure varies by lender and by deal, and lenders may calculate cash flow differently from this tool. Treat it as a planning guide and confirm with your lender.
Should a seller accept a vendor take-back?
It can help close a deal and may widen the pool of buyers, but the seller carries the risk that the buyer cannot or will not pay. A seller can reduce that risk with registered security, personal guarantees, financial and operating covenants, and clear step-in rights on default. Every seller's position is different, so get legal and tax advice before agreeing.