Replacing an Earn-Out With Staged Payments in a Welland Sale

The situation

Rosario had spent two decades as a paramedic before building a second business on the side: a home medical equipment supply company serving Welland and the surrounding Niagara region, renting and selling items like hospital beds, mobility aids and oxygen concentrators to families caring for someone at home. Dante, his partner, kept his job as an IT support lead but handled the company's books and scheduling software in the evenings. Together they had grown the business to roughly $1.3 million in annual revenue, and after years of running two jobs each, they were ready to retire from it.

A buyer named Alejandro, who had spent several years managing operations for a larger medical supply distributor, made an offer to purchase the business outright for about $1,150,000, structured as a purchase of the company's assets rather than its shares. An asset purchase means the buyer acquires the equipment, inventory, contracts and goodwill of the business directly, rather than buying the corporation that owns them — a structure buyers often prefer because it lets them leave behind liabilities they don't want to inherit. The initial offer included a signing deposit, a payment at closing, and the balance through what is known as an earn-out: a portion of the price paid out over time based on how the business performed after the sale.

What due diligence found

Before recommending that Rosario and Dante sign anything, our team reviewed the letter of intent and flagged the earn-out clause as the highest-risk part of the deal. An earn-out ties part of the purchase price to targets like future revenue or client retention, measured after closing — which means the seller is paid based on results the buyer, not the seller, will be controlling. If the buyer changes pricing, cuts staff, lets service contracts lapse or simply runs the business differently, the seller's final payment can shrink through no fault of their own, and disputes over whether targets were hit fairly are common and expensive to resolve.

That risk turned out to be more than theoretical here. During due diligence — the review of the business's financial and legal records before the deal closes — it became clear that close to 40% of the company's revenue came from just three long-term care referral relationships, and one of the largest was up for renewal within the year on terms nobody could confirm in advance. Alejandro's own advisors had proposed the earn-out specifically because of that concentration: if the referral relationships held, Rosario and Dante would eventually receive the full price; if they didn't, the price would adjust downward automatically. From the buyer's side, that made sense as a way to share the risk. From the sellers' side, it meant walking away from the business without knowing, for up to two years, what they had actually been paid for it.

Rosario and Dante were also giving up any influence over those client relationships the moment the sale closed. They would have no say in whether the referral sources were maintained, yet a meaningful share of their retirement income depended on it. That mismatch — no control, but real financial exposure — is the core problem with earn-outs for a retiring seller, and it was the issue our team raised directly with them before any agreement was signed.

What we did

1. Explained the earn-out's real mechanics before advising against it outright. Rather than simply telling Rosario and Dante to reject the structure, we walked through exactly how the earn-out would be measured, over what period, and what could cause it to fall short — so they understood the trade-off they were being asked to accept rather than just the headline price.
2. Proposed staged payments as an alternative. We drafted a counter-proposal replacing the earn-out with a series of fixed installment payments, unrelated to how the business performed after closing. Staged payments still let the buyer spread the cost over time, which addressed Alejandro's cash flow concerns, but they removed the uncertainty of a performance-based formula — the amount owed would no longer move based on results Rosario and Dante could not control.
3. Secured the deferred balance. A promise to pay later is only as good as the buyer's ability to pay. We had the agreement include a general security agreement over the purchased business assets, giving Rosario and Dante a registered claim against the equipment and inventory they had sold if Alejandro defaulted on the installments — turning an unsecured promise into a secured one.
4. Negotiated the price adjustment that made the trade acceptable to both sides. Alejandro's advisors pushed back, pointing out that staged payments gave him none of the downside protection the earn-out had offered if the referral relationships weakened. After several rounds of negotiation, the parties agreed to lower the total price by about $80,000, to roughly $1,070,000, in exchange for removing the earn-out entirely — a concession that reflected the referral risk without tying it to an ongoing formula.
5. Built in a holdback for a defined, time-limited period. As a middle ground, a smaller holdback of about $60,000 was set aside from the closing payment for six months, released to Rosario and Dante automatically unless a specific, identifiable problem with the transferred contracts arose in that window — a narrower and shorter-lived protection than the original two-year earn-out, but enough to satisfy Alejandro's advisors that some risk-sharing remained.

The outcome

The final agreement closed at roughly $1,070,000: about $650,000 paid at closing, $60,000 held back for six months pending confirmation the referral contracts had transferred without issue, and the remaining roughly $360,000 paid through fixed monthly installments over eighteen months, secured against the business assets. Six months after closing, the holdback released in full — the referral relationships had transferred cleanly, and no claims were made against it.

This was not the earn-out-free, full-price outcome Rosario and Dante had originally hoped for. They gave up about $80,000 from the initial asking price to get out of the performance-based structure, and Alejandro accepted a longer payment timeline than his original offer of a larger upfront sum. Both sides came away with something they needed: Rosario and Dante had a payment schedule they could plan a retirement around, without depending on decisions Alejandro would be making after they no longer had any say in the business, and Alejandro got predictable financing terms without paying full price up front for a customer base with a known concentration risk. Neither side got everything they wanted, which is often what a workable deal looks like once real risk has been identified and priced rather than papered over.

What you can learn from this