Earn Outs and Seller Notes
If you’ve started looking into selling your treatment center, you’ve probably come across two terms that sound simple but hide a lot of risk: earn-outs and seller notes. Both mean part of your payday doesn’t land in your account at closing. Both are common. And both are worth understanding in plain terms before you ever see them in a purchase agreement.
What an earn-out is
An earn-out means part of your sale price is held back and paid to you later — usually over 1 to 3 years — if the business hits agreed targets after the buyer takes over. Most often that target is EBITDA (the business’s profit). If the business hits the number, you get paid. If it doesn’t, you may get less than you expected, or nothing at all.
Buyers like earn-outs because they bridge a gap: maybe they’re not fully convinced the business is worth what you’re asking, or they want you financially tied to how well the transition goes. Either way, understand this going in — you’re being asked to bet part of your payday on a business you no longer control.
What a seller note is
A seller note is simpler to picture: you’re acting like the bank. Instead of the buyer paying 100% of the price upfront (in cash or through a bank loan), you agree to be paid back over time — typically 3 to 7 years, with interest. It helps buyers who can’t or don’t want to finance the entire purchase price at closing.
The catch: if the buyer also took out a bank loan to fund the deal, your note almost always sits behind that bank in line to get paid. If the business struggles, the bank gets made whole first — you’re further back in the line.
The numbers worth knowing
Earn-outs typically make up somewhere around 18-25% of the total deal value, and usually run 12 to 36 months. Here’s the number that surprises most owners: only about half to two-thirds of earn-outs actually pay out in full. The shorter the earn-out period, the better your odds — a 12-month earn-out pays close to 68% of the target on average, while a 36-month earn-out pays only around 41%. A good rule of thumb: if a buyer needs an earn-out to get to the price you want, assume it pays 50-70% of the stated target, not 100%, and decide if the deal still makes sense on that basis.
Seller notes typically run 5-30% of the purchase price, with interest rates in the 4-8% range reflecting the fact that you’re taking on real risk by financing part of your own sale.
What this looks like in addiction treatment specifically
Beyond the general numbers above, a few things tend to show up in our industry specifically:
Census or occupancy targets often get added alongside (or instead of) a pure profit target — worth checking that any occupancy number accounts for normal seasonal ups and downs rather than a flat line. Losing a key clinician or admissions director during the earn-out period can tank your numbers through no fault of your own if the agreement doesn’t address it. Maintaining your accreditation and state licensing is often a condition of getting paid — make sure that condition doesn’t quietly depend on decisions the new owner makes after you’re gone. And state licensing changes of ownership can take weeks or months to clear, which can affect how and when money actually moves at closing.
A few things worth pushing for
You don’t have to accept the first version of these terms a buyer offers. A few things worth asking for: a shorter measurement period rather than a longer one, since your odds of full payout drop the longer it runs; a clear, locked-in definition of exactly how the target gets calculated, spelled out in the agreement itself rather than left for later; payment as you go (a portion each year) rather than all-or-nothing at the very end; and, for a seller note, a personal guarantee from the buyer and a real look at where your note stands if their business runs into trouble.
The best negotiating move happens before any of this
Here’s the honest takeaway: the size and risk of an earn-out or seller note usually reflects how much risk a buyer sees in your business going forward. A business that isn’t dependent on the owner, has a documented marketing system, and can prove its own numbers gives a buyer far less reason to hold back part of the price. The stronger your business looks walking into a sale, the less of your payday you should have to leave on the table for later — and the more you can negotiate for cash in hand at closing.
This post is for general education and isn’t legal or financial advice. Every deal is different — work with a qualified M&A attorney and your tax advisor before signing anything.
Thinking about what a sale of your business could look like, and how much of it you'd actually see at closing?
