Earnouts, holdbacks and transition agreements, explained

On closing day, the price is fixed. What the business will do over the next two years isn't. The seller believes it will keep doing what it has always done. You hope so, but you've never run it, and you're about to borrow a lot of money on that hope.

Three tools let buyers and sellers share that uncertainty instead of arguing about it: earnouts, holdbacks and transition agreements. Each solves a different problem, and each can be fair or unfair depending on how it's written. If you're using an SBA loan, the rules also limit what you can do.

Earnouts: part of the price, paid if the business performs

An earnout is part of the purchase price that the seller receives later, only if the business hits targets after closing. Common targets are revenue, gross profit, or keeping certain customers.

Here's a hypothetical. You and the seller agree on $1.5 million, but you're not convinced a big new contract the company just won will last. So you pay $1.2 million at closing and agree to pay up to $300,000 more over two years if revenue stays above an agreed level.

When it's fair. An earnout makes sense when buyer and seller honestly disagree about the future: a recent jump in sales, a new product, a contract that hasn't renewed yet. The seller gets paid for the upside they believe in, and you don't pay for it unless it shows up.

Where it goes wrong. After closing, you control the business, and the seller's money depends on how you run it. That's a recipe for disputes. Sellers worry you'll spend heavily to depress profit, or let customers drift. Buyers worry about paying for growth they created themselves. To reduce the arguments:

• Measure something simple. Revenue is easier to agree on than profit.
• Keep it short. One to two years is easier to live with than five.
• Define everything in the purchase agreement, including how the number is calculated, when it's paid and what happens if you sell the company.
• Cap it. The seller should know the most they can earn.

The SBA rule. If you're buying with an SBA 7(a) loan, seller earnouts aren't allowed. The SBA does allow the reverse, a buyer rebate: the seller agrees to pay you back part of the price if the business falls short of agreed targets. Under the current rules, any rebate has to go toward paying down the SBA loan. A rebate can be a useful way to handle, say, the risk that the largest customer leaves in the first year. (Adjustments for working capital, explained below, are treated differently and aren't rebates.)

Holdbacks and escrows: part of the price, held for a while

A holdback is part of the price that isn't paid to the seller at closing. It's set aside, often in an escrow account held by an attorney or escrow agent, for an agreed period. If problems turn up that the seller is responsible for, the money covers them. If not, it goes to the seller when the period ends.

Holdbacks often back up the seller's promises in the purchase agreement. Those promises, called representations and warranties, are statements like "the financial statements are accurate," "there are no lawsuits pending" and "all taxes have been paid." If one turns out to be false, you have a claim, and with a holdback the money to pay it is already set aside, so you don't have to chase the seller for it.

A Florida example shows why this matters. Under Florida law, the buyer of a business can be liable for the seller's unpaid state taxes, such as sales tax, unless the seller provides a certificate of compliance from the Department of Revenue or a state audit clears the seller. Florida law also lets the buyer withhold part of the price to cover those taxes and pay it to the state within 30 days of closing, though only the certificate or a clean audit is a clear release. Your attorney can advise whether a holdback, a certificate or both makes sense for your deal.

Holdbacks are also used for working capital adjustments. If the deal assumes the business will have a normal level of inventory and money owed by customers at closing, the final amounts are counted after closing and the price is adjusted up or down. Holding back a small amount makes that adjustment easy to settle.

When it's fair. The size should match real risks, not a general wish for a discount. The release date should be clear, and so should the process for making a claim and for the seller to dispute it.

With an SBA loan. The lender's file has to include every agreement that's part of the purchase, so tell them early about any holdback or escrow and how it will work.

Transition agreements: the seller helps after closing

A transition agreement is a contract for the seller to keep helping after the sale: introducing you to customers and suppliers, teaching you how they price and schedule work, explaining quirks only they know. For a company where the owner has been the face of the business for decades, this can matter more than any other term.

A good transition agreement spells out:

• How long, and how many hours a week or month, with the hours often tapering off over time.
• What the seller will do: customer introductions, training, supplier handovers, specific projects.
• What the seller won't do: make decisions, direct employees or speak for the company without your agreement.
• Pay: whether they're paid separately as a consultant, and how much.

The SBA rule. In a typical SBA-financed purchase, the seller can't stay on as an owner, officer, director or employee. The business can hire them as a consultant for a transition period. Under the SBA's current rules (SOP 50 10 8.1, effective October 1, 2026), that period can't exceed 24 months in total, including any extensions. The previous version allowed 12 months, so ask your lender which version applies to your loan.

A related promise: not competing. You'll probably also want the seller to agree not to start or work for a competing business nearby for a period. In Florida, courts presume a seller's non-compete is reasonable in length if it's three years or less, and unreasonable if it's more than seven. It's a separate agreement from the transition, and your attorney will draft both.

Taxes. Consulting payments, non-compete payments and the purchase price can be taxed differently for both of you. Ask your CPA before you settle on how much goes where.

How they compare

Tool	What it protects you from	What it protects the seller from	Watch out for
Earnout	Paying for growth that doesn't last	Selling too cheap if it does	Disputes over measurement; not allowed with SBA 7(a) loans
Buyer rebate	Losing a key customer or revenue after closing	Having to cut the price up front	Under SBA rules, must pay down the loan
Holdback	Problems the seller is responsible for that surface later	Having to cut the price up front	Size, release date and claims process
Transition agreement	Losing customers and know-how with the owner	Being left out of what happens to their company	Vague scope; SBA time limit

Warning signs

• A seller who insists on a large earnout because the current numbers don't support the price they want. The price should rest on what the business earns now.
• A buyer who uses a holdback as a backdoor discount, making claims to keep money that should be released.
• A transition with no defined scope, which can leave you with either no help or a former owner still running things.

Putting it in writing

Mention each tool you expect to use in your letter of intent, with its rough size and length, and leave the details for the purchase agreement. Talk to your lender before you propose anything, and let your deal team do the drafting. If the seller will also lend you part of the price, see our post on seller financing. A seller note is a fixed debt you owe, unlike any of these.

Used well, these tools let you agree on a fair price without either side betting everything on a guess. Used badly, they postpone the argument until after closing, when it's harder to settle.