The headline price is not what you keep

Why is the price not simply paid in cash?

A buyer knows less about your business than you do, and cannot verify everything before paying. Deferred payments, performance-linked payments and warranties are how that uncertainty is shared. They are normal. The problem is not their existence, but how often sellers agree to them without working out what each one costs.

The four you will meet most often are vendor finance (you are paid in instalments), an earn-out (part of the price depends on future results), a holdback or escrow (part is kept back against claims), and warranties and indemnities (promises you give about the business, with money behind them). Our Academy lesson on earn-outs, escrow and warranties explains the mechanics; this article is about the seller’s side of the table.

How does vendor finance work, and what can go wrong?

With vendor finance, the buyer pays part of the price over time, often over two to five years, and you act as a lender to the business you sold. It helps buyers who cannot fund the full price from a bank, and it can lift the price you achieve. It also means you are exposed to the buyer’s success.

Check the following before you accept it:

• Security. A pledge and cession of the shares, a guarantee from the buyer’s owners or a charge over assets give you something to enforce. An unsecured promise from a newly capitalised buyer is a bet.
• Ranking. A bank funding the buyer will usually require your loan to rank behind its own. In a downturn you are paid last.
• Interest and repayment dates. Say them plainly, with consequences for late payment.
• Covenants. Limits on dividends, on selling the business or on taking more debt while you are owed money.

Our buyer-side funding guide shows why buyers ask for it. Knowing how they will present it helps you price it.

What is an earn-out, and why do sellers lose money on them?

In an earn-out, part of the price depends on the business meeting a target after the sale, usually revenue or profit over one to three years. It bridges a gap in price expectations. It also hands control of your payout to someone else.

The usual problems are predictable. The buyer controls pricing, costs, staffing and accounting policies, any of which can reduce the measured profit. Integration costs, management charges and changed cost allocations can appear in the profit line. The target may be set at a level that only a favourable year would reach. And disputes are common because the definitions were vague.

Protect yourself with a precise definition of the measure and the accounting policies, a clause restricting actions taken to reduce the earn-out, information rights during the period, a fast expert determination route for disputes rather than court, and a cap on the buyer’s ability to set off other claims. Ask honestly how likely the target is to be reached, and value the earn-out at that probability, not at its maximum.

Be careful if you stay on as an employee. If the payment depends on you remaining employed, SARS can treat it as remuneration rather than a capital gain, which changes the tax. Get advice on the wording before you sign.

Can I be taxed before I receive the money?

Yes. For capital gains purposes, proceeds are what you receive or what accrues to you. If you become unconditionally entitled to a price payable in later years, the whole amount generally counts as accrued in the year of sale, so the tax can fall due before the cash does. By contrast, an amount that depends on a future condition is generally taxed only when the condition is met, and an earn-out that cannot yet be quantified is generally taxed when it can be.

The risk runs the other way if the buyer fails. A seller who has paid tax on a full price and then does not receive it may only be able to claim a capital loss, which can be set off against capital gains and may not recover the tax paid. The point is that payment terms and tax timing are linked. Ask your tax adviser to model both before you agree instalments.

How do warranties and indemnities limit what you keep?

Warranties are statements you give about the business: that the accounts are accurate, that tax is paid, that there is no hidden litigation. If one proves untrue, the buyer can claim. Indemnities are specific promises to cover a named risk. The commercial question is how much of the price you are exposed to, and for how long.

According to indicative market ranges published by MJ Kotze Inc (March 2026), liability is typically capped by reference to the price: fundamental warranties such as title and authority up to 100%, business warranties often 20% to 50%, and general warranties 10% to 20%. Small claims below a minimum threshold are ignored, and claims only become payable once they pass a basket, which can work as a deductible or, if it “tips”, as a threshold after which the full amount is claimable. Time limits are typically 18 to 36 months for business and general warranties and longer for tax. These are indicative ranges, not rules, and every deal is negotiated.

The disclosure letter is where you protect yourself. A matter fairly disclosed generally cannot later support a claim, so be specific; resist broad statements such as “everything in the data room.” Disclose known tax issues and pending SARS queries. Expect the buyer to ask that its own knowledge not defeat its claim, and take advice on that clause.

What about warranty and indemnity insurance?

Warranty and indemnity insurance moves the claim risk to an insurer. A buyer-side policy is increasingly common on larger mid-market deals, and a seller-side policy can give a cleaner exit with less cash held back. It usually takes a few weeks to arrange and relies on thorough due diligence. It does not cover matters that were disclosed or known, certain tax risks, or fraud, so it supplements a well-negotiated agreement and does not replace one. Ask early whether it is proposed, because it can reduce or remove a holdback.

How do I compare two offers properly?

Here is a deliberately simple illustration. Two offers for the same business:

• Offer A: R26m, all cash on completion, with a 10% holdback (R2.6m) for 18 months against warranty claims.
• Offer B: R32m headline: R18m on completion, R6m in vendor finance over three years, and a R8m earn-out if profit targets are met.

If the earn-out pays nothing, Offer B is R24m on paper, with R6m depending on the buyer’s ability to pay. If you think there is a one-in-three chance of earning the R8m, its value to you is about R2.7m, so Offer B is worth roughly R26.7m before any discounting for time and risk. Offer A is certain apart from the holdback. Offer B may still be better, if the buyer is strong and the security is good. But “R32m” is not the number to compare. The numbers here are invented for the example and ignore tax and discounting.

Before you accept any structure, ask: how much is paid on completion, how much is secured, how much depends on the buyer’s performance, how much depends on mine, and what is my worst realistic outcome?

We structure sell-side processes so these terms are negotiated while several buyers are still competing, which is when you have most leverage. See how a confidential sale process runs, and how share and asset sales differ. For any contract, use a corporate attorney and a tax adviser; our role is to run the process and frame the commercial terms.

Sources. MJ Kotze Inc, Warranties and indemnities (10 March 2026; indicative ranges); Cliffe Dekker Hofmeyr, W&I insurance: a key consideration for M&A transactions (2021); Tax Faculty, Vendor beware: capital gains tax on instalment sales (general principles, written for the 2016/17 tax year; check current law). The illustration is invented and ignores tax and discounting.