Earnouts, Seller Notes, and Escrow: What You’re Agreeing To

Earnouts, Seller Notes, and Escrow: What You’re Agreeing To

Earnouts, seller notes, and escrow are three ways part of your franchise's price can reach you after closing instead of on closing day. A seller note is a loan you make to the buyer. Escrow is money held by a third party until agreed conditions are met. An earnout is a payment that depends on how the business performs after you have handed it over. The earnout is the one that ties your pay to decisions you no longer make, so it needs the closest read.

Will a buyer expect me to carry part of the price?

Plan on being asked. In BizBuySell's Q2 2026 Insight Report, 90% of buyers expect seller financing to be part of how they pay for an acquisition, while 29% of business owners plan to offer it, nearly half say they will not and 23% are undecided. Those figures cover small-business buyers and owners in general, not franchises only.

The gap between the two groups is the point. If you have not decided before an offer arrives, you decide with the offer on the table. Settle your own answer first: how much of the price, if any, you would leave in the buyer's hands, and for how long.

What do I take on if I carry a seller note?

You become the buyer's lender for that part of the price, and you are paid only as the buyer pays. The International Business Brokers Association (IBBA) glossary defines seller financing as "When the person selling a business offers financing to a buyer", either instead of or on top of the financing the buyer gets from someone else.

Buyers ask for a note because it closes a gap their own financing leaves. What matters to you is what the note says. Take these questions to your attorney before you agree:

• What secures the note? If the buyer stops paying, what do you have a claim on?
• Does it rank behind the buyer's other lender? If it does, who is paid first?
• What happens on a missed payment? Ask for the steps and the dates in the note itself.
• Does your franchise agreement, or your franchisor, limit what you can do? How a seller's claim is treated if the buyer defaults is a question your own agreement answers, so read it there.

How a note changes when you report the sale for tax is a separate question. Our article on the tax bill at closing covers that side, and your CPA settles it for you.

What is the difference between escrow and a holdback?

In escrow a third party holds the money. In a holdback the buyer keeps it. The IBBA glossary defines escrow as a "Third-party arrangement to hold and distribute funds (usually by an attorney); agreed upon by both the buyer and the seller."

Both are there to cover a claim that only shows up after closing. Typically, that means a statement in the agreement that turns out to be wrong, or a number promised at closing that does not match what the business shows later. Which of the two your deal uses is a drafting choice you make with your attorney.

How much is held, and for how long, varies from deal to deal. Ask your attorney three things: what claim the money covers, who decides that a claim is valid, and on what date the money is released if no claim is made.

What am I agreeing to with an earnout?

Part of your price depends on a result measured after closing, while someone else runs the business. The IBBA glossary defines an earn-out as "A contractual provision stating that the seller of a business is to obtain additional future consideration", and goes on to describe it as a way of matching a company's future earnings with payments to the seller.

An earnout exists because a buyer who will not pay today for growth that has not happened yet may agree to pay for it if it arrives. It can also go wrong without anyone acting in bad faith. The buyer decides on staffing, marketing spend and pricing, and each of those can move the number your payment is tied to. A target based on profit can shift with how the buyer assigns costs after closing; a target based on revenue is, in our view, easier to check.

How long should an earnout run against my franchise agreement?

Compare its length with the time left on the agreement. An earnout can only be earned while the buyer is still operating the franchise, and your agreement's remaining term and renewal timing affect value and timing.

Item 17 of the Franchise Disclosure Document (FDD) is the franchisor's summary of the agreement, and rows (a), (b) and (c) cover the length of the term, renewal or extension, and the requirements to renew (16 CFR 436.5(q)). Whether a buyer takes over your remaining term or signs a new agreement is a question for your franchisor. An earnout that runs past the buyer's term depends on a renewal neither of you has yet.

What can I ask for to protect an earnout?

You can ask for a target that is defined narrowly, measured the same way throughout and checked by someone other than the buyer, and whether to is a decision for you and your attorney. These are questions for your attorney:

• How the target is defined, in the agreement, with the treatment of costs spelled out.
• What the buyer commits to during the period, such as staffing or marketing spend.
• How a disagreement over the number is settled, agreed at signing and not after a dispute starts.
• A minimum payment, so not all of the earnout is at risk.
• Security behind the payment, so you are not relying on the buyer's promise alone.
• A shorter period, which leaves less time for the buyer's choices to move the number.

If you are selling more than one unit, add a question: is the target measured for each unit or across the group? Each unit may sit under its own agreement, term and renewal date.

Does my franchisor have a say in how I am paid?

Your franchisor has to approve your buyer. Whether it also reviews how the price is paid depends on your franchisor. Franchisor approval is part of every franchise sale, and Item 17 rows (l) and (m) cover whether approval is required and under what conditions, while row (k) defines a transfer (16 CFR 436.5(q)). Our article on franchisor approval covers what the franchisor looks at.

Read those rows and your agreement before you agree to terms that depend on the buyer's finances. Then ask your franchisor whether it wants to see the payment terms.

Why does the way the price is split across assets matter?

Because the purchase agreement can set that split, and the IRS asks for it in some sales. The IRS page on Form 8594 says both the seller and the purchaser of a group of assets that makes up a trade or business must use the form to report the sale if goodwill or going concern value attaches, or could attach, to the assets and the purchaser's basis is determined only by the amount paid (IRS, About Form 8594).

How the price is divided, and the tax result of each division, depends on your own deal. Ask your CPA to model the split on your own numbers before you sign a letter of intent. Our article on the tax bill at closing covers the tax side.

What should I do before I agree to any of these terms?

Do three things you control.

• Decide your answer on a seller note before an offer asks for one: how much, for how long, and what you need as security.
• Know your own number. A buyer's offer and your figure may not match yet, and why your number and a buyer's can sit apart is worth reading first.
• Take the terms to your attorney and your CPA before a letter of intent is signed. They decide these with you. We do not.

A free Opinion of Value needs no decision on any of this. It is a personal valuation page with a custom video walkthrough recorded by a senior advisor, free and with no card on file. Request your free Opinion of Value when you want your own number in hand before an offer arrives.

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