Your earn-out is an unsecured claim against the buyer

An earn-out is a promise to pay money later. It is not stock, and it is not secured. If the buying entity fails during the earn-out period, you stand with the general unsecured creditors, behind the acquisition lender, holding a prepetition claim. Collectibility comes from the obligor you name, the credit support you get, and the triggers you write.

What happens to my earn-out if the buyer’s business fails?

An unpaid earn-out is a general unsecured claim against the entity that promised to pay it. The Bankruptcy Code counts a right to payment as a claim even when it is contingent and unmatured. If that entity files, your earn-out is a prepetition claim, and it is paid only after secured and priority claims are satisfied.

It is not equity, and it is not secured unless someone gave you collateral. Rank then matters more than amount. The acquisition lender is secured only up to the value of its collateral, but that lien usually covers substantially all of the operating assets, and any shortfall joins your class. In chapter 7, priority claims are paid in the statutory order and general unsecured claims then share pro rata in what is left. In chapter 11 a confirmed plan governs, and it cannot pay you ahead of senior classes without their consent. An unearned earn-out is still a claim you can file. Filing and collecting are different activities.

Where the obligor is the company whose equity you sold, expect an argument that the claim arises from the sale of that company’s securities and belongs below other unsecured creditors. Courts are divided on that.

Law: 11 U.S.C. 101(5); 11 U.S.C. 506(a); 11 U.S.C. 507; 11 U.S.C. 510(b); 11 U.S.C. 726.

Tax timing is the second bruise. As of September 2026, a sale whose price cannot be fixed by the close of the year of sale is a contingent payment sale, reported on the installment method unless you elect out. That election is made on a timely filed return for the year of sale, extensions included, and is revocable only with IRS consent. Recapture is taxed in the year of sale though the cash comes later, and part of each deferred payment is recharacterized as ordinary interest income. Model both with your CPA.

Law: 26 U.S.C. 453; 26 U.S.C. 453(i); 26 U.S.C. 483; 26 CFR 15a.453-1(c), (d)(3).

Who is the named payment obligor on my earn-out, and can it pay?

The payment obligor is the entity the purchase agreement names as owing the earn-out. In many deals at this size that entity is a newly formed acquisition company holding the business it just bought with borrowed money. A promise from a thin entity is worth what the entity is worth.

So name it and test it. The signature block is the answer, and it is often a limited liability company formed six weeks before closing. Sometimes a holding company signs and owns nothing but the equity of the operating company that holds the assets. That subordinates you structurally: the operating company’s own creditors are paid from its assets first, and your obligor takes what is left.

I ask who signs the earn-out before I ask how the earn-out is calculated. Then I ask for that entity’s closing balance sheet and debt schedule, because those two documents decide whether the promise can be kept.

Ask for these before signing the letter of intent:

• The obligor’s exact legal name, state of formation, and good standing certificate.
• An ownership chart showing who sits above it, and its pro forma closing balance sheet with the acquisition debt shown.
• The restricted payments terms in the buyer’s loan documents, and whether the obligor holds the acquired assets.

If the buyer will not name the obligor until the definitive agreement, negotiate credit support now.

What happens if the buyer sells or shuts down the business during the earn-out period?

A resale does not carry the earn-out with it automatically. Under Delaware law a buyer of assets takes only the liabilities it expressly assumes, subject to narrow exceptions for de facto merger, mere continuation, and fraud. The obligation can be stranded in an entity that no longer operates anything. Bind successors, require written assumption, and accelerate on transfer.

Law: Ross v. DESA Holdings Corp., 2008 WL 4899226 (Del. Super. Ct. Sept. 30, 2008); 8 Del. C. 259; 6 Del. C. 18-209(g).

• Someone buys the equity of your buyer. The obligor is unchanged and still owes you. What changes is the balance sheet behind it.
• Someone buys the assets you sold. The cash goes to the obligor, the business goes to a stranger, and your claim stays with the entity holding the cash. The exceptions are hard to prove and get litigated after the money is spent.
• The obligor merges into another company. The obligation follows by operation of law, because the debts of a merged entity attach to the survivor. The question is whether the survivor can pay.

Three sentences handle most of this. The agreement binds successors and permitted assigns. Any transferee of all or substantially all of the business must deliver a written assumption to you as a condition of the transfer. No assignment releases the original obligor unless you agree in writing.

A successors clause without a required written assumption is a wish. A required written assumption with acceleration behind it is a term the buyer has to price.

Acceleration turns the contingent payment into a fixed sum due now on a defined event. Use it on change of control, on sale or shutdown of the line, and on payment default uncured after written notice, with the cure clock starting on the notice. Set the amount by a formula tied to the bargained metric; a number unrelated to what you lost invites the argument that it is a penalty. Do not key a trigger to the buyer’s bankruptcy, because terms that alter a debtor’s obligations for that reason alone are generally unenforceable once a petition is filed.

Law: 11 U.S.C. 365(e)(1); 11 U.S.C. 541(c)(1)(B).

A solvent buyer facing an accelerated balance negotiates. After a filing, acceleration at best fixes the size of an unsecured claim. Size is not the problem. Rank is.

Can I get security, a guaranty, or an escrow for the earn-out?

Security over the acquired assets is usually unavailable to a seller, because the acquisition lender takes a first lien and its loan documents prohibit junior liens. The credit support actually obtainable at this size is a funded escrow or a guaranty from whoever holds a real balance sheet. A bank letter of credit is uncommon here.

Read the guaranty like a document, not a gesture. Check who signs it, whether it is a payment or only a collection guaranty, whether it survives a sale, and whether it covers accelerated amounts. A guaranty from the acquisition company that already owes the money is a second copy of the same promise.

What information rights do I need to be able to enforce the earn-out?

Information rights decide whether an earn-out can be enforced. Once the sale closes you are no longer an owner, and statutory inspection rights belong to current owners, so you see only what the purchase agreement entitles you to see. A calculation, records access, an objection window, and a named tiebreaker are the minimum.

• A periodic statement on a fixed date, not only at the end of the period.
• The calculation shown line by line, with every adjustment and the reason for it.
• Access to the records behind the metric, with the right to bring your accountant.
• An objection window starting when a complete statement and its support are delivered, not on a calendar date, so a late or partial delivery cannot run your clock out.
• A named independent accountant deciding the defined items as an expert, with costs split by how far each side sat from the result.
• Payment of the undisputed amount on the original due date, with interest on anything late.

That package is a warning system. If statements stop arriving, you learn about trouble while acceleration and a guaranty can still do something.

Can I even have an earn-out if the buyer is using an SBA loan?

Usually not. Under SBA’s current standard operating procedure, a 7(a) loan financing a change of ownership requires a purchase price that is fixed and determinable at closing, and seller earn-outs are prohibited. If your buyer is borrowing from SBA, the deferred piece of your price will be a seller note, not an earn-out.

Law: 13 CFR 120.202; 13 CFR 120.130; SBA SOP 50 10 8 (effective June 1, 2025); SBA SOP 50 10 8.1 (effective October 1, 2026).

Dates matter, so state them. As of September 2026, SOP 50 10 8 governs applications in process, and SOP 50 10 8.1 applies to applications issued a loan number on or after October 1, 2026. It carries the bar on seller earn-outs forward. A performance-based rebate running the buyer’s way can be allowed, but that money pays down the SBA loan, not you.

Then read the standby paper yourself. A seller note counted toward the buyer’s required equity injection must be on full standby, no principal and no interest, for the life of the SBA loan, and it can cover no more than half of that injection. A note outside the injection can carry lighter terms, but the terms are whatever the standby agreement says, and lenders commonly use SBA Form 155. Ask which SOP version the lender is underwriting to, what may be paid to you and when, and which document controls if the two disagree.

Do not discover from the first missed payment that the buyer’s lender never permitted the payment in the first place.

Prevalence figures cut the other way. The earn-out percentages in the ABA’s 2023 Private Target Deal Points Study come from deals far larger than an owner-operated company, none SBA financed. That study is not your benchmark.

How do I stop the buyer from using setoff to freeze my earn-out?

Setoff is the buyer’s contractual right to withhold an earn-out payment against a claim it says it has against you. A broad setoff clause lets a buyer freeze a payment by asserting an indemnity claim it has not proven. Cap it, require detail, and keep undisputed amounts payable on time.

Here is the trap. An unsecured earn-out, with no guarantor, no acceleration, and a buyer free to set off any claim it asserts, is a payment the buyer controls completely. It does not need to win the indemnity claim. It only needs to make it.

• Limit setoff to finally determined claims, resolved by agreement or final decision, not merely alleged.
• Cap the withholding at the amount of the claim, not the whole payment.
• Require written notice before the due date: the facts, the provision breached, the calculation.
• Escrow the disputed portion while the dispute runs.

Know the limit. A contract can restrict setoff between solvent parties, but the Bankruptcy Code separately preserves a creditor’s right to set off mutual prepetition debts, so a buyer in bankruptcy may still assert it. Add interest on late payments. A buyer that owes nothing for delay has a free option.

Law: 11 U.S.C. 553.

What should I do next to make my earn-out collectible?

Making an earn-out collectible is a letter-of-intent job, not a closing job. Name the obligor, price the credit support, and settle acceleration and setoff before exclusivity narrows your options. Work these steps in order, starting with the documents that show whether the buyer can pay.

• Get the obligor’s legal name and good standing in writing, and read its pro forma balance sheet and debt terms.
• If the deal is SBA financed, expect a seller note, and get the standby agreement and the lender’s written confirmation.
• Put one form of credit support in the letter of intent, an escrow or a guaranty.
• Write acceleration on change of control, sale or shutdown, and uncured payment default, and require any transferee to assume the earn-out in writing.
• Build in statements, records access, an objection window starting on complete delivery, and a named accountant, and cap setoff to finally determined claims.

Every one is cheaper before exclusivity than after. After signing, the buyer has your commitment and you have a promise. Get the promise attached to something first.