Vendor Finance and Earn-Outs in Childcare Business Sales

A childcare deal can stall on a single number: the one in the middle, where the seller’s price and the buyer’s fundable offer don’t meet. When bank credit is tight, that gap doesn’t always close — and the deal that should happen quietly dies. Vendor finance and earn-outs are the two structures that let the parties carry the gap themselves rather than walk away. Both can rescue a sale. Both also leave real money on the table after the handshake, exposed to something going wrong. This article maps how they work in a childcare business sale and where the risk actually sits — it is general information, not advice, and the specific terms only ever make sense with your own accountant and solicitor across the table.

Why the Gap Appears in the First Place

A price gap is rarely about one side being unreasonable. It usually comes from two honest disagreements. The first is about the future: the seller prices the centre on where occupancy and earnings are heading, while the buyer prices on what is provable today. The second is about funding — a lender will only advance against what it can secure and verify, so even a willing buyer may be unable to raise the seller’s number in cash at settlement.

Both structures below are answers to that gap, and both change the shape of the deal rather than the headline price. Before you reach for either, it helps to be clear on what is genuinely driving the difference — our guide to what affects the price of a childcare centre covers the value levers, and financing a childcare centre purchase covers the bank-debt side a buyer will usually exhaust first. Vendor finance and earn-outs pick up where those stop.

Vendor Finance: the Seller Becomes the Lender

Under vendor finance — also called a vendor carry or deferred consideration — the seller effectively lends part of the purchase price to the buyer. The sale completes now, the buyer takes over the centre, and an agreed slice of the price stays owing, repaid over time with interest under a separate loan agreement.

It is worth separating this from a deferred settlement, which people often confuse it with. A deferred settlement simply pushes the completion date further out; nobody owns the business until the full price is paid. Vendor finance is the opposite — the business changes hands immediately, and the unpaid balance becomes a debt the buyer owes the seller.

That distinction is the whole risk. Once the buyer is operating the centre, the seller is an unsecured creditor unless the loan is properly secured. In Australian practice the seller’s protection usually runs through a written loan agreement with interest and default provisions, a security interest over the business assets, personal guarantees from the buyer’s directors, and registration on the Personal Property Securities Register (PPSR) to establish priority ahead of other creditors. Without those, a seller who has handed over the keys can find themselves chasing a debt behind the bank if the buyer runs into trouble.

Earn-Outs: Paying for a Future the Seller Is Betting On

An earn-out solves the other half of the gap — the disagreement about the future. Instead of paying the full price up front, the buyer pays a base amount at settlement and a further amount later, but only if the centre hits agreed performance targets. Australian advisers typically see earn-outs run over one to three years, with the contingent portion a set share of the total price rather than a token.

In childcare, the natural target is the thing both sides are actually arguing about: occupancy and the earnings it produces. A target might be pinned to utilisation reaching a level, to fee revenue, or to earnings once the usual adjustments are made — the same normalisation we cover in EBITDA adjustments buyers must understand. Because so much of a centre’s revenue flows through the Child Care Subsidy, a well-drafted target defines precisely which income counts and over what window, so the parties aren’t later fighting over what a “good month” was.

The elegance is that it aligns everyone: if the centre performs as the seller promised, the seller is paid in full and the buyer has bought a proven business; if it doesn’t, the buyer hasn’t overpaid for a story. The problem is that the person now running the centre is the buyer, while the person being paid on its performance is the seller.

The Risk Sits on Both Sides of the Table

Neither structure is a clever way for one party to win. Each simply moves risk to whoever is better placed to carry it — and both sides carry something.

The seller carries the risk of money not yet paid. Under vendor finance, that is credit and recovery risk: the buyer may default, and the seller’s position is only as strong as the security behind the loan. Under an earn-out, it is performance and control risk: the payout depends on results the seller can no longer influence.

The buyer carries the risk of being bound to a commitment made on someone else’s numbers. Under vendor finance, the buyer takes on a debt with interest on top of trading through a transition. Under an earn-out, the buyer must actually hit the targets — and if the market softens or an unexpected cost lands, targets set in an optimistic room can become a millstone rather than a bridge.

There is also a tax layer that neither side should treat as an afterthought. The Australian Taxation Office provides “look-through” treatment for qualifying earn-out rights, so that each earn-out payment is treated as proceeds of the original sale for capital gains tax rather than as separate income — but the rules carry conditions and a five-year limit on the arrangement. How the deal is structured changes the tax outcome, which is exactly the point we make in our companion guide to GST, going concern and transaction taxes. Get the accountant in before the contract is drafted, not after it is signed.

Build the Bridge Before You Need It

Vendor finance and earn-outs are tools with real downside, not tricks — used well, they turn a dead price gap into a completed sale that both parties can live with; used carelessly, they turn a clean exit into years of exposure or a dispute. The deciding factor is almost always the quality of the drafting: the security and PPSR registration on a vendor carry, and the run-the-business rules, reporting rights and dispute mechanism on an earn-out. If you are weighing either, work them through early with your solicitor and accountant, and read them alongside the broader picture in our guides to selling a childcare centre and buying one.

Considering a deal where the price gap won’t close on cash alone? Talk to ChildcareLink for a confidential, no-obligation conversation about how a sale could be structured. Visit childcarelink.com.au or contact our team directly.

Sources

• Sprintlaw (Australia) — vendor finance agreements and deferred consideration; vendor loan structure and PPSR security, 2026
• LegalVision (Australia) — vendor finance when selling a business, 2026
• Switchboard Finance / Emu Money (Australia) — vendor finance vs deferred settlement; common deal structures (deposit, instalments, vendor loan, earn-out, hybrid), 2026
• Miro Capital; Oasis Partners; Corestone (Australian business-sale advisers) — earn-out structure, typical periods, and buyer/seller risk, 2025–2026
• Australian Taxation Office — look-through earnout rights and capital gains tax treatment (law effective 25 February 2016; applies to rights created on or after 24 April 2015; five-year limit)

Disclaimer: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. ChildcareLink recommends seeking independent professional advice tailored to your specific circumstances before making any business or investment decisions.