Bridging the valuation gap with vendor financing
When Hims & Hers announced its agreement to acquire the digital healthcare company Eucalyptus for up to $1.15 billion, the headline figure made waves. Not only because of its size, but also because of how the deal was structured: Only about $240 million of the consideration would be paid in cash at closing.
The remainder would arrive later, through a combination of deferred payments and performance-linked earn-outs scheduled over several years.
For many founders imagining their own exit, this kind of arrangement might seem surprising. When you’re selling your business for the first time, it might not even occur to you that you won’t receive full cash payment until after completion.
In practice, however, deferred payments are common. They are used primarily when there is a gap between the valuation that is desired from the seller and what a buyer is willing or can pay. The two most frequently used structures for these moments are earn-outs and vendor financing.
We have spoken before of earn-outs, and many business owners have heard of them. Fewer have experience with vendor financing. So, what is vendor financing? And when is this tool useful in a transaction?
This article will explain what vendor financing is, and when you might want to use it.
What is vendor financing?
Vendor financing is, at its core, letting the buyer of your company make some deferred payments. Instead of one payment in cash or shares made at completion, the seller (you, the owner) agrees to finance part of the transaction.
In vendor financing, the buyer pays the majority of the purchase price upfront and signs a promissory note or similar loan for the remaining portion, which is repaid over time, typically with interest.
For example, with vendor financing, a company might sell for $20 million, with $17 million paid at closing and the remaining $3 million financed by the seller and repaid over five years. Ownership transfers immediately and a portion of the purchase price effectively becomes a loan extended by the seller.
In the Hims & Hers example, the guaranteed deferred payments are, in effect, a loan.
The logic behind this arrangement is simple: it allows a deal to close at a higher price. When a seller finances part of the purchase price, the buyer can agree to a higher overall valuation while committing less capital on the first day.
The seller preserves the headline valuation while accepting that some of the proceeds will arrive over time, often with interest that increases the total economic value of the transaction.
Credit, not performance risk
While both earn-outs and vendor financing represent future payments in a deal, the two have important differences.
Earn-outs tie future payments to operational performance, meaning the seller receives additional consideration only if the company meets specific revenue or profit targets after the sale. In an earn-out, the original founder often stays involved in the business and continues to operate it in some way. This is to help ensure that performance targets are met.
Vendor financing, by contrast, is debt. In vendor financing arrangements, the original founder typically steps away immediately, as they would in a strict cash sale. Payments are made to the original owner over time according to a contractually fixed schedule, regardless of whether the company outperforms or underperforms expectations, provided the acquirer remains solvent.
In short, vendor financing doesn’t require continued involvement and represents a different kind of risk than an earn-out. With an earn-out, the seller remains dependent on the operational decisions of the new owner. With vendor financing, the primary risk is whether the buyer and the business will reliably generate the cash required to service the debt.
Should you accept vendor financing?
The primary reason to use vendor financing is to close a valuation gap. This structure is best used when you need a higher price and you also believe the buyer will be good for the future payments.
Ask yourself:
Are you willing to delay some of the payments in order to receive a greater overall amount?
Is the buyer credible?
Do they have stable cash flows?
If you can reasonably assess your buyer’s capacity to repay, and you don’t mind the delay, then perhaps vendor financing can work for you.
Final thoughts
As deals like the Hims & Hers acquisition show, transactions are rarely governed by valuation alone. They are shaped just as much by the ways in which payment timing, financing sources, and risk allocation are arranged to satisfy both parties. In other words, structure.
Vendor financing is one of the simpler ways to structure a deal that works for both parties. By spreading part of the purchase price over time, it allows buyers to preserve capital efficiency while allowing sellers to maintain valuation. In situations where a transaction might otherwise stall over financing constraints, that structural flexibility can be enough to bring the deal across the finish line.
