Craft Distillery Seller Financing and Earnouts
Buyers and sellers of distilleries do not always agree on value. A seller may point to barrels that will become premium releases, while a buyer and its lender focus on cash flow the business has already produced. Craft distillery seller financing and, in some cases, earnouts can help bridge that gap by having the seller receive part of the price over time or based on future results.
This article is general information for buyers and sellers of existing, operating craft distilleries. Deal terms should be negotiated with qualified attorneys and accountants, and tax consequences reviewed with tax advisors. Lender and program rules may limit how seller financing and earnouts are used. Nothing here is legal, tax or financial advice.
How a Seller Note Works
With a seller note, the seller accepts part of the purchase price as a loan to the buyer, repaid with interest over an agreed period. The buyer pays the rest at closing using equity and other financing. When a bank or SBA-backed loan is also involved, the seller note is typically subordinate to the senior lender, meaning the lender is repaid first and may restrict when the seller can be paid.
Why Seller Financing May Help
- It can reduce the amount the buyer needs to borrow from a senior lender
- It can show the seller’s confidence in the business
- It may encourage the seller to support the transition, including introductions to distributors and staff
- It can help when the price includes inventory a lender is reluctant to finance fully
Seller Financing in SBA Transactions
SBA program rules address how seller notes may be structured, including when they may count toward the buyer’s equity and when payments may begin. These rules can change, and lenders apply them to each transaction. See our article on SBA loans for craft distilleries.
Earnouts
An earnout ties part of the price to future performance, such as revenue or earnings after closing. For a distillery, parties sometimes consider measures linked to aging releases or distribution results. Earnouts can be difficult to define and measure, and they can lead to disputes about how the business was run. Some lenders and programs limit or do not allow earnouts, so buyers should confirm with their lender before proposing one.
Inventory-Related Structures
Because aging spirits are hard to value, some parties tie a portion of the seller’s payment to inventory, such as an adjustment after a count at closing or a holdback until certain stock is released. Our article on aging spirits inventory discusses these issues.
Points to Negotiate
- Amount, interest rate and repayment period
- Subordination terms required by the senior lender
- Security, if any, and personal guarantees
- What happens if the business underperforms or is resold
- For earnouts, precise definitions, reporting and dispute resolution
How Seller Financing Affects Value
A seller who is paid over time may accept a structure that supports a price the buyer’s lender would not finance on its own. Our guide to craft distillery valuation explains how price and cash flow connect, and our article on craft distillery loan requirements covers what lenders expect from buyers.
For Sellers
Sellers should consider their own need for cash at closing and their willingness to carry risk. See our guide on how to sell a craft distillery.
US Professional Funding helps buyers structure financing for the acquisition of existing, operating craft distilleries, including transactions that involve seller notes. Learn more about our craft distillery acquisition financing.
