Seller Financing and Earnouts in Roofing Company Acquisitions
Not every dollar of a roofing company’s purchase price has to be paid at closing. In some sales, the seller agrees to receive part of the price over time through a promissory note, or ties part of the price to how the business performs after closing. Roofing company seller financing and earnouts can help bridge gaps between what a buyer can finance and what a seller expects, and they can keep the seller engaged in a successful transition.
This article explains how these tools may work in the acquisition of an existing, operating roofing company. Whether either fits depends on the deal, lender requirements and the parties’ goals. Terms should be negotiated with qualified attorneys and tax advisors. Nothing here is legal or tax advice.
What Seller Financing Is
With seller financing, the seller lends part of the purchase price to the buyer, who signs a promissory note and repays the seller over an agreed term, usually with interest. Key terms include the amount, rate, repayment schedule, any deferral period, security and how the note ranks relative to a bank or SBA loan.
Why It May Be Considered in Roofing Deals
- Closing a financing gap: a seller note can reduce how much the buyer must borrow or contribute in cash
- Shared confidence: a seller willing to be paid over time signals belief in the business
- Transition support: a seller with money still owed has reason to help with licensing, customers, crews and manufacturer relationships
- Uncertain items: payment over time can help the parties address concerns such as warranty claims on pre-closing work
Seller Notes Alongside Bank or SBA Loans
When seller financing is combined with a bank or SBA loan, the lender will typically require the seller note to be subordinate to its loan and may limit when the seller can be paid. SBA program rules address how seller notes may be structured and when they may count toward the buyer’s contribution. See our article on SBA loans for roofing companies.
What an Earnout Is
An earnout makes part of the price contingent on the business reaching agreed targets after closing, such as revenue, gross profit or the retention of particular customers. If targets are met, the seller receives additional payments; if not, payments may be reduced or not owed.
When an Earnout May Be Discussed in Roofing
Earnouts may come up when buyer and seller disagree about value, particularly when recent results were boosted by unusual storm activity, when results depend heavily on the seller’s relationships or license, or when a major customer relationship is uncertain. Our articles on roofing company valuation and roofing contractor license transfer explain why these factors affect price.
Earnout Challenges
- Weather can affect results in ways neither party controls
- Targets must be clearly defined and measurable
- The seller gives up control yet may be paid based on results
- Disputes can arise over accounting and whether targets were met
- Some lenders and loan programs limit or prohibit certain earnout structures
Buyers considering an earnout should raise it with their lender early.
Warranty Holdbacks and Offsets
Some purchase agreements address warranty claims on pre-closing work through indemnification, holdbacks or rights to offset certain costs against a seller note. Whether such terms are appropriate, and whether a lender will permit them, depends on the transaction. See our article on roofing warranty liability.
Structure and Security
Seller notes may be secured or unsecured and often interact with indemnification provisions in the purchase agreement. How the transaction is structured also matters. See our article on roofing company asset vs. stock purchases, and sellers preparing for a sale can read how to sell a roofing company.
US Professional Funding helps buyers finance the acquisition of existing, operating roofing companies and can help coordinate how a seller note fits with acquisition financing. Learn more about our roofing business acquisition financing.
