How can earnouts and vendor notes protect your Canadian business sale amid tariffs?

For Canadian owners with revenues between $5 million and $50 million, the shadow of U.S. tariffs looms over export-dependent operations — squeezed margins, disrupted supply chains and uncertain revenue. Rather than waiting for the storm to hit, you can sell now and structure a deal that shares the risk. Earnouts and vendor notes (seller financing) bridge the valuation gap between your optimistic projections and a buyer's tariff-wary caution, letting you capture upside while giving financial and strategic buyers the downside protection they want.

Why your exit can't wait — under the International Emergency Economic Powers Act (IEEPA), U.S. tariffs of 25% hit broad swaths of Canadian exports in March 2025, escalating toward 35% by August, with Canada's counter-tariffs on $60 billion of U.S. goods and a projected 0.1% to 0.2% drag on GDP. In manufacturing, autos and resources, EBITDA forecasts become unreliable, so strategic buyers fear eroded synergies and financial buyers see compressed multiples — leading to stalled deals or lowball offers.

Earnouts — defer 10% to 30% of the price, paid only if the business hits predefined post-closing milestones:
- Protect your upside if tariffs ease through court rulings or a new CUSMA deal
- Ease buyer hesitation by capping exposure to "what ifs"
- Keep them simple and measurable; earnouts fail 20% to 30% of the time from poor drafting, so include audit rights and clear definitions of "extraordinary" costs

Vendor notes — loan the buyer 10% to 40% of the price, repaid over three to seven years at 5% to 8% interest:
- Buy time for supply-chain diversification as stability returns
- Use amortizing or interest-only structures, a first lien on assets (subordinate to bank debt), prepayment options, and default triggers with tariff carve-outs (e.g., no default if EBITDA drops 15% due to verified duties)

Hybrid example — for a $20M business: $14M cash at close, a $3M vendor note (five-year, 6%) and a $3M revenue-based, tariff-adjusted earnout.

Negotiation must-haves — model tariff scenarios, use a Canadian M&A lawyer versed in IEEPA, plan tax (earnouts often as capital gains, notes as interest income), and retain a capped consulting role.

Key facts: earnouts and vendor notes amid tariffs

Earnouts defer 10%-30% of price to post-closing milestones; vendor notes loan 10%-40% over 3-7 years at 5%-8%
U.S. tariffs (25% to 35% in 2025 under IEEPA) compress multiples and stall deals
Earnouts fail 20%-30% of the time from poor drafting; audit rights and clear definitions are essential
Hybrid example on $20M: $14M cash, $3M vendor note, $3M tariff-adjusted earnout

Disclaimer: This article is for general informational purposes only and does not constitute legal, tax or financial advice. Consult qualified advisors regarding your specific circumstances.