Becoming the Buyer's Creditor and Shareholder as the Price of Selling Your Company
Of the £23.55m headline, cash at completion is 17%. The risks of loan note and share consideration, and how sellers can check them, as seen in the UK EARNZ–GEM deal.
Summary: When the sale price is received not in cash but in the buyer’s loan notes (Loan Note, an IOU the buyer writes promising to repay later) and shares, the seller hands over the company and at the same time becomes the buyer’s creditor and shareholder. When you receive an offer, it is a good idea to break the consideration down by type before looking at the price.
Up to £23.55m, but £4m in cash at completion
On 30 September 2026, UK AIM-listed EARNZ announced a conditional agreement to acquire the business of GEM Environmental Building Services, a London building maintenance company. The headline amount is up to £23.55m, but the cash the sellers receive at completion (when the price is paid, the shares actually transfer and the deal closes) is £4m, about 17% of the maximum consideration.
| Category | Amount | Nature |
|---|---|---|
| Cash | £4m | Paid at completion |
| Loan notes | £2m | Unsecured, 10% simple annual interest, repaid in a lump sum after 12 months |
| 100 million new shares (4p per share) | £4m | 12-month sale prohibition, followed by 12 months of restrictions on the manner of sale |
| Deferred consideration | Up to £13.55m | Conditional on revenue and a gross margin of 22% or more over 2 years; 20% may be paid in shares |
Normalised EBITDA for the prior year (operating cash-generating capacity recalculated after stripping out one-off items), which served as the pricing basis, was £3.2m. The initial consideration of £10m is about 3.1x that figure, or about 1.25x counting cash only.
Loan notes: whether you get paid in a year depends on the buyer’s credit
Overseas, this arrangement is called a Vendor Take-Back, commonly a Seller Note, and in Korean it could be called a seller loan. In effect, the seller lends part of the price to the buyer. The announcement states that these loan notes are subject to the set-off right (Set-off, cancelling amounts receivable and payable against each other) under the agreement. This reads as meaning that if a claim arises after the deal, such as a breach of representations and warranties (what the seller promised to be true about the company’s condition), the buyer can deduct it first from the money it owes.
Shares: £4m is only a calculation at the time of issue
4p per share is about 15.8% below the closing price of 4.75p immediately before the announcement, and the shares newly issued in this deal amount to about 50.5% of the issued shares after the capital increase. The amount the sellers actually end up with will be determined by the share price and trading volume after the lock-up (an agreement not to sell received shares for a set period) expires. On a simple calculation, if the share price falls 25%, £4m becomes £3m. EARNZ is pursuing a roll-up (Roll-up) strategy of bundling small companies in the same industry, so the value of the shares will be affected not only by GEM’s performance but also by what EARNZ buys going forward, at what price, and with what money.
Even the cash at completion is not yet certain money
The initial cash is being raised through a share issue of about £4.1m and convertible bonds of up to £0.7m, but the share issue is proceeding without underwriting by the arranger and requires shareholder approval. The acquisition is also a large transaction under the AIM rules, so it must pass a general meeting on 19 October, and if the conditions are not met by 23 October, the agreement will terminate. The threshold for the deferred consideration is not low either. To receive the maximum, revenue must be £35m in year 1 and £40m in year 2, whereas revenue in the prior year was £30.46m and the gross margin was about 18%.
Where does the seller’s money sit in the order?
For the buyer, a structure in which part of the price is reinvested or an equity stake is retained is a means of holding on to the seller’s sense of responsibility and motivation. However, because the seller’s money often goes in as subordinated (repaid later than other creditors if the company runs into difficulty), it can be relatively unfavourable to the seller. If you do not check where the seller’s money sits among the bank, the convertible bond investors and the existing shareholders, the price may look high while the risk piles up on the seller’s side.
That does not mean such structures are always bad. If the buyer grows, the value of the shares can exceed the original price, and it can make a deal possible even with a buyer that does not have ample cash. But you should go in clearly aware that this is a choice to exchange a stake in a company you controlled for a minority stake in, and unsecured claims against, another company you cannot control.
When you receive an offer, break it down like this
- How much is cash?
- How much is money tied to the buyer’s credit (loan notes, etc.)?
- How much is money tied to the share price, and how much to performance?
- When can each be turned into cash?
Even the same £23.55m will look like an entirely different deal once you write it down broken out like this.
Frequently asked questions
Why are seller notes (seller loans) used?
They are used to get a deal done when the buyer lacks cash, and to have the seller share responsibility even after the deal. The seller takes on the buyer’s credit risk.
How should consideration received in shares be valued?
It is realistic to look at it based not on the amount at the time of issue but on the price and trading volume at which the shares can actually be sold after the lock-up ends.