By Rhys Williamson, Partner at Mahoneys.
If you’re a founder selling under vendor finance (where the buyer pays you over time from business cash flow), the biggest question is: “Will I actually get my money?”
In a surety-backed structure, a major part of that fear can be reduced because a third party is designed to stand behind the deferred (vendor finance) payments if the buyer defaults, subject to the policy terms. In other words, the preparation work becomes less about “squeezing the buyer” and more about getting the foundations right, so the transition is sustainable for the people stepping up.
Succession is not simply a legal transaction. It’s a transformation in leadership, ownership and responsibility, and it is the bridge between your legacy and the future of your business.
With Surety, there are still three key issues to focus on:
- What the policy actually covers (and what it doesn’t)
- Your ongoing legal exposure after completion
- The health and future of the business you’re leaving behind
The art is to protect yourself in these areas without loading the buyers with obligations that make the transition harder, or make the business a less attractive (and less valuable) ownership proposition.
1. Understanding Your Surety Cover
You don’t need to turn the sale agreement into a pressure tool if the deferred payments are surety-backed. But you do need to understand how the cover works in practice:
- Conditions and exclusions: In what situations could the provider refuse to pay? (For example: fraud, undisclosed issues, late notifications, or other policy triggers.)
- Your obligations: What do you need to do to keep the cover in place? Do you need to provide information, cooperate with a claims process, or avoid changing transaction documents without consent?
- Interaction with warranties: In what scenarios might the provider look to you if a claim arises that relates to how the business was operated before completion?
These points are typically addressed between the seller, the surety provider and advisors, rather than by escalating obligations on the buyer(s).
2. Your Real Downside: Warranties, Claims, and Blame
If the deferred consideration is protected, your biggest remaining exposure is often warranty and indemnity risk, not non-payment.
As the seller, consider:
- Where risk in your business sits: Are there customer disputes, IP risks, regulatory exposure, negligence issues, or anything else that could generate claims?
- Scope and duration of warranties: Are you giving “long-tail” promises around tax, employment, IP, regulation, or data security?
- Caps and thresholds: What is the realistic dollar amount you could still be on the hook for, even if the price is protected?
You need to address these issues no matter who you sell to or what structure you use. Experienced advisors can help you and your successor team work through these questions and ensure the handover is set up to mitigate them.
3. Legacy and Reputation: Your Invisible Asset
In an employee-led buyout, founders often care about more than cash. These are your people. They may keep using your name, your brand story, and your reputation in-market.
With credit risk largely reduced, you can often afford to be more balanced in areas like:
- Restraints that are fair but not suffocating
- Transitional support that helps the new owners succeed
- Light but clear legacy protections: limited obligations around use of your name and “story”, rather than broad veto powers over how they run the business
You are still protecting your legacy and reputation, but not by hanging onto control. Instead, you set a few clear boundaries, then help the new owners stand on their own feet.
4. Letting Go, Without Drifting Back into Liability
If you’re still owed money, it’s normal to want visibility on how the business is tracking. But if the deferred payments are surety-backed, you usually don’t need to sit on the buyer’s shoulder.
Instead of heavy-handed controls, consider lighter tools:
- Regular management accounts while any amount remains outstanding
- Limited consent rights for truly major transactions
- A short advisory role, with clear written limits on duties and decision rights
This helps you stay informed without slipping into “shadow director” territory (in simple terms: staying so involved that you can be treated as still directing the company).
5. Smarter Structures Can Improve After-Tax Outcomes
Depending on your circumstances, this type of structure may support outcomes that are more tax-efficient than alternatives. For example (in Australia):
- Properly structured look-through earn-outs may allow future top-up payments to adjust capital proceeds (rather than triggering new tax events or tax on amounts not yet received)
- You may be able to access the 50% CGT discount and, where eligible, the small business CGT concessions
- Buyers may be able to fund more of the deal through debt, and associated interest costs may provide some tax relief as they repay, which can help the overall deal economics
This is highly fact-specific and should be assessed with tax and legal advisors.
6. A Cleaner Exit Than Most Founders Get
With Surety supporting the deferred consideration, the legal work is no longer about extracting every possible right from the buyer. It’s about three cleaner goals:
- Make sure the Surety will actually respond when needed
- Fence off your warranty and indemnity exposure
- Leave behind a healthy business, run by people you trust, without over-lawyering their future
If that balance is struck, you get something rare in an employee-led buyout: money you can rely on, a deal your team can live with, and a business you can look back on with pride.
By Rhys Williamson, Partner, Mahoneys Lawyers
Disclaimer: any advice contained within this article is of a general nature only and does not constitute legal or commercial advice. All care is made when preparing this article, however specific legal advice should be obtained and tailored to your particular circumstances.
Mahoneys will not accept any liability for any cause of action arising from or in connection with any information contained in this article.
