We are stuck between a buyer willing to pay 6x EBITDA in pure cash and our expectation of 8x EBITDA. Outside of traditional earnouts, what structural tools like seller notes, consulting agreements, and preferred equity can bridge this two-multiple gap?

Question

Tyler Smith · Accepted Answer

When a two-multiple valuation gap stalls a deal, jumping straight to an earnout is a mistake that exposes you to buyer misdirection. You can bridge this spread safely by using junior debt and senior equity instruments that do not rely on speculative post-close metrics.

Use these structural tools to close the spread:

- Yield-bearing subordinated seller notes. Accept the additional two turns of EBITDA in the form of a five-year seller note carrying an eight to ten percent coupon. This provides the buyer with non-dilutive leverage without increasing their senior bank equity check, while giving you an attractive yield secured by operational covenants.
- Consulting and non-compete agreements. Carve out a portion of the valuation gap into a structured twenty-four-month consulting agreement. The buyer deducts these payments as ordinary operating expenses over time, which reduces their tax burden and allows them to pay more total consideration than their initial financial model permitted.
- Preferred rollover equity. If you are rolling over equity into the buyer's holding vehicle, demand preferred equity with a cumulative eight percent annual dividend rather than common equity. You sit senior to common unit holders on liquidation, guarantee your annual return, and participate in equity upside when the platform executes a secondary exit.

Using these tools changes the negotiation from a binary argument over price into a collaborative capital structuring exercise. The buyer protects their cash-at-close metrics, and you secure the full economic value of your target multiple with clear priority of payment.