A buyer offered $12 million for our company, but our board is firm on a $15 million valuation. If we want to bridge this $3 million gap without taking on an unachievable operational earnout, how can we use structured preferred equity or a convertible seller note with a fixed yield to close the spread?

Question

Tyler Smith · Accepted Answer

When an unbridgeable valuation gap stalls negotiations, owners often default to earnouts. That is a mistake if your business has predictable margins and you do not want to manage post-sale performance disputes. You can close a three-million-dollar gap by introducing structured preferred equity or a convertible seller note that guarantees an attractive economic return while protecting the buyer from cash strain.

A preferred equity structure allows you to retain an equity position that sits senior to common equity holders. You can negotiate a preferred return, typically eight to twelve percent annually, that accrues or pays out before common distributions. To bridge the gap, structure this equity with a redemption feature requiring the buyer to buy out your position at fifteen million total enterprise valuation upon a future recapitalization or within a defined three-to-five-year timeframe.

Alternatively, use a subordinated seller note with payment-in-kind interest and an equity kicker.

- Issue a three-million-dollar seller note carrying an eight percent interest rate, where the interest capitalizes into the principal balance rather than draining monthly cash flow.
- Add a conversion right or warrant coverage allowing you to convert a portion of the note into common equity if the company hits specific enterprise milestones.
- Secure an exit fee premium, where the buyer agrees that upon a subsequent sale of the company, the payoff on your note includes an additional lump-sum payment equal to your original valuation target.

This provides the buyer with the headline multiple discipline they require for their investment committee while contractually guaranteeing your targeted financial return.