We are three million dollars apart on enterprise value with an interested buyer. How can we structure a combination of cash, seller notes, and equity rollover to bridge the gap safely?

Question

Tyler Smith · Accepted Answer

Valuation gaps do not require walking away from a transaction. When a buyer cannot or will not meet your cash-at-close valuation, the gap can usually be resolved by engineering the capital stack rather than surrendering on price. The goal is to reach your enterprise value target while ensuring deferred consideration is legally and operationally protected.

A resilient four-part deal structure incorporates:

- Baseline cash at close: Secure senior-funded institutional cash to cover your minimum net walk-away requirement, tax liabilities, and transaction expenses. This should ideally represent 70 to 80 percent of the total enterprise value.
- Secured seller note with market interest: Offer to carry a portion of the valuation gap via a seller promissory note amortized over three to five years. The note must carry an above-market coupon rate, typically 8 to 12 percent, to compensate for your illiquidity. Require the note to be secured by a junior lien on company assets or a pledge of the underlying equity, with clear cross-default clauses tied to the buyer's senior credit facility.
- Narrowly defined performance earnout: If the buyer hesitates on future growth assumptions, bridge the remaining gap with an earnout tied directly to gross profit dollars, never to net income or bottom-line EBITDA where the buyer can manipulate allocations. Establish clear operating covenants prohibiting the buyer from redirecting resources or firing critical staff.
- Meaningful rollover equity: Reinvest a minority percentage into the operating company or parent holding entity to align incentives on the next stage of growth.

Never accept deferred paper or earnouts from a buyer who lacks institutional capitalization or refuses clear protective legal covenants.