We have a massive valuation gap with a strategic buyer who loves our product but is skeptical of our projected sales pipeline. How do we creatively combine a performance-based earnout with a convertible seller note to bridge this gap while keeping the closing risk off our shoulders?

Question

Tyler Smith · Accepted Answer

A large valuation gap can easily stall a deal, but you can bridge it by combining a performance-based earnout with a convertible seller note. This dual-structure approach gives the buyer the risk mitigation they want while giving you a clear pathway to your target purchase price.

The seller note acts as a baseline level of deferred compensation that carries a reasonable interest rate, ensuring you receive a guaranteed return on that portion of the value. To protect yourself, you can build in a conversion feature where, if the business hits its sales pipeline milestones, you have the right to convert that note into equity or a higher cash payout.

The earnout is layered on top of this, tied directly to the performance of the sales pipeline. If the revenue from these new customers materializes as projected, the earnout pays out at a premium multiple. By separating the guaranteed debt of the seller note from the variable upside of the earnout, you reduce your closing risk while giving the buyer the security they need to move forward.

To manage this complex post-close structure, you must keep your sales pipeline tracking pristine. Use your EOS scorecard to track leading indicators of these sales milestones. By maintaining transparency and aligning your leadership team around these metrics during integration, you ensure both parties are looking at the same clean data, reducing the chance of a post-close dispute.