We have a significant valuation gap with a prospective buyer who loves our business but is hesitant to pay our asking price in cash upfront. What creative deal structures can we use to bridge this gap without taking on too much risk?

Question

Tyler Smith · Accepted Answer

Valuation gaps are common in middle-market transactions, but they do not have to be deal-breakers. You can bridge the gap by structuring the purchase price with a mix of consideration, including cash, seller notes, earnouts, and rollover equity. A seller note allows you to act as the lender for a portion of the purchase price, usually ten to twenty percent. This shows the buyer you have skin in the game and believe in the business, and you can negotiate a favorable interest rate to increase your total yield. Earnouts are useful when the buyer is skeptical of your future growth projections. You can tie a portion of the purchase price to reaching specific financial milestones, but make sure these milestones are based on gross profit or operational metrics you can control, rather than net income which can be manipulated by buyer overhead allocations. Finally, rollover equity allows you to reinvest a portion of your proceeds into the buyer's holding company. This gives you a second bite at the apple when they eventually sell the larger platform. When using these creative structures, work with your legal team to ensure your seller note is protected by default covenants and your earnout is shielded from post-acquisition accounting games.