A buyer is offering our target valuation of twelve million dollars, but only sixty percent is cash at close, with the rest split between a seller note and rollover equity. How do we evaluate whether this package actually meets our walkaway number?

Question

Tyler Smith · Accepted Answer

Headlines do not deposit into bank accounts. An offer of twelve million dollars that is forty percent back-ended is not a twelve million dollar deal. It is a seven million two hundred thousand dollar guaranteed liquidity event coupled with high-risk unsecured private financing and a minority equity speculation in an entity you no longer control.

To evaluate this deal structure against your actual walkaway requirements, analyze each tranche of consideration separately:

- The cash floor. Your cash at close, after paying transaction advisors, paying off outstanding balance sheet debt, and funding transaction taxes, must meet your baseline personal financial goals. If the transaction failed completely the day after closing, the net cash must leave you financially secure.
- The seller note. Treat the seller note as an unrated junk bond. Determine its position in the capital stack. If it is fully subordinated to aggressive senior bank debt, your probability of non-payment during a downturn rises sharply. Demand an attractive interest rate of eight to twelve percent, monthly amortization rather than a bullet balloon payment, and negative covenants that prevent buyer distributions if note payments are in default.
- The rollover equity. Price your rolled equity at zero on your personal balance sheet until proven otherwise. Examine the capitalization table. If institutional investors hold participating preferred stock with compounding dividend rates, your common rollover equity could be completely wiped out in a mediocre exit.

If the guaranteed cash at close fails to clear your walkaway floor, reject the headline valuation and negotiate to increase the cash component or shorten the note duration.