A buyer offers a nine-times multiple with sixty percent cash and forty percent earnout and seller note, while another offers seven times all cash. How do we evaluate these structures?

Question

Tyler Smith · Accepted Answer

Headline price is vanity; cash at close is reality. A nine-times multiple loaded with seller paper and contingent earnouts is frequently worth far less than an all-cash offer at seven times. You must discount contingent considerations for both counterparty risk and the time value of money.

In the nine-times structure, that forty percent deferred component carries substantial operational hazard. A subordinated seller note sits behind senior bank leverage. If the post-closing business hits a rough patch, senior lenders will block interest and principal payments to you under a standstill agreement. The earnout portion is even riskier: the buyer controls the capital allocation, hiring, and accounting post-sale. If they mismanage the integration, your earnout evaporates, leaving you with five point four times in cash and empty promises.

Evaluate the net present, risk-adjusted value of both offers:

- The seven-times all-cash offer eliminates post-close operational risk, litigation exposure, and integration interference. You take your chips off the table and move on.

- The nine-times structure should only be considered if you retain complete operational control to hit the earnout targets, the seller note carries a competitive interest rate with strict covenants, and the buyer has an undeniable track record of paying out deferred consideration.

Never accept a complicated capital structure just to brag about a headline multiple at a cocktail party.