A buyer presents a headline valuation of seven times EBITDA, but the offer is structured as fifty percent cash at close, twenty-five percent seller note, and twenty-five percent rollover equity requiring three years of continued employment. How do we calculate the true risk-adjusted value of this package versus an all-cash offer at a lower multiple?

Question

Tyler Smith · Accepted Answer

A high headline multiple loaded with conditional, subordinated paper is rarely worth its face value. When comparing a structured offer against a clean cash bid, you must apply practical discount rates to every non-cash tier.

Evaluate the components individually:

- Cash at Close: Discount at zero percent. This is real, bankable liquidity.

- The Seller Note: A seller note subordinated to senior bank financing carries equity-like risk while yielding debt-like returns. If the note pays eight percent interest over five years but sits behind senior covenants, discount its present value by fifteen to twenty-five percent to account for default risk and liquidity lockup.

- Rollover Equity: Minority equity in a buyer-controlled platform is non-marketable and subject to future dilution. If the buyer issues preferred returns ahead of common stock, your rollover can be wiped out in an average recapitalization. Unless you have anti-dilution protections and minority governance rights, discount rollover equity by thirty to fifty percent.

- Employment Contingencies: If rollover equity or note disbursements vest only if you remain employed, that value is deferred compensation, not enterprise purchase price. It is subject to ordinary income tax rates rather than capital gains.

When you run the math, a 7x structured offer often equates to an effective risk-adjusted value of 5.2x EBITDA. A competing all-cash offer at 5.8x EBITDA delivers more guaranteed money, eliminates post-closing operational stress, and removes tax bracket uncertainty. Never negotiate headline multiples in a vacuum; negotiate risk-adjusted proceeds.