A buyer is offering our full asking multiple, but fifteen percent of the purchase price is funded through an unsecured seller note and ten percent through a performance earnout. How should we evaluate and restructure this financing mix to protect our real net proceeds?

Question

Tyler Smith · Accepted Answer

A high enterprise valuation headline is meaningless if twenty-five percent of the consideration is tied up in uncollectible deal structures. When a buyer funds ten percent through a performance earnout and fifteen percent through an unsecured seller note, they are transferring financing risk and operational execution back onto your shoulders while taking immediate control of the equity.

To restructure this package into protected proceeds, follow these structural guidelines:
- Convert unsecured seller paper into a senior subordinated note with a defined interest coupon, a fixed maturity date of three to five years, and monthly or quarterly amortization. Demand a personal or parent company guaranty along with second-lien security against company assets.
- Ensure your seller note contains default remedies that reinstate operational voting rights or board observation rights if the buyer misses two consecutive scheduled debt payments.
- Reject subjective performance earnouts based on bottom-line net income or discretionary milestones that the buyer can manipulate post-closing through corporate overhead allocations.
- If an earnout cannot be avoided, tie the metric purely to top-line gross collected revenue or gross profit from legacy accounts, and include protective operational covenants that prohibit the buyer from discontinuing services or reducing the dedicated sales budget.

Your goal is certainty of cash. If the buyer cannot secure senior debt to fund eighty percent or more of the purchase price in cash at close, their offer must be discounted heavily against fully funded competing bids.