Why do business owners frequently mistake the enterprise value listed in a letter of intent for guaranteed cash, and how do deal terms like earnouts and seller notes reshape the true payout?

Question

Tyler Smith · Accepted Answer

A headline valuation in a Letter of Intent is merely a starting point for negotiation, not a guaranteed bank transfer. Many owners celebrate an enterprise value of thirty million dollars without realizing that the underlying structure of the purchase agreement could put half of that figure at extreme risk.

Buyers structure acquisitions using several components to hedge their risk:

- Cash at closing: This is the only guaranteed money you walk away with on transaction day.
- Seller notes: You lend a portion of the purchase price back to the buyer, usually subordinated to senior bank debt, paid out over three to seven years with interest. If the business stumbles, your payments can be deferred.
- Rollover equity: You roll ten to thirty percent of your proceeds into the buyer new equity vehicle, making your eventual second payout dependent on their ability to scale and recapitalize.
- Earnouts: Contingent payments tied to hitting future revenue or gross profit targets post-close. In many cases, earnouts fail to pay out because the new buyer alters operations, reallocates resources, or changes strategic direction.
- Working capital adjustments and escrows: Money held back to cover indemnification claims or balance sheet deficits.

If you want maximum cash at close and minimal contingent baggage, your business must be clean, defensible, and fully detached from your personal involvement. The cleaner your operations, books, and leadership team on your exit runway, the more leverage you possess to reject predatory structures and command cash at closing.