You believe your business is worth $12 million. The buyer’s offer says $9 million. For many owners, that gap feels like the end of the conversation. It does not have to be.
From a seller’s perspective, years of building a successful business often justify a premium valuation. Buyers, on the other hand, must account for future uncertainty, integration risks, customer retention, and the realities of financing an acquisition. Although the parties may differ on what the business is worth today, that disagreement does not necessarily have to derail the transaction.
Purchase price negotiations are rarely limited to a single cash payment at closing. Typical acquisition agreements often include a variety of provisions that allocate risk, reward future performance, and provide flexibility in how consideration is paid. These allow buyers and sellers to get to a closing, despite disagreements on the headline purchase price number.
Earnouts
One of the most frequently used tools in lower/middle market transactions is the earnout.
An earnout allows the seller to receive additional consideration after closing if the acquired business achieves agreed-upon financial or operational milestones. Generally, earnouts are based on EBITDA targets or revenue thresholds, or in certain instances, they are based on non-financial metrics, such as customer retention or product development milestones.
Earnouts work particularly well when buyers are skeptical of the seller’s financial projections while sellers remain confident that future growth will justify a higher purchase price. Instead of requiring one side to concede its position during negotiations, the parties can allow future performance to determine whether additional consideration becomes payable.
Because earnouts often become the subject of post-closing disputes, careful drafting is essential. The purchase agreement should clearly address issues such as: (i) how financial metrics will be calculated; (ii) the buyer’s obligations in operating the business; and (iii) audit rights and dispute resolution procedures.
Deferred Payments and Seller Financing
Not every purchase price disagreement requires contingent consideration. In many transactions, the parties simply agree that a portion of the purchase price will be paid over time. Examples of deferred consideration include seller financing (usually evidenced by a promissory note) or fixed installment payments.
For buyers, deferred payments reduce the amount of cash required at closing. For sellers, they may support a higher overall purchase price while providing an ongoing stream of income. Seller financing can also be an attractive solution when acquisition financing is expensive or difficult to obtain.
Equity Rollovers
Another increasingly popular approach is the equity rollover. Rather than receiving the entire purchase price in cash, the seller contributes a portion of its ownership interest into the acquiring entity. The seller then participates in the future appreciation of the combined business.
Private equity transactions frequently include rollover equity because it aligns the interests of management and investors while reducing the buyer’s upfront cash investment. For sellers who believe significant growth remains ahead, a rollover investment may provide the opportunity for a second and potentially more lucrative liquidity event.
Working Capital Adjustments
Most acquisition agreements include a post-closing true-up that compares the target company’s actual working capital at closing against an agreed-upon target. Although these adjustments often have only a modest impact on the overall economics of a transaction, they play an important role in ensuring that the buyer receives the business with an appropriate level of operating liquidity.
In some transactions, however, the adjustment can be substantial. Sellers who deliver working capital in excess of the target may receive additional purchase price, while buyers are protected when the seller’s working capital falls short of expectations. These provisions are particularly significant in inventory-intensive businesses, where inventory valuation can materially affect working capital.
A recent KJK transaction illustrates the point. We recently represented a buyer in an acquisition where, despite months of financial due diligence, the post-closing working capital review revealed that the seller had overstated its inventory by nearly $1 million. Pursuant to the purchase agreement’s working capital adjustment mechanism, the buyer received a significant downward adjustment to the purchase price. The transaction serves as a reminder that a carefully negotiated post-closing adjustment is more than a routine accounting exercise; it can provide meaningful protection when pre-closing financial information proves to be inaccurate.
Escrows and Holdbacks
In other transactions, the issue is not future performance but uncertainty regarding potential liabilities. Escrow arrangements allow a portion of the purchase price to be retained for a specified period to secure the seller’s indemnification obligations. If no covered claims arise, the escrowed funds are released to the seller.
Similarly, purchase price holdbacks permit the buyer to retain a negotiated portion of the consideration until certain conditions have been satisfied. These mechanisms often provide buyers with additional protection while allowing sellers to preserve the overall economics of the negotiated purchase price.
Creative Deal Structures Often Make the Difference
Successful M&A negotiations require far more than agreeing on a single purchase price, and most completed transactions are rarely those in which one party simply convinces the other to accept its valuation. The timing and form of consideration, allocation of risk, financing arrangements, tax implications, post-closing participation, and contingent payment mechanisms all influence the ultimate economics of a transaction.
No two transactions are alike. Every buyer and seller enters negotiations with different objectives, risk tolerances, financing constraints, and expectations regarding future performance. Fortunately, today’s M&A toolkit offers a wide range of structuring alternatives that can address those competing interests. When used thoughtfully, these tools allow parties to overcome valuation differences, allocate risk in a commercially reasonable manner, and reach agreements that might otherwise never come to fruition. In many cases, the difference between a failed negotiation and a successful closing is not the headline purchase price, but the creativity with which the transaction is structured
Questions about structuring your next transaction? Contact Alex Jones, Chair of KJK’s Corporate & Securities practice group, at AEJ@kjk.com or 216.736.7241.