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You Can Name the Price if I can Name the Terms
By Don Beezley © 2025
We discussed previously what drives the value of a business. It’s essentially the buyer’s perception of the risk inherent in the business, and the return on investment they require for taking that risk.
In any sale “deal structure” is an important variable that can affect the total value or price a buyer will place on a business. There’s a saying, You Can Name the Price If I can Name the Terms. It’s a bit tongue in cheek, but not entirely. To use an extreme example to demonstrate the point, if you want $5 million for your business but a buyer thinks it’s only worth $3 million, but you offer the following terms instead of cash at close: $5 million purchase price with $1 down, $4,999,999 financed by you as a “seller carry” note at 1% for 25 years, and if the business falls below its current level of profit during those 25 years the price drops by $1 million, they might take it and “pay” you the $5 million price you want on those terms. It’s obviously an outlandish example, but the principle is true in that there is a relationship between a given price and acceptable terms or deal structure.
“Deal structure” is related to the way you receive payment for your business, and how buyers try to manage risk. Sellers assume if they sell their business for a $3,000,000 valuation, they get a check for $3,000,000. Sometimes that’s true.
Basic Deal Structure
The basics of a typical structure for 100% of the business paid at closing at a $3,000,000 sales price might be:
Source of Funds | Allocation | % of Purchase Price |
Buyer Equity (cash) | $ 500,000 | 16.6% |
SBA Loan | $2,500,000 | 83.4% |
Total Purchase Price | $3,000,000 | 100.0% paid at closing |
A variation of this basic scenario might be when the bank requires a seller to “carry back” a loan on the business as a condition of approving the loan:
Source of Funds | Allocation | % of Purchase Price |
Buyer Equity (cash) | $ 300,000 | 10.0% paid at closing |
SBA Loan | $2,500,000 | 83.3% paid at closing |
Seller Carry Note | $ 200,000 | 6.7% paid over time |
Total Purchase Price | $3,000,000 | 100.0% with 93.3% paid at closing |
The seller carry note might occur due to bank policies 1, because the buyer doesn’t have enough equity to inject to qualify for what the bank will finance, or be an element negotiated by a buyer for any number of reasons.
Advanced Deal Structure
Seller carries are the most basic element of a modified deal structure versus all cash at close. And there is an almost endless variety of possibilities and combinations, but here we will highlight “earnouts” and “equity rollovers.”
Earnouts
An earnout can serve several purposes, but each version has the same objective: reduce the buyer’s perception of risk. As we know from the piece What Drives the Value of a Business, lower risk means higher value because it means a lower “discount rate.”
Let’s say this is your company’s EBITDA history:
5 Years Ago | 4 | 3 | 2 | Last Year |
$392,000 | $402,000 | $326,000 | $242,000 | $502,000 |
5 Year Average | $372,800 |
In the above, if one assumes a 4 times multiple of EBITDA for the value, $502,000 X 4 = $2,008,000. However, there’s a problem. A buyer is unlikely to pay you based on your one best year. For their analysis, in a pattern like the above, they are more likely to take a three- or five-year average of EBITDA. 372,800 X 4 = $1,491,000. That’s a difference of over $500,000. The buyer’s position is understandable—the history suggests that the $502,000 is an anomaly that isn’t likely to be repeated.
Let’s assume, however, there are additional details. Perhaps you introduced a new line of business 18 months ago that is doing well, has better margins, and continues to grow across a diverse customer base and you’re projecting $600,000 in EBITDA for the next year. Under this set of circumstances, an earnout may be a solution. For example, the solution could be: a $1.5mm purchase price at closing and three “earnout” or performance payments of $150,000 each for three years for a total of $1,950,000—close to full value on last year’s earnings. In addition, because your advisor was looking out for you, a “super earnout” is negotiated so that if the business outperforms expectations because of the new line of business and hits an average of $600,000 or more for those three years, an additional $150,000 is paid. The result is the transaction is valued at 1.5mm + 150k + 150k +150k + 150k =$2.1mm, with $1.5 million paid at closing. Generally, a buyer is willing to pay for the business they are getting, but they also don’t want to overpay for a temporary phenomenon, and earnouts can help solve that equation.
Rolling Equity
When you “roll some equity,” what you’re doing is taking ownership in the business going forward under the new ownership.
Transaction
Source of Funds |
Allocation | % of Purchase Price |
Rolled Equity |
$ 5,000,000 | 33.0%–ownership retained by the seller |
3rd Party Lender | $ 6,000,000 | 40.0%–bank loan, paid to seller at closing |
Seller Equity | $ 4,000,000 | 26.7%–Seller cash, paid to seller at closing |
Total Purchase Price | $15,000,000 | 100% |
In the situation above, the seller has elected to retain some interest in the business. That interest could be in the existing entity, a holding company of the buyer, a new entity the buyer creates for the transaction, or in some other way. This approach is no different financially at Closing than if they had paid the seller with $4 million in Amazon stock (obviously the Amazon stock is more liquid). [Note: There can be differential tax and legal implications for varying structures. Always involve your attorney and CPA]
There are many reasons why a seller might want to roll some equity:
The Rest of the Story
There are many combinations that are possible. A single deal could include buyer cash, a bank loan or loans, a seller note or notes, an earnout, and some rolled equity. Some seller notes might be split in two. For example, if the SBA lender requires 20% equity from the buyer and they can only come up with 15%, the other 5% might be structured as a seller note with very restrictive terms.
The example below assumes a total of $500,000 in seller carry notes was negotiated at a $5 million purchase price, with half the seller note on hold or “stand by” for two years (no payments).
Buyer Cash | $750,000 | 15.0% | |
Seller Note A | $250,000 | 5.0% | Full Standby–no payments for two years |
Seller Note B | $250,000 | 5.0% | Payments begin monthly after closing |
Bank Loan | $3,750,000 | 75.0% | |
Total | $5,000,000 | 100.0% |
In general, Seller’s should be open minded in their decision-making about creative structures that help achieve a mutually satisfactory deal, while remaining aware of the risks those structures may represent. Always consult your tax advisor and attorney as well!
[1] It’s not true, as many believe, that a seller carry is automatically an SBA requirement—it’s at the bank’s discretion. It comes into play as a requirement when the buyer lacks enough cash to inject as a down payment. A seller note on special terms can be used to make up that difference.
Don Beezley is President of Proforma Partners, LLC and a Business Certified Appraiser (BCA) with over three decades of M&A, banking, and business operations experience.
4450 Arapahoe Avenue, Suite 100 | Boulder CO 80303