The bigger offer is often the smaller one

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Sellers anchor on the number at the top of the offer, and experienced buyers know it. What reaches your account depends on everything underneath: what is paid at completion, what is deferred, what depends on performance you’ll no longer control, what sits in escrow, and what can still be clawed back.

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Two offers arrive in the same week. Buyer A offers $20 million. Buyer B offers $18.5 million. Most owners have made up their minds before they’ve finished reading the second one.

Now take them apart. Buyer A pays $13 million at completion, the day ownership and money change hands. Another $3 million is deferred over two years, $2 million depends on the business hitting targets after the sale, and $2 million sits in escrow, held back in case of claims. Buyer B pays $17.5 million at completion and $1 million after 12 months, subject only to limited conditions.

On the day, Buyer B puts $4.5 million more into your account. Buyer A’s extra $1.5 million exists only if everything after completion goes to plan.

Price isn’t the deal

The easiest way to misread an offer is to read the first number and stop. A sale has many moving parts: cash at completion, deferred payments, earn-outs, escrow, holdbacks, adjustments for working capital and debt, warranties and indemnities, conditions that must be met before completion, restraints on what you can do afterwards, your obligations during the handover, and tax. Each can change what you receive, when you receive it, and what you stay exposed to after the sale.

That’s why “they offered $25 million” tells you very little. What you need to know is how much is guaranteed, how much is cash, how much depends on future performance, how much can be clawed back, how much sits in escrow, what debt comes off, what has to happen before completion, and what you have to keep doing afterwards. The transaction is the whole package.

Cash on the day

Cash paid at completion is generally the cleanest money in a sale. It’s received. It doesn’t depend on next year’s performance, or on decisions made by somebody else, and it isn’t sitting in escrow or exposed to the buyer’s future finances.

There are legitimate reasons for a deal to pay some of the price later, and not every deal should be all cash. Understand what you’re agreeing to, though. A buyer asking you to take less at completion is asking you to carry risk after you’ve handed over ownership, and that risk needs to be understood and priced.

Money later is money at risk

Deferred consideration is a fixed amount paid at a later date. The amount may be certain. The payment isn’t. If $3 million is due in two years, find out who owes it: the company you’re selling to, its parent, or a company set up just for the deal. Find out whether it’s secured or guaranteed, and whether it earns interest. Then ask what happens if the buyer sells the business, becomes insolvent, or claims you breached a warranty and deducts the claim from what it owes you. You’re effectively lending the buyer money. Treat it as seriously as you would if they asked you for a $3 million loan.

An earn-out is less certain again. It pays part of the price only if the business hits agreed targets after completion, and it often appears when the two sides disagree about the future. You say the business is worth $25 million because growth is coming. The buyer says $20 million on current performance. The answer offered is $20 million now and $5 million more if the growth arrives. Conceptually elegant. Practically difficult, because after completion the buyer controls pricing, hiring, spending, strategy, and how head-office costs get charged to the business, and your money depends on the result. If you accept one, the definitions decide what you’re paid: which measure, when it’s measured, how costs are allocated, what happens if the buyer changes strategy or you leave, and how disputes get resolved. Whatever the definitions say, don’t bank it in your head as cash.

What can still come back

Buyers protect themselves against problems that only surface after completion, and some of that protection comes out of your proceeds. Warranties are promises you make about the business: that the accounts are accurate, that the contracts say what you’ve said they say, that there are no disputes you haven’t disclosed. Indemnities are promises to cover specific losses if they arise. Escrow is money held by a third party, and a holdback is money the buyer keeps, until the period for making claims has passed.

The details decide how much you keep: how much is held and for how long, what claims can be made, the thresholds and caps on them, what’s excluded, and what has to happen for the money to be released. A seller can be so focused on price that they barely notice the liability sitting behind the warranties. The sale proceeds may be in your account. Your exposure may continue.

This is one more place where preparation pays. The cleaner and better understood the business is before the sale, the easier it is to negotiate sensible limits.

From the headline to your bank account

Most offers are made on a “cash-free, debt-free” basis. The buyer prices the business as though it had no loans and no spare cash in the bank, which lets them compare it fairly with other businesses. That price is called the enterprise value, and it’s usually the number at the top of the offer. What you’re actually paid is worked out from it.

Imagine agreeing to sell your company for $15 million and mentally spending $15 million. At completion, the business still owes the bank $2 million. The buyer is taking that debt on, so it comes off the price. There’s also $1 million in the bank beyond what the business needs to trade, and that’s yours, so it’s added back. You’re now at $14 million, and working capital hasn’t been touched yet.

Working capital is the money tied up in running the business day to day: the stock on your shelves and the invoices customers haven’t paid yet, less the bills you haven’t paid your suppliers. A buyer expects to receive the business with a normal amount of it, enough to keep trading on the first morning without putting in more of their own money. That’s why the deal sets a target. Hand over less than the target, and the difference comes off the price.

Now suppose the target turns out to require $1.2 million more working capital than you expected. That comes off too. You’ll receive $12.8 million for a business you sold for $15 million, and that’s before tax and your advisers’ fees. The headline valuation hasn’t changed. Your economics have.

Most of the argument is over what “normal” means. In a seasonal business, stock and unpaid invoices swing through the year, so the months chosen as typical can move the target a long way. In a growing business, last year’s normal is too low for this year. That’s how definitions that look like accounting detail, such as what counts as debt, what counts as cash, and which months set the target, end up moving real money.

Agree these principles early, before everyone is exhausted, and ask your accountant to walk you through both steps for your own business: from the headline price to the value of your shares, and from there to the cash you’ll actually receive.

Certainty is a term

A buyer can offer an excellent price and still offer very little certainty that the deal will happen. Between agreeing the deal and completing it, there’s usually a list of things that must happen first, known as conditions precedent. The buyer may still need its bank to approve the loan that pays you. Its board may need to sign off. A foreign buyer may need government approval. Your landlord may have to agree to transfer the lease, or a major customer may have to agree to keep buying from the new owner. Each item on that list is a way for the deal to fall over, and none of them is in your control.

Waiting costs you as well. Once you’ve accepted an offer, you’ve usually agreed to exclusivity, which means you can’t talk to other buyers while this one finishes its checks. Every week it drags on, the other buyers move on to other businesses, your staff sense something is happening, and you’re still carrying the risk of a bad month showing up in the numbers before completion.

Picture two offers again. One is $500,000 higher, but it depends on the buyer raising finance it hasn’t secured yet. The other is lower, and the buyer already has the money and no conditions beyond the usual ones. The lower offer may well be the better one. Certainty is a deal term. Price it.

When the legal documents get hard to follow, it helps to know that every significant term answers one or more of three plain questions: who benefits if things go better than expected, who pays if they go worse, and when the money actually reaches you. An earn-out means you only receive that part of the price if the business does well after you’ve handed it over, so you’re carrying a risk you no longer control. Escrow means part of your money sits with someone else in case the buyer makes a claim, so the downside is on you. A deferred payment means you wait, and you carry the risk that the buyer can’t pay when it falls due. If you can’t answer the three questions for a clause, ask your lawyer to explain it until you can.

If you’re raising money rather than selling, read a term sheet the same way. The valuation at the top is the headline, and the terms underneath decide what it’s worth.

If you are the buyer here: a well-advised seller will compare your offer with others line by line. Lead with what you’ll pay on the day, and be ready to explain every dollar that isn’t.

What to do this week

Take any offer you’ve had, or sketch a realistic one for your business, and rewrite it as four lines: what arrives at completion, what arrives later and from whom, what depends on performance after completion, and what could be held back or clawed back.

Then put a date and a rough probability next to each line. The total that comes out is much closer to what you’d actually be selling for than the number at the top.

If you haven’t had an offer yet, and most owners haven’t, the sketch is even more useful. Every dollar you’d expect a buyer to move out of “at completion” is there for a reason: a customer they’d worry about, a contract that might not transfer, growth you can’t prove yet, a warranty you couldn’t comfortably give. Each of those reasons is something you can start fixing now. The more of them you close before a buyer arrives, the less of your price ends up deferred, held back, or dependent on targets.

How to take an offer apart, from cash at completion to the three questions every term answers, is in Mastering the Art of Negotiation and Sales Processes. Why working capital can move your price, and how to understand the cash behind your profit, is in Financial and Legal Essentials for Selling Your Business. Both are free to download from the Download Vault: manolutions.com/downloads.