It is not unusual for the offer with the highest headline price to deliver less to the seller than a lower one. The difference lies in how and when the money is paid, how certain it is, and what the seller has to do to receive it.
The building blocks of consideration
- Cash at completion. Paid on the day the deal completes. The most certain element of any offer.
- Deferred consideration. Fixed amounts paid later, often in instalments over one to three years. Certain in amount, but dependent on the buyer’s ability to pay.
- Earn-out. Further payments linked to the business’s future performance, usually profit or revenue targets. Neither the amount nor the timing is guaranteed.
- Rollover or reinvestment. Part of the price taken as shares in the buyer or a new holding company, common with private equity buyers. Potential upside, but no immediate cash.
Two offers compared
Consider two offers for the same business:
| Offer A | Offer B | |
|---|---|---|
| Headline price | £6.0m | £5.0m |
| Cash at completion | £2.5m | £4.25m |
| Deferred consideration | £1.5m over three years, unsecured | £0.75m over twelve months, guaranteed by the buyer’s parent company |
| Earn-out | Up to £2.0m over three years, linked to profit growth | None |
| Guaranteed amount | £4.0m | £5.0m |
Offer A looks £1m better. But only £2.5m arrives at completion, the deferred payments are unsecured, and £2.0m depends on hitting targets for three years, under the buyer’s ownership. If the earn-out pays half of its maximum, Offer A is worth £5.0m, received over three years and with considerably more risk attached. Offer B delivers 85% of its value on day one.
Neither offer is automatically right. An owner who believes strongly in the business’s growth, and wants to stay involved, may prefer Offer A. The point is to compare them on the same basis.
The question is not “which number is bigger?” but “how much will I receive, when, and how certain is it?”
Questions worth asking of every offer
- How much is paid at completion, and how is it funded? Is the buyer’s finance already agreed?
- How are deferred payments secured: a parent company guarantee, a bank guarantee, an escrow account or security over assets?
- For an earn-out: how exactly is the target defined, which accounting policies apply, and what say will you have over costs, pricing and investment during the earn-out period?
- What conditions must be satisfied before completion, and how long an exclusivity period is the buyer asking for?
- What warranties and indemnities will you be asked to give, and what are the limits on your liability?
- What role is expected of you after completion, for how long, and on what terms?
- What does the buyer intend for your employees, your premises and the business’s name?
Certainty has a value
A slightly lower offer from a buyer with a strong track record, committed funding and a sensible approach to due diligence is often worth more than a higher one that is likely to be renegotiated. Price reductions during due diligence, after exclusivity has been granted, are one of the most common causes of disappointment for sellers, and they are far harder to resist once competing bidders have been turned away.
That is why assessing buyers deserves as much attention as negotiating the price.
In short
- Compare offers on cash at completion and guaranteed value, not just the headline.
- Deferred payments are only as good as the buyer’s ability to pay and the security behind them.
- Earn-outs can bridge a gap in expectations, but definitions and control matter enormously.
- Certainty of completion is part of the value of an offer.
Peter Hogan is the founder of Hogan Capital and has spent almost nine years working with owner-managed businesses, predominantly across mergers and acquisitions. More about Peter or connect on LinkedIn.
This article is general information and does not constitute financial, legal or tax advice. Figures are illustrative.