How Buyers Structure
an Offer

Why Deal Structure Matters as Much as Price

This article is for owners who have received an offer or are preparing to enter a sale process, and who want to understand what a buyer's proposed terms really mean. If you want the mechanics of running the process itself, our Lower Middle Market M&A Process article covers that in detail. Here, we focus on the terms inside the offer.

In lower-middle-market transactions, buyers may use deferred or contingent consideration to address financing constraints and disagreements about valuation. PwC's global deals research points to higher interest rates, persistent valuation gaps between buyers and sellers, and a large backlog of private equity-owned companies still waiting to exit as constraints on mid-market dealmakers. In our experience, those conditions push mid-market buyers toward creative structure rather than higher cash prices. PwC's figures provide broad market context, but they do not establish the prevalence of specific terms in lower-middle-market transactions because the research is global and includes larger deals.

When cash is expensive and buyers and sellers disagree on price, structure becomes the tool that closes the gap. Understanding these six structures helps you compare the cash, conditions, and post-closing exposure in each offer.

Cash at Closing

Cash at closing is the amount a buyer wires to you the day the deal closes. It is the cleanest form of payment and the baseline every other structure is measured against. When a buyer defers part of the price, ties it to future performance, or asks you to keep a stake, they are moving money out of this bucket and into something less certain.

An offer described as all cash may still include an escrow, holdback, or post-closing adjustment. Those provisions can reduce the amount wired at closing even when the purchase consideration is otherwise payable in cash. A buyer might hold back a portion for a set period to cover any problems that surface after closing, or set aside funds in escrow against representations you made about the business. The stated purchase price may therefore differ from the amount wired to you at closing.

It also helps to separate cash at closing from enterprise value. Enterprise value is what a buyer assigns to the business as a whole, before debt, cash on the balance sheet, and working capital adjustments are settled. Cash at closing is what lands after those items are netted out. Two owners can agree to the same enterprise value and walk away with very different amounts of cash, depending on how much debt gets paid off and how the other terms are structured. Our EBITDA and business valuation basics article walks through how enterprise value is built if you want the underlying math.

Cash paid at closing does not depend on the company's future performance or a later buyer payment, although escrows, indemnity claims, and post-closing adjustments can still affect your final proceeds. The other five structures trade some of that certainty for other benefits, and each one deserves scrutiny on its own terms.

Earnout Agreements

An earnout ties part of the purchase price to how the business performs after closing. Instead of paying the full amount at closing, the buyer pays a base price now and promises additional payments if the company hits agreed targets over a set period. Owners often accept an earnout to close a gap between what they believe the business is worth and what the buyer will pay upfront.

Earnouts can create post-closing conflict because the buyer controls the company while its decisions may affect whether the agreed targets are met. Once the buyer owns the business, it can change pricing, cost structure, or accounting policies, and any of those changes affects whether your targets get met. Delaware Vice Chancellor J. Travis Laster put it plainly, noting that an earnout “often converts today's disagreement over price into tomorrow's litigation over the outcome,” as cited in an A&O Shearman analysis published by the Harvard Law School Forum on Corporate Governance.

The metric you agree to measure against deserves close attention. Revenue targets reduce the influence of post-closing cost allocations, while EBITDA and net-income targets account for profitability but introduce more choices about expenses and accounting treatment. Whatever metric the parties select, the agreement should define how it will be calculated after closing.

Ambiguous milestones can create disputes even when the parties agree on the underlying metric. In one case cited by the same source, undefined terms like “Company Products” led to a multimillion-dollar judgment for the seller after the buyer folded acquired technology into its own existing products. Before you sign, push for milestones defined in specific, objective language, with worked examples of what counts and what does not. You should also negotiate reporting and verification rights so you can see the numbers behind the payment calculation.

For calibration, the median earnout outside life sciences ran about 24 months and represented roughly 31% of closing payments in 2024, according to the SRS Acquiom 2025 M&A Deal Terms Study, cited in the Harvard Law School Forum. Those figures describe the study's 2024 sample and should not be treated as required terms for a particular deal. A larger or longer earnout leaves more of your proceeds contingent on performance under the new owner. Reducing the contingent amount or shortening the measurement period limits that exposure, although the appropriate terms must reflect the valuation gap being negotiated.

Rollover Equity

With rollover equity, you take part of your sale proceeds as an ownership stake in the post-sale company instead of cash at closing. In a typical private equity transaction, the buyer may place its investment and your rolled-over stake in a new holding company. In middle-market deals, rollover often falls in the 10% to 30% range, though the exact figure depends on the deal.

Buyers ask for rollover for two practical reasons. Rollover equity keeps part of your proceeds invested in the company and reduces the buyer's cash requirement at closing. A buyer may also view your continued investment as evidence that your interests remain tied to the company's performance.

Rollover equity gives you the potential to participate in a later sale of the company. Private equity firms typically hold a company three to seven years before selling again, and if the business grows, your minority stake can be worth far more at that second sale. Axial models a $10 million deal with a 25% rollover where the company grows to $25 million in five years. Your rolled stake returns $6.25 million at the second exit, bringing total proceeds to $13.75 million against $10 million taken all in cash.

That simplified calculation does not account for differences between the buyer's equity and the equity issued to you. The buyer typically holds preferred equity that gets paid first, often with a liquidation preference and an annual preferred return stacked on top. Using the same $25 million exit, Axial shows how a 1x preference plus an 8% preferred return cuts the seller's common-equity return to roughly $3.6 million instead of $6.25 million. The business performed identically, but the capital structure changed who got paid.

Evaluate the rollover percentage together with the equity class, liquidation preferences, distribution waterfall, and other rights attached to your stake. A 25% stake in junior common equity behind a large preferred stack can pay far less than the headline number suggests. Rollover equity is also illiquid until the buyer sells again, on a timeline that is rarely written into the contract, and as a minority holder you lose your say over strategy, hiring, and capital decisions.

Ask what class of equity you are getting, what sits ahead of it, and how proceeds are split before you weigh the upside. Our comparison of a strategic buyer versus a private equity buyer covers who typically asks for rollover and why.

Seller Notes

A seller note is a portion of the purchase price that the buyer owes you as debt, usually with interest and a defined repayment schedule. Instead of receiving that portion in cash at closing, you carry it as a loan and collect principal and interest across the life of the note. Buyers rely on this structure to bridge the gap when their senior or SBA financing stops short of the full purchase price, and a note signals to their lender that you believe in the business going forward.

Seller notes can appear in smaller transactions when the buyer's available cash and third-party financing do not cover the negotiated purchase price. They may also accompany SBA-backed financing, but the note's size and repayment restrictions vary by transaction and lender.

The risk owners most often underweight is subordination. Your note typically sits behind the buyer's senior lender, whether that is a bank or an SBA loan, and the senior lender gets paid first. A note can be current under its own terms yet remain unpayable because the senior lender has blocked payment, meaning no principal or interest reaches you. In some SBA-backed transactions, the lender may require a seller note to remain on standby, particularly when the note supports the buyer's required equity contribution. The standby agreement determines whether principal or interest may be paid during that period. Standby terms vary by deal, so confirm the exact length and conditions before you agree to carry the note.

One industry guide reports that seller-note interest rates commonly range from 6% to 8% and repayment periods often run three to seven years. Use those figures as a reference point rather than a market standard, and evaluate the proposed note against the buyer's capital structure, projected debt service, collateral, and repayment priority.

Before you agree to carry a note, negotiate the protections that make default less likely and recovery more realistic. Owners commonly ask for a personal guarantee, a UCC lien on business assets, an acceleration clause on resale, and rights to periodic financial statements.

Working Capital Adjustments

For transaction purposes, working capital generally consists of specified current operating assets, such as receivables and inventory, minus specified current operating liabilities, such as accounts payable. The purchase agreement defines which accounts are included and often excludes cash, debt, and other nonoperating items. A buyer generally prices the company on the assumption that an agreed level of working capital will remain in the business at closing so operations can continue. Most deals set a working capital peg, which is a target amount agreed in the letter of intent or purchase agreement.

Your final proceeds get adjusted against that peg. If the business closes with working capital below the peg, the purchase price drops by the shortfall. If it closes above the peg, you get paid the difference. Buyers and sellers rarely calculate the exact number at closing, so they use an estimate and then run a true-up in the weeks after. The true-up compares actual closing working capital to the peg and moves cash accordingly.

Working capital true-ups can produce post-closing disputes when the parties interpret the peg, included accounts, or accounting methods differently. The peg depends on how you define a normal level of working capital, which accounting methods apply, and which accounts count. Two reasonable parties can read the same balance sheet and reach different numbers. A peg set too high quietly hands the buyer a price reduction after you have already signed the deal.

Do not accept a buyer's first proposed peg at face value. A buyer may propose a peg based on historical working capital. Review the measurement period, seasonality, accounting methods, and included accounts because each can materially change the result. We help owners review the proposed peg and true-up language before it is locked into the agreement, so the mechanic reflects how the business actually runs rather than a calculation that favors one side. Our guide to the working capital peg explains the calculation and the terms that can change the final adjustment.

Staged and Multi-Step Deals

In a staged deal, the buyer purchases a controlling stake now and defers buying the rest for a set period. A common version is the majority recapitalization with a deferred buyout. The buyer might take 60% at closing while you keep the remaining 40%, with that second purchase happening in two to five years through a put and call option agreement.

The put and call mechanic decides who controls the timing of that second sale. A call option lets the buyer force you to sell your remaining shares, and the buyer controls that option for most of the window. A put option lets you force the buyer to purchase your shares if the buyer never calls, though it usually opens only near the end of the buyer's window and for a short period. If neither side acts, the agreement lapses and you keep your minority stake.

A buyer may propose this structure to acquire control while deferring part of the investment until the company's later performance can be measured. The initial purchase gives the buyer control without requiring it to acquire all remaining shares at closing. Your retained stake leaves part of your proceeds exposed to the company's performance and the second-stage pricing formula.

The agreement may price the second tranche using future EBITDA instead of a fixed amount. In that case, the EBITDA definition, valuation multiple, measurement date, and permitted adjustments determine the later payment. If the buyer paid 10 times EBITDA for the first 60%, the remaining 40% might be priced at 10 times an updated EBITDA calculated at the exercise date. Your proceeds on the second stage depend on how the business performs under a new majority owner, which is why sellers negotiate protections against buyer actions that could suppress the price and expert determination for pricing disputes.

Because you no longer control the business during the interim period, review who runs it, how EBITDA is measured, and what happens if performance falls short before you accept a staged offer.

How the Six Structures Compare

The six structures differ mainly in payment timing, payment conditions, and the exposure you retain after closing. The table below lays those tradeoffs out side by side, and full detail on each one sits in the sections above.

Most real offers combine several of these at once, so read the table as building blocks rather than mutually exclusive choices.

Getting Structure and Price Both on the Table

Structure is negotiable, and the amount of leverage you hold depends heavily on how many buyers are at the table. Negotiating with only one buyer gives you less market evidence and fewer alternatives if the proposed terms are unattractive. Multiple offers let you compare price and structure at the same time. Competing alternatives may give you more room to seek additional cash at closing, a shorter earnout, or stronger seller-note terms.

An unsolicited offer can be worth exploring, but one buyer's offer does not necessarily represent the full market terms available for your company. The same is true of structure. A buyer who proposes a 30% rollover or a two-year earnout is proposing a starting point, not a fixed reality. Comparing alternatives can reveal whether another buyer would offer more cash at closing, less contingent consideration, or stronger protections. Our Lower Middle Market M&A Process article walks through how a competitive process creates that room to negotiate.

Evaluate an offer by separating enterprise value from expected closing proceeds and by pricing each deferred, contingent, or retained component. If you have multiple offers, compare those components on the same basis. That comparison takes judgment about fair market terms, not just a valuation figure. Terms used throughout this article, including earnout, rollover, and true-up, are defined in our M&A glossary for the lower middle market.

If you have received an offer or are considering a sale process, Salt Creek Advisory can help you compare the proposed structure with available market evidence and assess which terms merit further negotiation. Contact Salt Creek Advisory if you would like to discuss the offer and your options.