This article is valuation commentary. It is not legal, tax, accounting, or investment advice. Specific engagements depend on facts and applicable professional standards.
A headline offer is not cash at close
The “price” in an LOI is usually an operating-business value, not guaranteed cash to the seller on day one. Debt payoff, cash-free debt-free assumptions, normalized working capital, escrows, seller-financed notes, earnouts, rollover equity, tax allocation, and real estate treatment can all change the answer materially. Two offers with the same nominal headline can produce very different actual seller proceeds.
Current market data confirms the pattern. SRS Acquiom reports working-capital purchase price adjustments appear in more than 90% of recent private-target M&A deals; in the lower middle market specifically, 92% of deals include a purchase price adjustment and nearly half include a separate PPA escrow. SRS also finds that earnouts in non-life-science deals pay roughly 21 cents on the dollar across all deals with earnouts. Even where some earnout is achieved, only about half of maximum earnout dollars are paid. Those figures come from actual deal data, not hypothetical risk.
Seven economics that can change the real value of the offer
1. Enterprise value vs equity value
The first item to pin down is whether the offer quotes enterprise value or what you actually receive for equity. In a typical private-deal structure, the target is acquired on a debt-free, cash-free basis, and equity value equals enterprise value less net debt, with working capital then measured against a target peg. Enterprise value is usually derived from the buyer’s view of sustainable earnings, often an EBITDA multiple. The headline multiple is a value for operations before final balance-sheet adjustments, not a promise of seller proceeds.
2. Net debt and debt-like items
Some sellers hear “debt” and think only of bank loans. Buyers think more broadly. Deal documents usually ask the seller to deliver the business cash-free and debt-free, with seller transaction expenses handled out of proceeds. In practice, the definitions of debt, cash, minimum operating cash, and seller-paid expenses materially affect the check at closing. Items that get classified as debt-like include unfunded pension liabilities, deferred compensation, accrued bonuses, capitalized leases, contingent liabilities, and earn-outs from prior acquisitions.
3. The working capital peg
Working capital in this context means a normalized level of working capital the buyer expects to receive with the business, not an accounting footnote. The peg is set during negotiation; the actual delivered working capital at closing gets compared against it. Above the peg, the seller receives the excess. Below the peg, the buyer receives a price reduction. SRS reports the average buyer-favorable adjustment amount is roughly 0.9% of transaction value. On a $20M deal, that is $180,000, small as a percentage and real money in absolute terms.
4. Escrows, holdbacks, indemnity, and survival periods
These reduce what you control immediately after closing even if the nominal price is unchanged. SRS reports that virtually all lower-middle-market deals have at least one escrow or holdback; more than half of smaller deals have two or more escrows. Two offers with the same price can feel very different once one requires a larger holdback, longer survival period, or more seller exposure to indemnification claims.
5. Deferred consideration: seller notes and earnouts
6. Rollover equity
Financial buyers often present rollover as alignment and upside. It can be both. It also means part of your consideration is now an investment in a different security, issued by a different entity, with different governance and liquidity terms. Rollovers are common with financial buyers, often in the 10–40% range. The post-closing issuer needs separate diligence: valuation, governance, exit mechanics, whether your equity is pari passu or subordinated economically, and what tax treatment applies. Some practitioners call rollover equity “the deal within the deal” for a reason.
7. Tax allocation and contingent liabilities
In an asset acquisition, the same nominal price can produce different after-tax outcomes depending on how the price is allocated among inventory, fixed assets, goodwill, and other intangibles. The IRS requires both buyer and seller to use Form 8594 when a group of assets making up a trade or business is sold and goodwill or going-concern value attaches. The allocation affects ordinary income, capital gains, and depreciation recapture differently for each side. Contingent liabilities (litigation, threatened claims, customer disputes, change-of-control provisions in contracts) frequently surface during diligence as price chips, escrows, or post-closing exposure.
A hypothetical that illustrates why structure matters
Suppose an owner receives a “$12 million offer.” If that number is enterprise value and the deal also assumes:
- $1.5 million of debt payoff
- $500,000 negative working-capital true-up
- $750,000 indemnity escrow held for 18 months
- $1 million rollover equity in the buyer’s holding company
- $1 million earnout tied to two-year performance milestones
Then the owner is looking at a structured package whose risk-adjusted value may be materially lower than $12 million of cash at close. Cash at close after the debt payoff and working capital adjustment is closer to $7.25M. The escrow eventually returns (probably) but takes time. The rollover may be worth more, less, or the same in the future. The earnout is worth what its milestones are likely to pay, not its face. Suppose the parties, after working through the forecast and the buyer’s post-closing plans, put a 25% chance on the full $1M paying, a 35% chance on half, and a 40% chance on nothing. The expected payout is $425,000 before discounting, and discounting two years at a rate that reflects the buyer’s credit and its control over the milestones brings it lower still. Those probabilities are illustrative. The point is that the analysis starts from this deal’s terms and forecast, with the historical payout statistics as context for how often earnouts disappoint. That is valuation common sense rather than a legal conclusion.
Why non-cash consideration needs separate valuation judgment
Each non-cash component of the offer requires its own valuation analysis. Generic “face value” thinking produces consistently optimistic seller expectations.
- Real estate treatment. If the business owns its operating real estate, the deal can include the property in the price, exclude it so the seller keeps the building and leases it to the buyer, or pair the business sale with a sale-leaseback of the property to an investor, which makes the business a tenant. Each produces different seller proceeds. When the seller keeps the property and becomes the landlord, the rent stream is part of the consideration and carries its own credit and discount-rate questions; below-market rent shifts value to the business buyer, and above-market rent shifts it back. In a sale-leaseback, the rent is a cost the business carries after closing, and buyers price the business accordingly.
- Seller notes. A 5-year seller note at 6% interest is not the same as $X of cash. The discount rate that reflects the buyer’s actual credit risk is usually well above 6%, and the note’s present value is correspondingly less than face. Seller notes also typically carry subordination risk to senior bank debt.
- Earnouts. Modeled scenario by scenario from the milestone definitions and the forecast: what has to happen for each tier to pay, how likely that is, and when the cash arrives, then discounted for time, the buyer’s credit, and the buyer’s post-closing control over the operations that drive the milestones. The historical payout statistics are context for the risk, not the weighting.
- Rollover equity. The buyer’s assumed exit value, the rollover’s position in the buyer’s capital stack, the timeline to liquidity, and the seller’s minority-interest discount all affect the actual present value.
What to ask before signing the LOI
- Is this enterprise value or equity value? If enterprise value, what’s the assumed debt? What’s the working capital target?
- What gets defined as debt or debt-like? Is there a list, or just a general definition?
- What’s the working capital peg? How was it calculated? What’s the look-back period?
- What’s the escrow size and survival period? Is there a separate working capital escrow? An indemnity escrow?
- Is there a seller note? What’s the rate, term, and security?
- Is there an earnout? What are the metrics? Who controls operations during the earnout period?
- Is rollover equity required? What percentage? In what entity? What governance comes with it?
- What’s the asset purchase agreement vs stock purchase agreement? What are the tax allocation implications?
- Real estate? Included, excluded, leaseback?
- R&W insurance? Buyer or seller pays the premium? What’s the deductible?
When to call before you sign
The right time to bring in a valuation professional is during LOI review, not after the LOI is signed. The LOI usually establishes the structure that the definitive agreements then refine. Once the structure is set, the seller’s leverage to renegotiate working capital pegs, escrow sizes, earnout structures, or rollover terms drops significantly. Owners who model the actual economics of the offer before signing tend to negotiate from a stronger position than those who learn the structure’s implications during diligence.