When an offer arrives, the price is the first thing you look at. That’s natural. But the terms around that number decide how much you actually receive, and when. Two offers with the same headline price can leave you in very different places.
Start with the cash at closing
The most certain part of any price is the cash you receive on closing day. It’s usually funded by the buyer’s own money and a bank loan. Anything paid later carries risk, because by then you no longer control the business that has to generate it.
So a higher headline price with less cash up front isn’t automatically better. Here’s a simplified, hypothetical comparison:
| Term | Offer A | Offer B |
|---|---|---|
| Headline price | $5,000,000 | $4,500,000 |
| Cash at closing | $3,000,000 | $4,000,000 |
| Seller financing, repaid over time | $1,000,000 | $500,000 |
| Earnout, paid only if targets are met | $1,000,000 | $0 |
| Bank financing still to be approved | Yes | No |
Offer A looks bigger. But $2,000,000 of it depends on targets being hit and on the buyer making payments after you’ve handed over the keys, and the deal can still fall through if the bank says no. Offer B pays $1,000,000 more on closing day, from a buyer whose financing is in place. Many owners would lean toward B, but the right answer depends on the buyer, the targets and how much risk you’re comfortable carrying.
If an offer has arrived without you looking for one, our article on what to do when a buyer approaches you is a good companion to this one.
Earnouts: price that depends on the future
An earnout is part of the price that’s paid only if the business hits agreed targets after closing, such as a revenue or earnings level over one or two years. It can settle a real disagreement: you believe growth will continue, and the buyer wants proof before paying for it.
Earnouts are also a frequent source of disputes. If you’re offered one, look closely at:
- exactly how the target is defined and calculated, including the accounting rules used;
- how the buyer can run the business afterward, and whether they can make changes that hurt the numbers;
- your right to see the figures and challenge the calculation;
- what happens if the business is sold or merged before the earnout ends.
Seller financing
A vendor take-back (VTB) is a loan from you to the buyer for part of the price, repaid over time with interest. Unlike an earnout, it doesn’t depend on hitting targets. But repayment still depends on the business, and it usually ranks behind the bank. The interest rate, repayment schedule, security and subordination terms all affect what it’s really worth to you. We cover this in more detail in how a vendor take-back works.
Working capital and holdbacks
Most deals assume you’ll hand over the business with a normal level of working capital: receivables and inventory, less what you owe suppliers. The purchase agreement sets a target, and the price moves up or down after closing if the real figure is different.
Set too high, that target quietly lowers your price. Set without allowing for seasonal swings, it can produce a surprise depending on the month you close. Agreeing the method early, using your past monthly balances, heads off most arguments.
Buyers also protect themselves against problems they didn’t know about through promises in the purchase agreement, called representations and warranties, backed by indemnities. Part of the price may be held back or kept in escrow for a period to cover claims. The size of that holdback, how long it lasts and the limits on what can be claimed are all negotiable.
Shares or assets, and your role after closing
Whether the buyer purchases your company’s shares or only its assets affects your taxes, which contracts and permits transfer, and which liabilities go with the business. Sellers often prefer a share sale and buyers often prefer an asset purchase. A share sale of a qualifying small business corporation may qualify for the Lifetime Capital Gains Exemption, but the eligibility rules are detailed. Get advice from your own accountant, tax advisor and lawyer before you weigh this in an offer.
Most buyers will also want you to help with a handover. Check how long they expect you to stay, how much of your time it takes, what you’ll be paid and any non-compete or non-solicit terms. A long, unpaid transition is a real cost.
How to compare offers side by side
Because these terms affect each other, it helps to lay every offer out the same way. For each one, write down:
- the cash you receive at closing;
- amounts paid later, and what each one depends on;
- money held back, and for how long;
- what you’re committing to after closing;
- conditions that could stop the deal from closing, such as financing.
The letter of intent shows the price. What counts is what you keep, and how sure you are of getting it.
Where possible, Kingston tries to have more than one interested buyer at the same time, so you’re comparing real alternatives rather than one offer against a hope. You can see where offers fit in our sale process. Whatever your situation, keep in mind that a slightly lower price from a well-financed buyer with clean terms is often the stronger offer.
General information for business owners and buyers, not financial, legal, tax or accounting advice. Any examples are hypothetical.
