You negotiated a $12M sale price. Butthe deal structure means you'll actually only see $7M. Here's what you need toknow.

‍Let's start with a scenario that plays out more often than it should:

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You've been negotiating with a buyer for three months. After someback-and-forth, you agree on a purchase price: $12 million. You'rethrilled. You shake hands. You call your spouse with the good news.

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Then you sit down with your attorney to review the actual letter ofintent.

Here's what it says:

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• $2 million held in escrow for 18 months (to cover indemnification claims)
• $2.5 million in seller financing (paid over 5 years at 6% interest)
• $2 million earnout (contingent on hitting revenue targets after you're no longer running the business)
• $5.5 million upfront cash at closing

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You do the math. That's $12 million. Perfect, right?

Not quite.

Your CPA walks you through the reality:

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• Escrow: That $2M is locked up for 18 months. If the buyer finds any issues during that time—real or manufactured—they can make claims against it. You might see all of it, some of it, or none of it.
• Seller financing: That $2.5M gets paid over 5  years. If the business struggles under new ownership, or if the buyer  makes bad decisions, you might not see all of it. You're now the bank—but with subordinated debt and no real control.
• Earnout: That $2M is based on revenue  targets. But you're not running the business anymore. The buyer controls  pricing, marketing, operations, and every decision that impacts whether you hit those targets. Studies show most earnouts don't pay out fully.
• Upfront cash: That $5.5M is real money—but because this is structured as an asset sale, you'll pay ordinary income tax rates on a portion of it (not capital gains). After federal and state  taxes, you net maybe $4M.

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So here's what you actually got:

• $4M today (after taxes)
• $2M maybe (escrow—if no claims)
• $2.5M probably (seller note—if the business stays healthy)
• $2M unlikely (earnout—good luck)

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You didn't sell for $12M. You sold for $4M now, with maybe $6-7M moreover the next five years—if everything goes perfectly.

And nothing ever goes perfectly.

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Why Deal Structure Matters More Than Purchase Price

Here's what most business owners don't understand until it's too late:
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The headline number doesn't matter. The terms matter.

A $10M offer with great structure can net you more than a $12M offer withterrible structure.

But most sellers fixate on the purchase price and ignore the fine print.And that's exactly what sophisticated buyers count on.
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Buyers use deal structure to:

• Shift risk from themselves to you
• Reduce their upfront capital requirement
• Hedge their bets in case the business underperforms
• Claw back money post-closing through escrow claims or earnout manipulation

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It's not personal. It's business. And if you don't understand how theseterms work, you're going to get screwed.

Let's break down the three major deal structure terms that can make orbreak your exit—and how to protect yourself.

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Earnouts: A Tool or a Trap?

An earnout is a portion of the purchase price that gets paid afterclosing, contingent on the business hitting specific performance targets.

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Why buyers love them:

• Reduces upfront cash requirement
• Shifts performance risk to the seller
• "Proves" the business can perform under new ownership
• Gives them leverage if things don't go as planned

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Why sellers should be very cautious:

• You no longer control the business, but you're responsible for hitting targets
• Buyers can make decisions that tank your earnout—and you can't stop them
• Disputes over measurement are incredibly common
• Most earnouts don't pay out fully

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When Earnouts Might Make Sense

There are rare situations where an earnout is reasonable:

1. You and the buyer genuinely disagree on valuation and the earnout bridges the gap
2. You're staying involved in a meaningful role with real authority (not just "consulting")
3. The business is fast-growing and you're confident about  continued trajectory
4. The metrics are crystal clear and can't be manipulated

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But even in these situations, earnouts are risky.
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The Four Keys to a Good Earnout (IfYou Must Accept One)

If you're going to accept an earnout, follow these rules:

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1. Keep It Short (1-2 Years Max)

The longer the earnout period, the more that can go wrong. Marketschange. Buyers make bad decisions. Your influence fades.

Insist on: 12-24 months maximum. Anything longer dramatically increases the chanceyou won't see that money.

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2. Tie It to Metrics You Can Actually Control

Bad earnout metrics:

• Net profit (buyers can manipulate expenses)
• "Management's discretion" (they'll always find reasons not to pay)
• Metrics dependent on buyer decisions (like new product launches they control)

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Better earnout metrics:

• Gross revenue (harder to manipulate)
• Customer retention (if you're staying involved with customers)
• Specific milestones (contract renewals, product deliveries)

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Best practice: Tie it to EBITDA with very clear definitions of what gets included and excluded.

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3. Limit Grey Areas—Define Everything in Writing

Earnouts fail because of disputes over definitions. What counts asrevenue? How are costs allocated? What happens if the buyer changes pricing orproduct mix?

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You need crystal-clear language:

• Revenue recognition policies
• Expense allocation methodology
• Treatment of extraordinary items
• Resolution process for disputes

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If it's not explicitly defined in the purchase agreement, assume thebuyer will interpret it in their favor.

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4. Avoid Complex Formulas

If you can't explain the earnout calculation in one sentence, it's toocomplicated—and too easy to manipulate.

Bad: "Earnout based on adjusted EBITDA after allocation of corporateoverhead and normalization adjustments determined by buyer's accountingpractices."

Better: "Earnout based on gross revenue exceeding $5M in Year 1, calculatedusing the same revenue recognition policies in place at closing."

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When to Walk Away from an Earnout

Sometimes the right answer is "no earnout."

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Walk away if:

• The earnout represents more than 20% of the total purchase price
• You're not staying involved post-closing
• The metrics are vague or highly  subjective
• The buyer won't agree to clear,  objective definitions
• Your gut tells you it's a setup

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Remember: An earnout is the buyer saying "I don't believe this business will perform as well as you claim—so I'm going to make you prove it after I own it."

Do you really want to bet on their management decisions?

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Seller Financing: Why You Should BeVery Cautious

Seller financing (also called a seller note) is when you provide a loanto the buyer for a portion of the purchase price.

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Here's how it works:

Instead of the buyer paying you $10M at closing, they pay you $8M atclosing and give you a promissory note for $2M to be paid over the next 3-5years with interest.
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You just became the bank.
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Why Buyers Want Seller Financing

From the buyer's perspective, seller financing is great:

• Reduces their upfront cash requirement (they can use their capital for operations or other investments)
• Shows seller confidence (if you're not willing to finance part of the deal, they wonder what you know that they don't)
• Can improve their other financing terms (SBA loans and banks look more favorably on deals with seller financing)

And here's the part they don't say out loud:

• If the business fails, you don't get paid—but they've already extracted value
  
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The Risks of Being the Bank

When you provide seller financing, you're taking on significant risk:

1. If the business struggles, you don't get paid. And unlike a bank, you probably don't have strong collateral or collection rights.
2. Your loan is typically subordinated. This means the bank gets paid first, vendors get paid second, and you get paid last—if there's anything left.
3. You can't force good management. If the buyer makes terrible decisions, you watch your note become worthless.
4. Collection is expensive and ugly. If you have to sue to collect, you're spending legal fees to chase money that might not exist.
5. You're stuck in a relationship with the buyer. For 3-5 years, you're dependent on their success. That's a long time to watch someone run your former business into the ground.

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If You Must Provide Seller Financing,Protect Yourself

If seller financing is non-negotiable (and sometimes it is), here's howto minimize risk:

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Limit the Amount (10-20% of Purchase Price Max)

The more you finance, the more you risk. Keep it to 10-20% of the totaldeal.

Example: On a $10M sale, limit seller financing to $1-2M. Not $3-4M.

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Keep the Term Short (3-5 Years)

The longer the note, the more that can go wrong. Insist on 3-5 yearsmaximum, with payments starting immediately (not deferred).

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Charge Market Interest Rates (6-8%)

Don't give the buyer a sweetheart deal. If they're borrowing from a bank,they'd pay 8-10%. Charge at least 6-8%.

This isn't about profit—it's about ensuring they take the debt seriously.

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Secure It with Business Assets

Get a lien on the business assets (equipment, inventory, receivables). Atleast if they default, you have some recourse.

But be realistic: If the business is failing, those assets might not be worth much. Thisis better than nothing, but it's not a guarantee.

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Include Protective Covenants

Your seller note should include covenants that protect you:

• Minimum working capital requirements
• Restrictions on additional debt
• Requirements to maintain insurance
• Prohibition on asset sales without your consent
• Financial reporting requirements (you get to see how the business is doing)

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If they violate these covenants, you can accelerate the note (demand full payment immediately).

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When to Say No to Seller Financing

Sometimes the right answer is "no seller financing."

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Walk away from seller financing if:

• The buyer is financially weak (they need you to finance because no bank will)
• The amount is more than 20% of the purchase price
• You're not confident in the buyer's ability to run the business
• They refuse to provide financial covenants or reasonable security
• Your gut tells you this buyer is going to fail
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Better to walk away from a deal than to finance a disaster.
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Escrows & Holdbacks: ThePost-Closing Surprise

An escrow (or holdback) is money held by a neutral third party afterclosing to cover potential indemnification claims.

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How Escrows Work

At closing, instead of paying you the full purchase price, the buyerplaces 5-15% of the price in an escrow account controlled by a third party(usually an attorney or escrow agent).

That money sits there for 12-24 months.

If the buyer discovers issues (undisclosed liabilities, breach of representations and warranties,financial misstatements, etc.), they can make a claim against the escrow.

If no valid claims are made, the escrow is released to you at the end of the holdback period.

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Why Buyers Want Escrows

Escrows protect buyers from:

• Undisclosed liabilities (lawsuits, tax issues, environmental problems)
• Financial misstatements (revenue or expenses that weren't what you represented)
• Breaches of representations (anything you said was true that turns out not to be)

In theory, this is fair. If you misrepresented something, the buyer should have recourse.

In practice, it's often abused.

How Escrows Can Go Sideways

Here's what happens more often than it should:

The buyer closes the deal, gets control of your business, and then startslooking for reasons to make claims against the escrow.

Common escrow claim tactics:

• "We found an undisclosed liability." (A vendor dispute you didn't know about, an old tax issue, etc.)
• "The financials weren't accurate." (Revenue recognition disputes, expense allocation arguments)
• "A key employee left." (Even though they caused it by changing compensation)
• "A customer didn't renew." (Even though the buyer mismanaged the relationship)

Some of these claims are legitimate. Many are not.

But here's the problem: You have to fight them. And fighting means legal fees, time, andstress—over money that's supposed to be yours.

How to Protect Yourself on Escrows

You can't eliminate escrow risk entirely, but you can minimize it:

Negotiate the Escrow Amount (10-15% Max)

Common escrow amounts: 10-15% of purchase price for 12-18 months.

If the buyer wants more (20%+), push back. That's excessive unless there are unusualcircumstances.

Shorten the Escrow Period (12-18 Months)

Most escrows are 12-24 months. Try to negotiate for 12-18 months. The shorter the period, the less timefor issues to arise.

Define Claims Clearly

The purchase agreement should specify:

• What constitutes a valid claim (specific breaches, not vague "dissatisfaction")
• Minimum claim amounts (basket or threshold—e.g., claims under $25K don't count)
• Notification deadlines (buyer has 60 days to raise issues, not 18 months)
• Dispute resolution (arbitration, not litigation)

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If the language is vague, assume the buyer will interpret it broadly.

Partial Release Provisions

Negotiate for partial releases of the escrow over time:

Example: 50% of escrow released after 6 months if no claims, remaining 50%released after 12 months.

This limits your exposure and gives you access to some of the moneysooner.

Tax Structure: Asset Sale vs. StockSale (And Why It Matters)

This is where hundreds of thousands—or millions—of dollars can vanish.

The structure of your sale determines your tax treatment. And thedifference is massive.

Asset Sale

What it means:
The buyer purchases specific assets of your business (equipment, inventory,customer lists, goodwill, intellectual property).

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Buyer advantages:

• Cherry-picks assets they want
• Avoids liabilities
• Gets favorable tax treatment (depreciation and amortization)
• Starts with a "clean slate"

Seller disadvantages:

• Higher tax burden (some assets taxed as ordinary income, not capital gains)
• Must transfer contracts and licenses individually
• More complex transaction

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Why it's common: 90%+ of small and middle-market business sales are asset sales becausebuyers prefer them.

Stock Sale (or Membership InterestSale for LLCs)

What it means:
The buyer purchases the ownership shares/interests in your company entityitself.

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Seller advantages:

• Lower tax burden (capital gains rates, typically 15-20% federal)
• Simpler transfer (onetransaction)
• Maintains existing contracts and relationships

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‍Buyer disadvantages:

• Inherits all liabilities (known and unknown)
• Less favorable tax treatment
• Higher risk

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Why it's less common: Buyers resist stock sales unless the entity continuity is critical(e.g., contracts that can't be transferred, licenses that require the entity).

The Tax Difference: Real Numbers

Let's say you're selling a business for $10 million.

Asset Sale Tax Impact:

• Portion allocated to goodwill/intangibles: Capital gains (20% federal) = $1.2M tax
• Portion allocated to equipment/inventory: Ordinary income (37% federal max) = potential $800K+ tax
• Total tax: $2M+ (federal only, not including state)

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Stock Sale Tax Impact:

• Entire $10M: Capital gains (20% federal) = $2M tax
• Total tax: $2M (federal only)

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In this scenario, the structures are similar—but that's not always thecase.

In many asset sales, the allocation can result in significantly highertaxes for sellers. The difference can easily be $500K-$1M on a $10M deal.

How to Protect Yourself

Work with a CPA who specializes in business sales. Not your general CPA who does yourannual taxes. You need someone who understands purchase price allocation, taxelections, and strategies to minimize your tax burden.

At Trusted BTA, we work with tax specialists as part of your deal team.Tax structure is too important to leave to generalists.

Working Capital Adjustments: TheHidden Post-Closing Surprise

Here's a term that catches sellers off-guard: working capital adjustment.

What It Means

Working capital is the operating liquidity of your business:

Working Capital = Current Assets - Current Liabilities

In a business sale, the parties agree on a "target working capital" level—the amount of working capital the business should have at closing.

Why it matters: Buyers want to ensure the business has enough cash, inventory, and receivables to operate smoothly after closing.

How the Adjustment Works

At closing, the business is valued assuming it has the target working capital.

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Example:

• Purchase price: $10M
• Target working capital: $500K

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After closing, an accountant reviews the actual working capital at the closing date.

If actual working capital is:

• $500K → No adjustment
• $450K → Seller owes buyer $50K (business had less liquidity than expected)
• $550K → Buyer owes seller $50K (business had more liquidity than expected)

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Why This Can Go Sideways

Disputes over working capital adjustments are incredibly common:

• How is working capital calculated? (Which accounts are included?)
• What date is used? (Closing date? Day before? Average of 30 days?)
• Who does the calculation? (Buyer's accountant? Independent firm?)

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Sellers often lose money because the calculation methodology wasn't clearly defined upfront.

How to Protect Yourself

Define everything in the purchase agreement:

• Specific accounts included in working capital calculation
• Methodology for calculation (who does it, when, using what standards)
• Dispute resolution process (independent accountant as tie-breaker)
• Timeline for resolution (30-60 days post-closing)

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And review the calculation carefully before agreeing to any adjustment. Buyers' accountants have an incentive to find issues that reduce the amount owed to you.

The Bottom Line: Price Is Just theStarting Point

When someone offers you $10 million for your business, that's just the opening line.

The real question is:

• How much is upfront cash?
• How much is locked in escrow (and for how long)?
• How much is seller financing (and on what terms)?
• How much is tied to an earnout  (and will you actually see it)?
• What's the tax structure (and how much will you pay)?
• Are there working capital adjustments or other post-closing surprises?

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The difference between a great deal and a terrible deal isn't the headline number. It's the fine print.

At Trusted Business Transaction Advisors, we negotiate deal structure aggressively because we know where sellers get hurt:

• Earnouts that will never pay out
• Seller financing that puts you at risk
• Escrows that get claimed unfairly
• Tax structures that cost you hundreds of thousands
• Working capital adjustments that surprise you post-closing

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We've seen buyers try to extract value through every one of these terms.And we know how to protect you.

Don't Let Deal Structure Destroy YourExit

You've spent decades building your business. Don't let bad deal structure cost you millions—or leave you holding risk that should belong to the buyer.

If you're negotiating a sale, or if you've received a letter of intent and the terms don't feel right, let's talk.

We'll review the structure, identify the risks, and help you negotiate terms that protect your interests and maximize your net proceeds.

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📞 Call us: (330) 388-0768
🌐 Visit: www.trustedbta.com
✉️ Email: info@trustedbta.com

Let's make sure the deal you negotiate is the deal you actually get.