Just because the Seller and Buyer are far apart on valuation doesn’t mean a deal can’t happen.
Here are four options that I’ve used or seen used to bridge the valuation gap in a business sale.
𝟭) 𝗘𝗮𝗿𝗻-𝗼𝘂𝘁:
If the Seller believes the business can do $100M revenue in two years but the Buyer believes it can only do $80M in revenue, there is likely to be a valuation gap.
An earn-out could be a solution. A part of the value is paid at closing, and the remaining value is paid when the Seller achieves the targets.
Earn-outs are not without their downsides (usually these are around the ability of the Seller to control the business after the deal) – but are often used in private deals.
𝟮) 𝗣𝗮𝘆𝗶𝗻𝗴 𝗽𝗮𝗿𝘁 𝗼𝗳 𝘁𝗵𝗲 𝘃𝗮𝗹𝘂𝗲 𝘄𝗶𝘁𝗵 𝗕𝘂𝘆𝗲𝗿’𝘀 𝘀𝘁𝗼𝗰𝗸:
If the Buyer cannot raise the cash to pay the Seller’s ask, the Seller can accept part of the deal value in the Buyer’s stock, or “roll over” the Seller’s equity if a new entity is being formed.
In this case, the Seller hitches its wagon to the Buyer’s but if the Seller is optimistic about the Buyer’s prospects, this approach could help plug the hole.
𝟯) 𝗔𝗰𝗰𝗲𝗽𝘁𝗶𝗻𝗴 𝗮 𝗦𝗲𝗹𝗹𝗲𝗿 𝗻𝗼𝘁𝗲:
Similar to the above, if the Buyer cannot or does not want to pay all the cash upfront, the two sides could structure a part of the value as debt (with interest payments), payable over time.
𝟰) 𝗦𝗲𝗹𝗹𝗶𝗻𝗴 𝗮 𝗺𝗶𝗻𝗼𝗿𝗶𝘁𝘆 𝘀𝘁𝗮𝗸𝗲:
Usually, the Seller wants to sell 100% of the business and walk away.
However, if Buyers are not willing to pay the value that the Seller wants, the Seller may be able to sell only a minority interest in the business (less than 50%) and retain the option to sell the rest later (at a higher value).
Not all Buyers will accept this since the Buyer won’t have control to make changes to the business.
But this does allow the Buyer to make a smaller investment with lower risk.