The Deal Terms That Quietly Decide What You Keep

The Price Is the Marketing. The Terms Are the Deal.

A founder I know sold a specialty distribution business for what he described to his friends as eleven million dollars. Eighteen months later he had received a little over six. Nothing improper happened. No one lied to him. Every dollar of the gap was disclosed in documents he signed, in language he read, in a room where he had counsel present.

He simply negotiated the headline and accepted the mechanics. That is the most common error in middle-market M&A, and it is not an error of intelligence. It is an error of attention. Founders spend thirty years learning to read customers, markets, and people. They spend four months learning to read a purchase agreement, and they do it while running the company that is being valued.

The buyer has no such handicap. The buyer does this professionally. The buyer's team has closed forty deals and knows precisely which clauses the seller will fight over and which he will wave through in the interest of momentum. Price is the clause you will fight over. That is exactly why it is the clause they concede most easily.

Working Capital: The Adjustment That Eats Founders Alive

The single most expensive paragraph in most purchase agreements is the working capital peg, and most founders do not fully understand it until the true-up arrives sixty to ninety days after close.

Here is the structure. The buyer agrees to purchase the business on a cash-free, debt-free basis with a "normalized" level of working capital left in the company. That normal is defined by a target, the peg, usually calculated as a trailing twelve- or twenty-four-month average of your net working capital. If you deliver less than the peg at close, the purchase price is reduced dollar for dollar. If you deliver more, in theory you get paid for the excess, though the collar and dispute mechanics often make that harder to collect than to lose.

The problems are rarely in the concept. They are in the definitions. Which receivables count, and at what age? Are prepaid expenses included? Is deferred revenue a working capital item or a debt-like item? That last question alone has moved seven figures in deals I have watched. If your business collects annually in advance and the buyer classifies deferred revenue as indebtedness rather than a working capital liability, you have just funded the buyer's next year of service delivery out of your own proceeds.

Negotiate the peg definition before you negotiate the peg number. And insist that the calculation methodology be illustrated with a worked example attached as a schedule, actual numbers, actual month, actual line items. If the buyer resists attaching a worked example, you have learned something important about how the true-up is going to go.

Earnouts Are Not Deferred Payment. They Are Optional Payment.

I tell every founder the same thing about earnouts: price the deal as though you will receive none of it. If the number still works, take the deal. If it does not, you have not been offered what you think you have been offered.

This is not cynicism. It is an accurate reading of control. The moment the wire clears, you no longer decide how the business is run. The buyer decides pricing. The buyer decides whether to consolidate your back office into theirs, whether to allocate corporate overhead to your entity, whether to push your salespeople onto their comp plan, whether to invest in the pipeline that would have produced your earnout year. Every one of those decisions is reasonable from their seat. Every one of them can suppress the metric you are being paid against.

If you accept an earnout, and there are good reasons to, particularly when you and the buyer genuinely disagree about the trajectory of the business rather than its history, then fight on three fronts. First, the metric. Revenue is harder to manipulate than EBITDA; gross profit sits in between. Second, the covenants. Require affirmative operating commitments: minimum sales headcount, no reallocation of corporate overhead into your P&L, no change to pricing below a floor, maintenance of the existing accounting methodology. Third, acceleration. If the buyer sells the business, terminates you without cause, or materially changes the operating plan, the remaining earnout becomes immediately due.

And read the dispute provision. An earnout with a good metric and a bad arbitration clause is still a bad earnout.

Indemnity: Where Your Money Sits After It Is Nominally Yours

The representations and warranties section will run forty pages and read like tedium. It is not tedium. It is the buyer's list of everything he intends to be able to claw back from you if it turns out to be untrue.

The terms that matter: the survival period, the cap, the basket, and whether it is a tipping basket or a true deductible. A ten percent cap with a one percent tipping basket and a three-year survival is a materially different deal than a five percent cap with a half-percent deductible and an eighteen-month survival, even at identical price.

Pay particular attention to the carve-outs from the cap. Fundamental representations, title, authority, capitalization, taxes, are typically uncapped or capped at the full purchase price, and that is standard. But watch for buyers who attempt to move ordinary business representations into the fundamental category. Customer contracts, intellectual property ownership, employee classification. If those carry unlimited exposure for six years, you have not sold the business. You have rented it out with a personal guarantee attached.

Representation and warranty insurance has become common in this market and is usually worth the premium. It shifts the indemnity exposure from your escrow to an insurer, which means you take your money home and the buyer still has a remedy. It changes the negotiation from adversarial to administrative. That alone justifies the cost.

Also understand the sandbagging provision. Pro-sandbagging language allows the buyer to collect on a breach he knew about before closing. Anti-sandbagging language does not. Diligence trackers exist. Buyers keep records of what they were told. This clause is quietly worth real money.

Rollover Equity and the Second Bite That Never Arrives

Private equity buyers will ask you to roll ten to thirty percent of your proceeds into equity in the new holding company. They will describe this as alignment, and they will tell you the second bite is often larger than the first. Sometimes that is true. It is a real phenomenon, and I have seen founders do very well on it.

But understand exactly what you are receiving. You are almost never receiving the same security the sponsor holds. You are frequently receiving common equity beneath a preferred stack that accrues eight or twelve percent annually, compounding, with a liquidation preference senior to you. If the platform grows modestly and exits in five years, the preference may consume the entire gain. Your ten percent of the equity is ten percent of whatever is left after the preference is satisfied, which in a flat outcome is nothing.

Ask for the waterfall. Ask them to model your rollover proceeds at a flat exit, a modest exit, and a strong exit. A credible sponsor will run that model without hesitation, because they believe in the upside case and want you to see it. A sponsor who deflects is telling you where the value actually sits.

Then read the shareholders' agreement. Drag-along rights, tag-along rights, transfer restrictions, call rights on your shares if you leave employment, and critically, at what valuation the call is struck. A call at fair market value is one thing. A call at original cost, or at book value, is a mechanism to remove you from the cap table before the exit you rolled into.

The Employment Agreement Is Part of the Purchase Price

Most founders treat the post-close employment agreement as an afterthought, a formality to be handled once the real negotiation concludes. It is not an afterthought. It is a two- or three-year commitment of your labor, usually at below-market compensation, secured by an earnout you cannot collect if you leave and a non-compete that prevents you from doing the only work you have ever been excellent at.

Read the termination provisions with more care than you read the price. What constitutes cause? Some agreements define cause broadly enough that any dispute becomes a termination event, at which point your earnout evaporates and your non-compete remains enforceable. What constitutes good reason for you to resign, reduction in duties, relocation, change in reporting line, and what happens to unvested consideration if you do?

And know the length and scope of the restrictive covenant. A five-year non-compete across a broadly defined industry, in a state that enforces such things, is a decision about the rest of your working life. Founders in their fifties sometimes sign these without registering that they have just agreed not to work until their sixties.

I have watched capable men go quietly gray in the eighteen months after a sale, employed in a company that carries their name but no longer answers to them. That outcome is not caused by the price. It is caused by the employment agreement nobody read closely.

Exclusivity Is Where Your Leverage Goes to Die

The letter of intent is non-binding on price and binding on exclusivity. Understand the asymmetry in that sentence.

The day you sign, you stop talking to other buyers. Your leverage, which was at its maximum the hour before, begins decaying immediately and continues decaying for the sixty to ninety days of diligence. Meanwhile your costs accumulate: legal fees, quality of earnings, your own attention diverted from running the business. By week ten you have spent three hundred thousand dollars, your team suspects something, and the buyer knows all of it.

That is when the retrade comes. Not always. But often enough that you should plan for it. A diligence finding, a softening month, a customer concentration concern, and the price moves down six percent. At that point you are not negotiating. You are deciding whether to eat the reduction or write off the spend and start over.

The defenses are structural. Keep the exclusivity period short, forty-five days, with extension conditioned on the buyer's continued good-faith progress. Get the material diligence done before exclusivity, not after: sell-side quality of earnings, legal cleanup, customer contract review. Negotiate the key terms of the definitive agreement into the LOI itself, at least in summary form, escrow, cap, survival, earnout metric. And do not let the process stop being competitive until the last honest moment.

The founders who get the best outcomes are not the ones who negotiate hardest. They are the ones who did the work eighteen months earlier so there was nothing left for the buyer to find.

What to Do With This

None of the above is exotic. Every clause I have described is standard in middle-market transactions and known to every competent M&A attorney in the country. The failure is not one of information availability. It is one of sequencing and attention. Founders engage with terms at the moment terms are hardest to change, after exclusivity, under time pressure, with fatigue setting in and a number already promised to a spouse.

The work belongs earlier. Understand the architecture of a deal before you are inside one. Model your net proceeds under realistic term structures rather than headline figures. Build the business so that diligence produces no surprises, because every surprise is a retrade and every retrade is a transfer from your account to theirs.

And retain judgment that is not compensated on closing. Your banker is paid to close. Your attorney is paid to paper what you instruct. Somewhere in the room you need a voice whose only interest is whether this particular transaction, on these particular terms, serves the life you intend to live afterward.

If you are approaching a transaction and want that conversation, you can schedule a private discussion at consulting.lionmaker.io.

If you're sitting with a question this article touched, schedule a private conversation.