Can your buyer actually pay
Where the money for your price comes from, how to tell early whether an approach is funded, and what the deferred part of an offer really costs you.
Almost everything written about deal financing is written for the buyer. How to fund an acquisition, how to structure the debt, how to approach a lender. Very little of it is written for the person on the other side of the table, who has a simpler and more urgent question. Can this buyer actually pay, and when does the money arrive?
That question matters more than it first sounds. A buyer for a company of this size almost never writes a single cheque. The price is assembled from three or four sources, each with its own conditions, and some of those sources depend on things that have not happened yet. A price agreed in March can quietly become a smaller price in September without anybody acting in bad faith.
This guide covers where a buyer's money comes from, what you can see early that tells you whether an approach is real, what the deferred parts of a price are actually worth, and what you are entitled to ask. None of it requires you to be suspicious of anyone. It requires you to be specific.
Where the money actually comes from
A buyer offering four million euros for your company is rarely offering four million euros of their own money. They are assembling it, usually from four layers, and the layers behave very differently once a deal is under way.
A single illustrative deal, funded the way transactions of this size are commonly funded. The figures are an example. The shape is typical.
How a four million euro price is usually assembled| Senior bank debt | €1,800,000 | Lent against your sustainable profits and secured on the assets. The bank decides the size of this layer, not the buyer. |
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| The buyer's own equity | €1,200,000 | Cash the buyer or their fund actually holds. This is the layer you can most easily ask a direct question about. |
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| Seller loan | €600,000 | You lend part of your own price back to the buyer, repaid over two or three years. |
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| Earn out | €400,000 | Contingent. Paid only if the business reaches agreed figures after you have gone. |
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| Headline price | €4,000,000 | |
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One million of that headline is not money. It is two promises, and the two promises are of very different quality.
Read the table again and notice what it means for you rather than for the buyer. The headline is four million. The amount that reaches your account on the day you hand over the keys is three million. The remaining million arrives later, if it arrives, and you are the party carrying the risk that it does not.
This is not a trick and a buyer proposing it is not trying to take advantage of you. It is the ordinary structure of the market at this size. But an owner who hears four million and plans a retirement around four million has misread their own deal, and that misreading tends to surface at the worst possible moment, which is after completion.
The bank in that table sized its loan off your profits, so the same adjustments a buyer will argue about also decide how much cash is available to pay you. EBITDA and normalisation
Four kinds of buyer, and how each one pays
- A trade buyer. A company in your industry or next to it. They usually pay from their own balance sheet or from a facility they already have in place. This is the most certain money in the market, because the decision is theirs and the cash already exists. The cost is that they will look hardest at your customer list, and they may be a competitor you are cautious about opening your books to.
- A private equity fund or a search fund. Professional acquirers with committed capital and lenders they work with regularly. They will not waste your time and their process is fast, because they have run it many times. They also use more debt than anyone else, which makes their offer the most sensitive to whatever your accounts turn out to say in month three.
- Your own management team. A management buyout. The people who know the business best and who can personally pay the least. Almost all of the price comes from a bank and from you, in the form of a loan back. Certainty of intent is the highest of the four. Certainty of funding is the lowest.
- An individual buyer. One person, often recently out of a corporate career, buying a business to run themselves. Some are well funded and entirely serious. Others are hoping the deal itself will produce the funding. Telling those two apart early is the single most valuable thing in this guide.
Telling early whether an approach is funded
You will usually know inside two conversations, if you know what to listen for. Nothing below requires you to challenge anybody or to accuse anybody of anything. These are simply things that are either present or absent, and their absence is informative.
What a funded buyer already has, and an unfunded one does not
- A named source for each part of the price, usually offered before you ask for it.
- Advisors already instructed and being paid, rather than advisors who will be engaged once terms are agreed.
- A specific lender, named, with a named person at it. Not a general statement that debt is available in the market.
- Previous transactions they can describe in detail, including at least one that did not complete.
- A timetable expressed in weeks with named steps in it, rather than a stated intention to move quickly.
- Willingness to write their funding structure into the heads of terms, rather than describe it in a meeting.
The part of the price you do not receive on the day
Two structures move money out of completion day and into the future. They are talked about as though they were roughly the same thing. They are not, and confusing them is expensive.
A seller loan and an earn out are not the same risk | Seller loan | Earn out |
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| What it is | You are owed a fixed sum and have agreed to be paid it later, usually across two or three years, usually with interest. | You may be owed a further sum, if the business reaches agreed figures in the years after you leave. |
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| What decides whether you get it | Whether the company can pay. The amount itself is already settled. | Performance you no longer control, measured in accounts the buyer now prepares. |
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| Your position if it goes wrong | You are a creditor, usually unsecured, ranking behind the bank that funded the purchase of your own company. | You have a contractual argument about how a number was calculated, against someone holding all the records. |
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| How often it pays in full | Usually, where the business is stable and the buyer is competent. | Less often than sellers expect, and often for reasons nobody predicted at signing. |
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| What to negotiate hardest | Security, interest, and what happens if the company is sold again before you are repaid. | A short measurement period, one simple metric, and a written say in the decisions that move it. |
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The practical rule is this. You should be willing to sign the deal at the completion payment alone. If the figure that lands on the day is not a figure you could live with, you are not selling a business. You are lending one, and hoping.
Why a deal that rests on a bank can fail late
The most painful failure in this market is not the deal that never begins. It is the deal that runs for five months, absorbs your attention, tells your staff that something is happening, and then dies in the fortnight before completion because a lender changed its mind.
That happens for a structural reason rather than an unlucky one. The bank is the last party to commit, and it commits on the basis of information that only becomes final near the end of the process.
- An indication is not an approval. Early on, a buyer may hold a letter from a lender saying the transaction is of interest and setting out likely terms. That letter is not a commitment and usually says so in its own text. Credit approval comes later, after the lender's own review, and it can come back smaller than the letter suggested.
- The loan is sized off your profits, not off the price. A bank lends a multiple of sustainable earnings. If financial due diligence reduces your accepted profit, the loan reduces with it, and it reduces by that same multiple. One hundred thousand removed from accepted earnings can take several hundred thousand out of what the bank will advance.
- Somebody has to fill the gap. When the debt comes back smaller, the price does not automatically fall. The buyer first tries to fill the hole. More of their own equity, if they have it. A larger seller loan, if you will take one. A bigger earn out, if you will carry one. Every one of those moves risk from them to you, late in the process, at the point where you are tired and already committed.
- Conditions precedent. The loan agreement lists things that must be true before the money moves. Landlord consents. Change of control approvals from major customers. Insurance in place. Each is ordinary, each takes time, and any one of them that cannot be obtained stops the funds on the day they are needed.
- Something outside your deal moves. Interest rates. The lender's appetite for your sector. An unrelated loss elsewhere in their loan book. None of this concerns your business and all of it can end your transaction.
This is the same stage at which everything else comes under pressure, and the two problems compound, because the finding that reduces your profit is also the finding that shrinks the loan. Due diligence, from the seller's side
The questions you can ask without giving offence
Owners hesitate here, and the hesitation is understandable. You worry that asking about money makes you look distrustful, or worse, that it makes you look anxious to sell. The opposite is closer to the truth. In this market the seller is the scarce side of the table. A buyer who is genuinely funded expects these questions and is relieved to answer them, because most of the people you are also speaking to cannot.
Ask them plainly, ask them early, and ask them in the same tone you would use about their timetable. Written answers inside the heads of terms are worth more than spoken ones, and asking for that in writing is normal practice rather than an accusation.
Six questions, in the order to ask them
- How is the price made up? What is cash at completion, what is deferred, and what is contingent?
- Where does the equity come from? Your own funds, a committed fund, or investors you still have to approach.
- Which lender are you working with, and are you at indication or at credit approval?
- Who is instructed on your side, and are they engaged and being paid already?
- What is your timetable to completion, with the steps written into it?
- What was the last transaction you completed, and what was the last one that failed?
What to settle before any of this arrives
Every part of a buyer's funding is built on your profits. The bank sizes its loan off them. The equity gap is calculated from them. The earn out targets are set from them. If you have never looked at your own figures the way a lender will, you are about to negotiate about a number you have not examined.
Before you take the meeting
- Know your adjusted profit, and be able to defend every adjustment inside it out loud.
- Know which of your customer relationships are written down and which are not.
- Decide, in advance and privately, the smallest completion payment you would accept.
- Decide whether you are willing to lend part of the price back, and against what security.
- Decide how long you are prepared to stay after completion, because an earn out will normally require you to.
All of it starts from a defensible view of your own value, because every funding conversation you are about to have is downstream of that one number. What is my business worth
Start with your own number
You cannot judge whether a buyer can pay until you know what they would be paying for. The two questions are the same question approached from opposite ends.
Our valuation is free and takes about ten minutes. It returns a range, the reasoning underneath it, and the benchmark it is calibrated against, so you can see the profit figure a lender would be sizing a loan against before anybody makes you an offer.
Step one of three: see your number, free, with no account and no name.
See what it's worth