Cavu director warns sellers to look beyond headline valuations

Cavu Corporate Finance director Sahil Nayyar says founders selling their businesses should assess payment terms alongside headline valuations, because the advertised price may differ substantially from the cash available at completion.

Writing in Elite Business, the shareholder and director outlines how performance-linked payments, delayed consideration and retained equity exposure affect a seller’s proceeds. Cash, debt and working capital calculations form a separate layer of negotiation that can also change the final amount.

What happened

Nayyar’s analysis focuses on the difference between agreeing a value for a business and establishing what its shareholders will actually receive. Offers carrying the same headline price can have different financial outcomes once their payment schedules and conditions are examined.

One distinction is the proportion paid immediately. A proposal that leaves more of the price outstanding requires the seller to assess the terms governing that balance, rather than treating the whole valuation as money secured on completion.

An earnout makes part of the purchase price dependent on the business meeting agreed targets after the transaction. It can help resolve a disagreement between buyer and seller about the level of earnings the company can sustain or the value it could achieve in future.

That arrangement leaves the seller exposed to subsequent trading performance. Meeting the agreed conditions releases the additional payment; falling short can reduce it or leave that part of the price unpaid altogether.

Deferred consideration works differently. It is generally an agreed, fixed amount payable later, rather than a sum that must be earned through future business results. The distinction is between postponing an agreed payment and making a payment conditional on performance.

For that fixed balance, the key exposure is to the buyer’s ability to pay. Nayyar describes it as a debt owed to the seller: deterioration in the purchaser’s financial position after completion can put collection at risk even though the amount was settled during negotiations.

An equity rollover changes the form of the proceeds rather than simply their payment date. The seller puts part of the value of their existing holding into the acquiring company, accepting an ownership interest instead of receiving the entire purchase price in cash.

This can appeal to a seller who believes the combined or acquiring business has further growth potential. The buyer, meanwhile, gains a shareholder with an interest in increasing the value achieved at a later exit.

The background

Nayyar identifies balance sheet adjustments as a further influence on proceeds, separate from the way the purchase price is paid. His analysis describes pound-for-pound adjustments for cash, debt and working capital as a feature of almost every transaction.

The underlying expectation is that the buyer should not inherit borrowing accumulated under the previous ownership without an adjustment to the price. Debt remaining in the company at the sale date therefore affects the amount attributable to the seller.

Cash is considered in the opposite direction. Where the business has built up and retained cash before the sale, Nayyar says that value belongs to the seller and should be recognised when the transaction figures are reconciled.

Although these adjustments are established deal mechanics, their treatment remains open to negotiation. Technical disagreements can have a material effect on value, making them more than an accounting exercise to be left until the end of a process.

Working capital adds another area for discussion. Nayyar flags its complexity and the scope for competing technical arguments, but does not set out a calculation method or a detailed treatment in the analysis.

What people are saying

For Nayyar, control is a central issue when negotiating an earnout. A founder who previously directed the business may lose authority over operational decisions after selling, while still depending on the results of those decisions to receive the outstanding price.

He argues that the performance measures should be unambiguous and the targets attainable. In particular, he favours arrangements that avoid a sharp threshold determining whether a payment is made, rather than a structure whose apparent simplicity conceals difficult conditions.

Transparent reporting is another protection he identifies. Sellers need visibility over performance during the earnout period, together with agreed safeguards governing how the company is operated while the additional consideration remains at stake.

He also places responsibility on the seller’s adviser to challenge the proposed terms. The objective is to make the earnout achievable in practice and address uncertainty before it becomes a disagreement over payment.

For deferred consideration, Nayyar says the purchaser’s financial strength and the protections available to the seller deserve scrutiny alongside the offer itself. A contractual entitlement to money later does not provide the same security as receiving it at completion.

With an equity rollover, he highlights the need to negotiate the precise investment instrument the seller will receive. Rights attached to that investment, protection against losses and safeguards for the value carried forward all matter when assessing the retained stake.

What happens next

Nayyar recommends examining these arrangements before a sale process begins, rather than waiting for the detailed terms to follow an attractive valuation. That preparation gives founders a basis for comparing offers whose headline figures appear equivalent but whose obligations differ.

He does not present earnouts, deferred payments or equity rollovers as reasons to abandon a transaction. His recommendation is to establish how much is payable, when it becomes due and what must happen before the seller receives it, so that negotiations focus on the financial outcome rather than the valuation alone.