The Price on the Term Sheet Is Not the Price
The number at the top of a term sheet is the one an owner repeats at dinner that night. It is rarely the number that reaches the account. Between the headline and the wire sit four or five structural terms, and most of them move money in the same direction, which is away from the seller.
This is the part owners are least prepared for, because they spent months arguing about the multiple and almost no time on the words underneath it. The multiple sets the size of the pie. The structure decides how much of it is real, how much is a promise, and how long you wait to learn the difference. I have watched sellers celebrate a number on Friday and spend the following 2 years discovering what it actually meant.
An earnout is a discount wearing a bonus costume
Buyers like earnouts because they bridge a gap in price without spending cash today. Sellers accept them because the headline stays high and the extra tranche feels like found money. Then the years pass.
The data on how earnouts actually pay is not flattering. SRS Acquiom, which administers a large volume of these transactions, has reported that earnouts pay out only around 21 cents on every dollar of the maximum, and that they are contested at least 28 percent of the time. Most of the money promised in an earnout is never paid, and better than 1 in 4 turn into a fight.
The fights are rarely about fraud. They are about the ordinary friction of one company running a business that another company's payout depends on. Whose accounting decides whether the milestone was hit. Whether the buyer used "commercially reasonable efforts," a phrase that has kept Delaware courts busy for years precisely because nobody agrees what it means. If you take an earnout, take it on metrics you can see from the outside, over a period short enough that the business you built still resembles the one being measured. A 4-year earnout on net income run by someone else is not a deferred price. It is a lottery ticket with your name misspelled on it.
Rollover equity is a second decision, not a leftover
More sellers are keeping a piece. According to GF Data, rollover equity appeared in roughly 29 percent of deals through the first three quarters of 2024, and the trend has been climbing for years. The pitch is appealing. Take some chips off the table, keep a stake, get a "second bite" when the business sells again down the road.
Sometimes that second bite is larger than the first. Sometimes the rolled equity sits in a company you no longer control, on terms written to pay other people first. The question is not whether rollover is good or bad in the abstract. It is whether you understand what class of equity you are actually holding, who stands ahead of you when it converts to cash, and what has to be true for the second bite to arrive at all. If you cannot answer those three, you have not been paid partly in equity. You have been paid partly in hope.
Cash today has a quality the rest does not
There is also the money you never see move: the escrow held back against future claims, the working capital target that trues up weeks after closing and almost always in the buyer's favor if no one negotiated the peg. None of these show up in the headline. All of them come out of it.
Rank the pieces of any offer by one test: how certain is this dollar, and when does it arrive. Cash at close is certain and immediate. A seller note is fairly certain and slow, assuming the business survives to pay it. Rollover is uncertain and distant. An earnout is, on the evidence, mostly theoretical.
A lower headline made mostly of cash routinely beats a higher one padded with the back three categories. Owners who learn this after signing learn it the expensive way. The offer with the biggest number on top is a sales document. What you are negotiating is the mix, and the mix is where the money actually is.