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When you receive an offer to buy your business, the question most sellers ask is: Is this offer fair? The headline purchase price is the easiest part of the offer to evaluate, but it’s only one part of the story. The key is understanding how the terms below it work together. Cash at close, seller notes, earnout structures, escrow holdbacks, working capital pegs, and exclusivity clauses all interact to determine what actually reaches your bank account at closing and what remains at risk afterward. This article explains what each of those mechanisms is designed to accomplish from the buyer’s perspective, so you can read the offer as a negotiating document rather than a take-it-or-leave-it proposal.

Receiving an offer is a significant moment. You’ve probably spent years building something, and now a number sits in front of you. But the document attached to it is written in language that feels like it belongs to someone else’s world. That feeling points to something that’s important to recognize: the buyer has almost certainly done this before, and you almost certainly have not. The offer document reflects the buyer’s experience, the buyer’s priorities, and the buyer’s language. Before you respond to anything, your job is to understand what they are actually proposing. That starts with reading the terms the way a buyer thinks about them.

The headline price and the terms

Buyers and sellers in the lower middle market frequently agree on a headline price faster than either side expects. The real negotiation happens in the structure. A buyer who agrees to a $10M headline price is not necessarily agreeing to pay $10M. They are agreeing to a framework that will determine how much of that $10M is paid at closing, how much is contingent on future performance, how much is held in escrow pending post-closing claims, and how the working capital calculation will adjust the final number. Understanding how deal structures work is the difference between knowing what you agreed to and finding out later.

What cash at close puts in your pocket

Cash at close means the portion of the purchase price paid to you on the day the transaction closes. It is the most straightforward component of any deal, and for most sellers, it’s the number they care about most. But “cash at close” is not always as simple as it sounds.

The amount you receive at closing is typically the headline price minus any escrow holdbacks, minus any purchase price adjustments tied to working capital, and minus any seller-side transaction costs. If the deal includes a seller note or an earnout, those components reduce the cash at close figure further. A $10M deal with $2M in seller financing and $1M in escrow is a $7M cash-at-close transaction, not a $10M one.

When you evaluate an offer, the first question to ask is: what is the actual cash I will receive on closing day, net of all adjustments? That number is the foundation everything else is measured against.

What seller notes are and how to evaluate them

A seller note is a form of financing where you, the seller, agree to accept a portion of the purchase price over time rather than at closing. The buyer pays you back, with interest, over an agreed term. Seller notes are common in lower middle market transactions, particularly when buyers are using SBA financing or when the deal structure requires bridging a gap between what a lender will finance and what the buyer is willing to pay.

Seller notes are a standard part of middle-market deal mechanics, and in many transactions, they reflect a buyer’s confidence in the business rather than a weakness in the deal.

What sellers should understand is that a seller note is an unsecured or partially secured obligation. If the buyer’s business struggles after closing, your note is at risk. The specific terms that matter most are the interest rate, the repayment term, whether the note is secured by business assets, and what happens in a default. A seller note secured by a first lien on business assets is significantly different from an unsecured note. An M&A transaction attorney can help you understand what protections are available and whether the terms in front of you are reasonable for a deal of this size and type.

What earnouts are designed to accomplish

An earnout is a mechanism used to bridge a valuation gap. When a buyer isn’t fully confident that the business’s recent performance will continue post-closing, they propose paying a portion of the purchase price only if certain milestones are met after closing. From the buyer’s perspective, this is a rational risk-management tool. From the seller’s perspective, it is deferred consideration tied to a business you no longer control.

These are standard deal mechanics. Middle-market transactions utilize earnouts particularly in professional services, healthcare, and businesses where the seller’s relationships are central to revenue. But sellers should understand what they are accepting when they agree to an earnout component. The specific terms that matter most are: what milestones trigger payment (revenue, EBITDA, or something else), how those milestones are measured, what covenants restrict the buyer’s ability to change the business in ways that affect the milestones, and what your remedies are if a dispute arises.

You can read more about how earnouts work in business sales to understand the mechanics in detail. The core question is: how much of this earnout do I expect to collect, and am I comfortable with the risk that the answer is less than the headline number suggests? Whether that trade-off makes sense depends on your specific situation. An M&A transaction attorney and experienced M&A advisor can help you understand it and evaluate it.

What the escrow holdback tells you

Some offers in the lower middle market include an escrow holdback: a percentage of the purchase price (commonly 10-15%) held in escrow for a period of time (commonly 12-18 months) to cover post-closing indemnification claims. If the buyer discovers after closing that a representation you made in the purchase agreement was inaccurate (a customer contract that was not as described, an environmental issue that was not disclosed, a liability that was not on the books), they can make a claim against the escrow.

From the buyer’s perspective, the escrow is a backstop against surprises. From the seller’s perspective, it means a portion of your proceeds is not actually in your hands on closing day, and it remains at risk for the duration of the escrow period. The size of the escrow and the scope of the representations and warranties that trigger claims are both negotiable. A buyer proposing a 20% escrow in a straightforward transaction is signaling something about their confidence in the deal, or about their negotiating posture. Either way, it is worth understanding.

The representations and warranties section of the purchase agreement is where the escrow risk lives. The broader those representations, the more exposure you carry. This is one of the places where having experienced M&A advisory support matters most. Facilitating many transactions over time means your M&A advisor can recognize which representations are standard and which are unusually broad.

What the working capital peg does

The working capital peg is consistently the mechanism that surprises sellers most at closing, and it is almost always set at the Letter of Intent (LOI) stage, before most sellers realize they’re negotiating it.

Here is what the buyer is trying to accomplish: they are acquiring a business that needs a certain level of working capital (receivables, inventory, and similar current assets minus current liabilities) to operate normally. They want to receive the business with that normal level of working capital included in the purchase price. If you close with less working capital than the peg, you owe the buyer the difference. If you close with more, the buyer owes you the overage. In practice, the disputes almost always run in the buyer’s favor, for two reasons.

First, the peg is often anchored to a period that flatters the buyer’s position. For example, a trailing twelve-month period that includes a seasonal high or a methodology that excludes items the seller considers normal working capital. Second, by the time the purchase agreement is being drafted, the peg methodology is already locked in. Sellers who didn’t push back at the LOI stage have little room to negotiate it later. If you are looking at an offer right now, find the working capital section and understand exactly how the peg is calculated before you sign anything.

What the exclusivity clause means

The LOI is mostly non-binding. Many sellers treat it as a formality, like a handshake document that gets things moving while the real negotiation happens later. M&A advisors consistently push back on this mindset, and for good reason.

The exclusivity clause in the LOI is binding. Once you sign it, you are typically locked out of the market for 30-90 days: no other conversations with buyers, no competing offers, no ability to create the competitive tension that produces better terms. Your leverage, which was at its highest the moment the buyer submitted the offer, drops the moment you sign exclusivity. The buyer knows this. That’s why your M&A advisor will recommend thoroughly vetting the buyer and the opportunity before you sign anything.

To be clear, exclusivity is not unreasonable. It’s a standard feature of LOIs, and buyers need it to justify the cost of due diligence. (The exclusivity period gives the buyer time to complete due diligence while you can’t shop the deal elsewhere.) But the length of the exclusivity period, the conditions under which it can be extended, and the protections you retain during that period are all negotiable at the LOI stage. Once you sign the LOI, those conversations are largely over.

If you’re considering whether to sign an LOI on an unsolicited offer, please pause and take a moment to understand what unsolicited offers typically mean for your negotiating position.

Don’t make the mistake of treating the LOI as a simple preliminary document. The LOI establishes the deal’s structural framework. Price, working capital peg methodology, earnout structure, escrow size, and exclusivity terms are set at the LOI stage, and each becomes progressively harder to renegotiate as the process moves forward.

Reading the offer as a system, not a collection of terms

The most useful shift to make when looking at an offer is to stop evaluating each term in isolation and start seeing the terms as a system. The buyer has designed the offer to accomplish something specific: transfer as much post-closing risk as possible to the seller while paying the minimum amount of certain consideration at closing. Every mechanism in the offer serves that goal to some degree.

This does not mean the buyer is acting in bad faith. It means the buyer is acting rationally in their own interest, as they should. Your job is to do the same. That means reading the offer as a translation problem: what is this term trying to accomplish, what does it mean for my proceeds, and is this the right trade-off given what I know about this buyer and this business? The sellers who get the best outcomes are the ones who can answer those questions before they respond.

Most business owners who receive an unsolicited offer believe they can evaluate it on their own. That confidence is understandable, but almost always misplaced. You hire a CPA to handle your taxes. You see a doctor instead of diagnosing yourself. You go to the dentist because you know what’s at stake if you don’t. This situation is no different, and the consequences of getting it wrong are far larger.

If an offer is in front of you, it’s time to engage with a professional. You don’t have to work with us, but you should work with someone. When you’re ready to think through what this offer means for your situation, we would welcome that conversation.

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