Why Deal Structure Matters More than Headline Valuation

When business owners begin exploring a sale, conversations naturally centre around valuation. For many sellers, the headline number quickly becomes the benchmark against which every offer is judged ^[1]. If a buyer values the business at £5 million, the assumption is often that £5 million will arrive on completion.

In reality, however, valuation is only part of the story.

At SME level, very few transactions are fully paid upfront. Most involve some form of deferred consideration, where part of the value is received on completion and the remainder is paid over time, often subject to conditions linked to future performance. As a result, the structure of a deal can ultimately matter just as much as the headline valuation itself.

As Mark Sykes, M&A Director at Hornblower Business Brokers, explains, “probably one in ten of any deals that are done actually get fully paid out on completion.”

For sellers approaching a transaction for the first time, this often requires a significant shift in mindset. Rather than focusing purely on the valuation being offered, attention has to move towards a more practical question: how much of that value is genuinely secure, when will it be received, and under what conditions?

“You need to stop focusing on the number,” Sykes says, “and shift that mindset to what you’ll actually receive, when, and under what conditions.”

Why Buyers Structure Deals

Deferred structures are not necessarily a sign that something is wrong with a transaction. In many cases, they simply reflect how buyers assess risk.

When acquiring a business, buyers are not only purchasing historic financial performance. More importantly, they are assessing whether that performance is sustainable once ownership changes hands. Questions around recurring revenue, customer concentration and dependence on the current owner all influence how much certainty a buyer is prepared to offer.

“What buyers are looking at,” Sykes explains, “is what the business will do in the future and what the risk around the sustainability… of that performance continuing.”

Businesses with broad customer bases, recurring revenues and limited reliance on the founder naturally tend to attract stronger terms. By contrast, companies with concentrated revenues or heavy owner dependency often lead buyers to seek additional protection through structured payments.

“The more uncertainty there is,” Sykes notes, “the more structure you tend to see in a deal.”

Financing also plays a role. Even experienced buyers rarely commit all of their own capital to an acquisition, particularly in the SME market where debt funding is common. That alone is not necessarily a concern. More important is understanding how much risk the buyer is genuinely sharing.

“If a buyer has no personal risk,” Sykes warns, “then really that shifts all the risk to the seller.”

At the same time, buyers who commit all of their capital upfront also assume significant exposure themselves. In practice, most deals sit somewhere between those two extremes, with the structure acting as a mechanism for balancing risk between both parties ^[2].

Understanding Earn Outs and Deferred Payments

In practice, most deferred structures fall into two broad categories. The first is straightforward deferred consideration, a fixed, legally binding commitment to pay agreed amounts over a defined period following completion. While payment is delayed, the amount itself is not usually tied to future trading performance.

The second, and often more heavily negotiated structure, is the earn out. Here, part of the consideration becomes conditional on the business achieving agreed financial targets after completion, typically linked to revenue or profitability ^[3].

Although earn outs are often viewed negatively by sellers, Sykes argues they can work well when structured properly, particularly alongside meaningful upfront cash consideration.

“Earn outs can be extremely positive,” he explains, “particularly if there is a mix of fixed and earn out consideration.”

When expectations are realistic and incentives are aligned, earn outs can allow sellers to participate in future upside while also giving buyers reassurance around performance continuity. The challenge, however, is that they inevitably introduce greater uncertainty.

“It moves the outcome from guaranteed value to conditional value,” Sykes says, “which is always going to be more challenging for the seller.”

That is why the credibility of any targets becomes critical ^[4]. A superficially attractive valuation can quickly become far less appealing if the conditions attached to future payments are unrealistic or heavily dependent on factors outside the seller’s control.

Where Structured Deals Go Wrong

One of the most common misconceptions around deferred consideration is that buyers intentionally structure deals simply to avoid paying sellers later. In reality, Sykes argues, problems usually arise because deals are badly aligned or poorly structured.

“The earnouts don’t fail just because they exist,” he says. “They fail because they’re badly structured or badly aligned.”

In many cases, issues emerge because the buyer lacks sector experience or the business itself carries operational risks, such as customer concentration or excessive founder dependency. Sellers can also become vulnerable if they accept aggressive structures without proper protections in place.

A major part of the negotiation process therefore involves ensuring appropriate safeguards are built into the transaction documents, particularly around operational control and financial management after completion. These protections are often negotiated through the Heads of Terms and ultimately documented within the Share Purchase Agreement.

“It’s so easy to miss them,” Sykes says, “and even experienced legal people often do miss them.”

The quality of advice during this stage can materially influence the eventual outcome for the seller, particularly where earn outs or longer-term deferred payments are involved ^[5].

Balancing Price and Certainty

Ultimately, one of the most important judgements in any transaction is balancing headline valuation against certainty of cash.

“Cash at completion is the only ultimate certainty,” Sykes explains.

This means the highest offer is not always the best offer. A lower valuation with substantial upfront cash and realistic terms may ultimately prove more valuable than a larger headline figure tied to aggressive earn out conditions and limited buyer commitment ^[6].

“The best deal isn’t always the highest number,” Sykes says. “It’s what you actually realise at the end of it.”

Assessing that properly requires more than simply comparing valuations. Sellers must consider the strength and experience of the buyer, the achievability of future targets and the level of certainty attached to the deal structure itself.

Because in the end, the value of a deal is not defined by the number on the first page of an offer, but by what ultimately arrives in the seller’s bank account.