The price on an offer letter is not the amount you receive. Between the headline enterprise value and your bank account sit the cash and debt in the business, a working capital adjustment, often a retention, sometimes an equity rollover, and sometimes an earnout or deferred consideration paid over years rather than at completion. For Australian businesses at $2M to $25M EBITDA, structure matters as much as price, and the higher headline can result in the lower amount received at settlement.
This article is general information, not tax or legal advice. It explains how deal structures work commercially and names the tax and legal questions each one raises. It does not tell you how you will be taxed or what any agreement will mean in your circumstances. Those answers depend on your business structure and broader personal structure, your history and the specific terms in front of you, and they need your own accountant and lawyer.
Why the headline price is not what you receive
Most owners have a number in mind long before an offer arrives. When the offer does arrive, the headline number is often misunderstood.
The number on an indicative offer is almost always an enterprise value, which prices the business as an operating thing, independent of how it happens to be financed. It is not a statement of what will be transferred to you. Between that number and your account sit a series of adjustments, structuring, and hold-backs, each of which is normal, each of which is often negotiable, and several of which owners are not told about until the sale agreement is being drafted. In our experience, on a mid-market deal, once structuring is included, the gap between the headline and what the seller receives can be 30% or more.
This matters most when choosing between offers, because the offers will not be structured the same way. One buyer pays less and pays it all now. Another pays more and pays half of it later, conditional on things you will no longer control. Comparing offers on headline price is a common and costly error, because the headline is the only figure that both offers state in the same terms.
What happens to the cash in your business when you sell
This is the question owners ask most often, so it comes first.
By standard market convention, the price in a mid-market transaction is agreed on a cash-free, debt-free basis. The buyer is saying: I am pricing your business as though it has no surplus cash sitting in it and no borrowings against it. So the enterprise value is the starting point, and what you actually receive is that number, plus surplus cash, minus debt and debt-like items, plus or minus a working capital adjustment.
The cash side usually works in the seller's favour, but it is often misunderstood. Surplus cash at completion is generally added to what you receive, because it is treated as yours rather than as part of what is being bought. What complicates it is that not all cash is surplus. The business needs a working balance, and the cash that funds the next payroll run, the quarterly BAS or a seasonal stock build is working capital rather than yours. Where that line falls is negotiated, not calculated, and businesses with lumpy cash cycles argue about it hardest. Timing matters too: a business that collects most of its receipts in the first week of the month looks very different on the 5th than on the 28th, which is why good agreements use an average rather than a snapshot. And cash committed to a customer deposit, an unpaid tax liability or an employee entitlement provision is spoken for, however it looks in the bank account.
The debt side is simpler. Borrowings are deducted and usually repaid at completion out of the proceeds, which is what allows the shares or assets to transfer unencumbered. A business with $18M of enterprise value and $3M of bank debt delivers around $15M to the seller, all else equal. Debt is an adjustment, not an obstacle, and businesses carrying it sell all the time. What to watch is not the borrowings you know about but what the buyer's lawyers will classify as debt when the agreement is drafted, which is usually wider than your loan balance: finance leases, hire purchase, shareholder loans, unpaid director fees, accrued but untaken leave above the provision, and any dividend declared but unpaid. Every item that lands on the debt side reduces what you receive. This is a definitional fight rather than a factual one, it happens in the sale agreement rather than in due diligence, and it is one of the places where an owner without experienced advice gives up a material amount, because each item can look small and reasonable in isolation.
The instinct many owners have when a sale approaches is to build the cash balance up, on the reasoning that it will come back to them at completion. That is true as far as it goes. What it ignores is the second half of the equation: if you build cash by delaying supplier payments or running stock down, the working capital adjustment will take it straight back off you. Cash and working capital are two ends of the same negotiation, and you cannot win one by losing the other.
Working capital: how the target is set and adjusted
Working capital is the money tied up in running the business: receivables and stock, less payables. The buyer is buying a business that works, which means buying it with enough working capital in it to keep functioning from day one. If they have to inject cash in the first month because working capital was run down before completion, they have effectively paid more than the agreed price.
So the agreement sets a target, sometimes called the peg. At completion, actual working capital is measured against it. Above the target you are paid the difference. Below it, the price is reduced.
The target is the part to pay attention to, because it is not a fact about your business. It is a number the parties agree, usually by reference to an average of recent months, and every element of how that average is built is arguable: which months are included, whether an unusually good or bad period is treated as an outlier, how stock is valued and whether obsolete stock counts, whether a large one-off receivable is normalised out, whether seasonality is smoothed or ignored.
Two consequences follow, and they run opposite to what most owners expect. Running the business lean before completion does not help you, it hurts you, because converting working capital into cash raises the cash and triggers an offsetting reduction through the adjustment, while irritating your suppliers and thinning your stock in the exact period a buyer is watching. And a business whose working capital has been rising because it is growing needs that growth reflected in the target, or the peg will be set against a period that no longer describes the business.
The mechanism is standard and buyers are not usually acting in bad faith when they push on it. It is a part of the price settled in a technical negotiation after the headline has been agreed, at a point when many sellers are less inclined to negotiate. That timing is the practical risk.
Completion accounts or locked box: two ways to fix the final number
There are two mechanisms in use for settling the adjustments above, and it is worth knowing which one you are in.
Completion accounts is the traditional approach. The deal completes, then a set of accounts is prepared as at the completion date, in our experience usually within sixty to ninety days. Cash, debt and working capital are measured against the agreed definitions and targets, and a true-up payment flows one way or the other. In our experience this remains the more common mechanism in the Australian mid-market.
Locked box works the other way around. The parties fix the balance sheet at a date before signing, often the last audited or reviewed period end. The price is set from that balance sheet and does not move. From that date forward, the economic risk and reward of the business belong to the buyer, and the seller undertakes not to extract value out of the business in the meantime, which is what the "locked box" refers to. No true-up follows.
The trade-off is certainty against exposure.
| Completion accounts | Locked box | |
|---|---|---|
| When the price is fixed | 60 to 90 days after completion | At signing, from a historical balance sheet |
| Certainty for the seller | Lower. The final number is unknown at completion | Higher. The number is known before you sign |
| Who carries trading risk between the box date and completion | The seller, until completion | The buyer, from the box date |
| Scope for post-completion dispute | Real, and it is the main source of them | Minimal on price, though leakage can be argued |
| Where it suits | Businesses with volatile working capital, or where recent accounts are not reliable | Businesses with clean, recent, reliable accounts and stable working capital |
| Practical cost to the seller | Continued involvement in a process you no longer control | You give up the upside of good trading between the box date and completion |
The point for a seller is not that one is better. It is that locked box converts an unknown into a known, and completion accounts leaves a meaningful part of the price to be settled after completion, when your negotiating position is weaker. If your accounts are clean enough to support a locked box, it is worth asking for one.
Earnouts
An earnout is the part of the price most likely to be paid short or not at all, and it is the part of an offer that sellers most often agree to without fully understanding.
What it is. Part of the price is not paid at completion. It becomes payable later, and only if the business hits agreed targets over an agreed period. In our experience the period is typically one to three years.
Why buyers ask for one. Usually because they do not believe your forecast, because they cannot verify something, or simply as a market accepted way for the buyer to lower their risk. A business with customer concentration, a short track record on a new product line, a recent step-change in earnings, or heavy dependence on the departing owner will attract an earnout, because the buyer is being asked to pay today for performance they suspect may not survive the handover. An earnout is a buyer's way of saying: if you are right, you will be paid; if I am right, I will not have overpaid. That is a reasonable position for them to take. It is also a transfer of risk from them to you.
What gets measured matters more than the percentage. Revenue is the cleanest to measure and the preferred for sellers generally, as there are the least amount of factors the buyer can manipulate against you. EBITDA is closer to economic reality and considerably more contestable, because after completion it is the buyer who decides what costs sit in the business. Group management charges, a new head office allocation, the buyer's more expensive insurance programme, a decision to invest in salespeople, a change of accounting policy on revenue recognition: every one of these is a legitimate business decision and every one of them can reduce the number your payment depends on.
The central issue is control. You are being paid on the performance of a business you no longer run, under a strategy you do not set, measured by accounts the buyer prepares. Even a buyer acting entirely in good faith will make decisions that suit the enlarged group and damage your earnout, because they are running their business, not your payment. A buyer acting in bad faith has considerable scope to do so.
The protections available, each of which should be negotiated. Agreed accounting policies written into the agreement, so the basis of measurement cannot be changed. Conduct-of-business covenants restricting what the buyer may do during the earnout period. Ring-fencing the business as a separate reporting unit so its numbers remain identifiable. A cap on management charges and cost allocations. A right to information, so you can see the numbers as they accrue rather than at the end. Acceleration, so that the full amount falls due if the buyer breaches the covenants, sells the business on, or terminates your involvement. A dispute mechanism with an independent expert rather than litigation.
What an earnout is worth in practice. Less than its face value, and often much less. When you are comparing offers, the useful discipline is to ask what the deal looks like if the earnout pays nothing at all. If you can live with that outcome, the earnout is genuine upside. If you cannot, you are not choosing a higher price. You are accepting a lower one with a contingent amount attached. Some sellers go further and treat contingent consideration as worth zero when comparing, on the basis that anything paid is a bonus. That is conservative, and it is rarely the wrong instinct.
The tax question, which is real and which is not answered here. Capital gains tax applies to the sale of a business in Australia. How an earnout is treated for tax purposes depends on how the right to those payments is structured, and the treatment is not uniform across every arrangement that gets called an earnout. Separately, the capital gains tax changes taking effect from 1 July 2027 have not been reconciled with earnouts. The government has indicated carve-outs are intended following consultation, but no legislative detail has been published, so if part of your consideration will be received after that date the position is currently unresolved. What those changes are, including the transitional rule for assets held on 30 June 2027, is set out in How to Prepare Your Business for Sale.
These are questions for your accountant before you sign a term sheet, not after, because the structure is easier to change while it is still a proposal.
A reminder, because this section touches tax. The paragraphs above name the tax questions an earnout raises. They do not answer them and they are not advice. How any of this applies to you depends on your structure, your circumstances and the exact drafting of your agreement. Take it to your own accountant and lawyer before you agree terms.
Deferred consideration and vendor finance
These two get used interchangeably and they are not the same thing. Deferred consideration is part of the price payable at a later date regardless of performance. It is a debt: the amount is known, the timing is known, and the only question is whether the buyer can pay. Vendor finance is deferred consideration where you are explicitly the lender, leaving part of the price in the business to be repaid over an agreed term, usually with interest. It is common in management buyouts and appears in trade sales where the buyer is stretching. An earnout is neither, because it is conditional on performance rather than only on the buyer's solvency.
The same short list applies to both.
- Be secured. In practice that means a general security agreement over the business, registered on the Personal Property Securities Register, and it may mean guarantees from the buyer's parent or its principals. Unsecured deferred consideration is an unsecured loan to a company you no longer control or have visibility over.
- Know where you rank. If the buyer funded the acquisition with bank debt, the bank will require your security to sit behind theirs. That is standard and usually unavoidable, but understand what it means: if the business fails, the bank is paid first and you are paid from whatever is left, which is frequently nothing.
- Charge interest, and price the term. Money paid in three years is worth less than money paid today. Interest compensates for that and for the risk you are carrying. A vendor finance arrangement at no interest is, in substance, a reduction in price.
- Get acceleration rights. The agreement should say what happens if the buyer misses a payment, breaches a covenant, sells the business on, or enters administration. Without them you have no ability to act when the buyer's position deteriorates.
- Diligence the buyer. If a meaningful amount is being deferred you are extending credit, and you should look at the buyer's balance sheet with the seriousness a bank would.
Where vendor finance funds a management buyout, that route is covered in Trade Sale vs Private Equity vs Management Buyout, which also deals with equity rollover, a different structure again where you retain a stake rather than being owed money.
Warranties, indemnities and retentions
Warranties are statements you make about the business in the sale agreement: that the accounts are accurate, that there is no undisclosed litigation, that the business complies with its obligations, that the contracts are what they appear to be. If a warranty turns out to be wrong and the buyer suffers loss, they can claim against you. Indemnities are narrower and harsher, being a promise to cover a specific identified risk, usually without the buyer needing to prove loss in the same way. This is the part of the transaction where a seller's exposure continues after they have left, and it is why the sale agreement takes as long to negotiate as it does.
Four things are negotiated and all four are worth negotiating. The cap is the maximum you can be liable for, usually expressed as a proportion of the price. Time limits set how long claims can be brought, with general warranties usually running for a shorter period than tax warranties. De minimis and basket thresholds stop you being pursued for trivial amounts, by setting a floor for individual claims and an aggregate figure all claims must exceed. And the disclosure letter is the seller's main protection and the document sellers most often give too little attention to: anything properly disclosed cannot later be claimed as a breach, so the discipline of disclosing thoroughly and in writing at the time is what converts a known problem into a settled one. Warranty and indemnity insurance can shift part of this exposure to an insurer, and what it costs and how well it covers you depends heavily on the quality of your disclosure, which is dealt with in How to Prepare Your Business for Sale.
Retentions sit alongside the warranty package. A retention is an amount held back from the price at completion and released later, usually to secure the buyer against warranty claims. Three things to settle: how long it runs, and in our experience twelve to eighteen months is common because it allows a full financial year to pass under the buyer's ownership; what releases it, which should be automatic on the agreed date less only properly notified claims, because anything requiring the buyer to agree to release gives them a negotiating position you do not want them to have; and where it is held, because money in an independent trust or escrow account is meaningfully safer than money the buyer has merely agreed to pay you later. A retention is standard practice, but it is part of your price held outside your control.
Two further points sit alongside the warranty package and are worth naming without going further than naming them. Most buyers will require a restraint of trade, and its length and geographic scope are negotiated rather than fixed; how well a restraint holds up depends on how it is drafted and which state's law applies, which is a question for your lawyer. And the structure of the sale itself, whether the buyer acquires the shares in your company or the assets of the business, changes the tax and duty position for both sides, can bring goods and services tax and state transfer duty into play, and affects which liabilities stay with you. That choice is one of the most consequential structuring decisions in the deal, and it is one to take advice on early rather than to accept as offered.
How to compare two offers that are not comparable
The points above matter most when two offers are on the table with different headline numbers and different structures.
Here is a worked comparison. The figures are illustrative, on a business with around $3M of EBITDA.
| Offer A | Offer B | |
|---|---|---|
| Headline enterprise value | $18.0M | $21.0M |
| Paid in cash at completion | $16.2M | $14.0M |
| Held in retention | $1.8M, released at 12 months | $1.0M, released at 18 months |
| Deferred, payable regardless of performance | none | $2.0M over 24 months |
| Earnout, payable only on performance | none | $4.0M over 3 years |
| Certain at completion | $16.2M | $14.0M |
| Certain within two years | $18.0M | $17.0M |
| Dependent on performance you will not control | nil | $4.0M |
Offer B is $3M higher. On the analysis below, it is also the lower offer for most sellers.
Work it through. If the earnout pays in full, B delivers $21.0M over three years against A's $18.0M within one. If the earnout pays nothing, B delivers $17.0M and A delivers $18.0M, and A pays it sooner. So B is only the better deal if you believe the earnout will pay substantially, and the thing that determines whether it pays is a business you will have handed over.
The method, rather than the answer:
- Strip both offers back to cash at completion. That is the only number in either offer that is certain.
- Add amounts that are deferred but not conditional, discounted for time and for the buyer's credit. These are debts, and they are worth close to face value from a strong buyer and materially less from a weak one.
- Treat contingent consideration separately and never add it to the same total. Ask what the deal looks like if it pays nothing, and decide whether you can accept that outcome.
- Only then compare the headline numbers, with the above in view.
None of this means never accept an earnout. Earnouts are sometimes the only way to bridge a genuine difference of view about the future, and a well-structured earnout on a business with a credible plan and a buyer who will leave it alone can be worth taking. It means knowing what you are accepting when you accept one, and pricing it rather than banking it.
It also means the negotiation of structure is where a large part of the value of good advice sits. The work of running a competitive process and finding the right buyers determines the headline. The work that happens afterwards, on the definitions of cash and debt, the working capital target, the earnout metric, the cap, the retention period and the security over deferred amounts, determines how much of that headline you actually keep. The second piece is less visible and frequently worth more.
Where M&A Concierge fits
Buyer access and structuring are different skills, and advisors are not equally strong at both. An advisor with excellent relationships in your sector will find you the right buyers and may still give away value in the sale agreement. An advisor who negotiates structure well but does not know your market may run a thin process and negotiate hard over a smaller number. At $2M to $25M EBITDA, where the owner is usually selling a business once, you need both, and a credentials presentation will not tell you which you are getting.
M&A Concierge works on M&A advisor selection: matching business owners with the right advisor for their business and their likely buyer universe, drawn from a proprietary M&A advisor database spanning 100+ industry sectors across the Australian mid-market. Our fee is a uniform referral rate model, paid by the advisor rather than by you, and the rate does not change according to which advisor is recommended. If you are weighing whether to engage an advisor at all, that question is dealt with separately in Should You Use an M&A Advisor to Sell Your Business, or Do It Yourself?
Most mid-market sales are priced on a cash-free, debt-free basis, which means the agreed enterprise value assumes no surplus cash and no borrowings. Surplus cash in the business at completion is generally added to what you receive and borrowings are deducted. The complication is that not all cash is surplus. The business needs an operating balance, and cash that funds payroll, tax or stock is treated as working capital rather than as yours. Where that line falls is negotiated in the sale agreement.
Goodwill is not something sold separately. It is the part of the price that exceeds the value of the identifiable assets, and it represents what a buyer is paying for, e.g. reputation, customer relationships, recurring revenue, brand and the business's ability to keep earning. In practice the negotiation is about the total price rather than about goodwill as a line item, though how the price is allocated can matter for tax purposes and differs depending on whether shares or assets are being sold. That allocation is one to take to your accountant.
Yes, and most have debt. On a cash-free, debt-free basis, borrowings are deducted from the enterprise value and usually repaid at completion out of the proceeds so the business transfers unencumbered. What to watch is the definition of debt in the sale agreement, which is typically wider than your loan balance and may capture finance leases, shareholder loans, unpaid director fees, excess employee leave provisions and declared but unpaid dividends. Every item that lands on the debt side reduces what you receive.
An earnout is part of the price that is not paid at completion and becomes payable only if the business meets agreed targets afterwards. In our experience the period is typically one to three years. Buyers ask for earnouts where they cannot verify something, most often a forecast, a new revenue line or a business that depends heavily on the departing owner. The metric used matters more than the amount, because after completion it is the buyer who controls the costs and decisions that determine whether the target is met.
It varies with the buyer type and the business, and there is no reliable Australian figure to quote. As a broad pattern, trade buyers tend to pay the highest proportion at completion, private equity transactions typically involve retaining a stake rather than taking it all in cash, and management buyouts often involve the lowest cash at completion because the team is assembling the price from debt and vendor finance. The useful question is not the average but what is certain in the specific offer in front of you.
Deferred consideration is part of the price payable at a later date regardless of how the business performs. It is a debt, and the only real question is whether the buyer can pay it. An earnout is conditional: it is payable only if agreed performance targets are met. Deferred consideration should be secured, ranked and documented like a loan. An earnout needs a different set of protections, covering how performance is measured and what the buyer may and may not do during the period.
Capital gains tax applies to a business sale, and the treatment of earnout payments depends on how the arrangement is structured rather than on what it is called. Specific rules can apply to certain earnout arrangements. Separately, the capital gains tax changes taking effect from 1 July 2027 have not been reconciled with earnouts, with carve-outs indicated following consultation but no legislative detail published. This is a question to put to your accountant before signing a term sheet, while the structure can still be changed.
Yes, it can. The agreement sets a working capital target, and at completion the actual position is measured against it. Above the target you are paid the difference, below it the price is reduced. The target is agreed rather than calculated, usually from an average of recent months, and how that average is built is negotiable. This is also why running the business lean before completion does not help: converting working capital into cash raises the cash but triggers an offsetting reduction through the adjustment.
General information only. This article describes how business sale structures work in commercial terms. It is not tax advice, legal advice or financial product advice, and it does not take account of your circumstances. Capital gains tax, goods and services tax, state duty and the terms of any agreement will apply differently depending on your structure and the specific deal. Speak to your own accountant and lawyer before agreeing terms.