Same $18M Price. Three Different Equity Requirements.
Price is what gets negotiated. Structure is what gets funded, and the two are decided in different rooms by people who rarely compare notes.
Take an illustrative case. Two buyers agree $18 million for the same business in the same month. The first pays all of it in cash at close. The second pays $12 million at close, $4 million through an earnout over 24 months, and $2 million on a seller note. Identical headline price. The cash each buyer needs on closing day differs by $6 million, and one of the two does not find that out until the credit agreement is drafted.
The target has $3 million of EBITDA.
The all-cash deal is the simple one, and the expensive one
A lender sizing a facility against $3 million of EBITDA at three times total leverage supports $9 million of debt. The buyer paying $18 million entirely at close covers the difference: $18 million less $9 million is $9 million of buyer equity, wired on the day.
Nothing is wrong with that deal. It is clean, it closes quickly, and the seller has no ongoing exposure. It also consumes nine million dollars of the buyer’s capital, which is capital not available for the next acquisition or for the working capital the combined business will need in its first year.
The deferred deal has two versions, and nobody tells you which one you agreed to
The second buyer needs $12 million at close rather than $18 million. What the lender will advance against that $12 million depends entirely on how the $2 million seller note is written, and that clause is usually negotiated as a payment term rather than as a financing term.
If the seller note sits on full standby, meaning no principal and no interest paid during the life of the senior facility, most lenders treat it as equity-like rather than as debt. It sits outside the leverage calculation. Senior capacity stays at $9 million, and the buyer’s equity at close is $12 million less $9 million, or $3 million.
If the same note pays current interest, it is debt. It counts inside the three times leverage cap, so the $9 million of total capacity now has to accommodate it: senior debt drops to $7 million, and the buyer’s equity at close becomes $12 million less $7 million, or $5 million.
Same price. Same seller. Same $2 million note. A two million dollar swing in the cash the buyer brings, decided by a subordination clause.
The earnout is not free either
The $4 million earnout looks like the part that costs nothing at close, and at close that is true. It costs later, and lenders price that in now.
Spread over 24 months, $4 million is $2 million a year of contingent obligation. That money has to come from the same cash flow servicing the $9 million senior facility. A lender looking at $3 million of EBITDA, debt service on $9 million, and a potential $2 million annual earnout payment does not ignore the third item. It shows up as tighter covenant headroom, or a requirement that earnout payments be blocked while the facility is outstanding, or a demand that they be escrowed.
Those conditions produce the outcome buyers find most frustrating: an earnout agreed to bridge a valuation gap can end up restricted by the facility that funded the rest of the deal, so the seller does not get paid on the schedule they negotiated even when the business hits the targets.
What to do about it, in the order that matters
Model the debt against the deal terms before signing them, not after. The three numbers above, $9 million, $5 million and $3 million of equity at close, are all available on the same transaction at the same price. Which one a buyer gets is determined weeks before anyone drafts a credit agreement, in the conversation where the earnout period and the seller note terms are set.
Then negotiate the subordination language as a financing term. A seller focused on getting paid will resist full standby, and that resistance is reasonable from where they sit. But it is a negotiable trade with a known value, and a buyer who knows it is worth two million dollars of their own capital can pay for it somewhere else in the deal.
How Thalos Capital Approaches This
Thalos Capital models the capital structure against the deal structure while both are still moving. That means testing the proposed terms against what a lender will actually credit, identifying which clauses change debt capacity and by how much, and putting a number on each one before the letter of intent hardens.
The work runs borrower-side across acquisition and strategic debt from $50 thousand to $100 million and above. In practice it means the buyer walks into the price negotiation knowing which structures they can finance and what each concession costs, rather than discovering the cost during documentation when the terms are no longer open.
The buyer who agrees a price without that analysis has not made a bad deal. They have made an unpriced one. Somewhere between three and nine million dollars of their own capital is being committed by clauses they treated as details, and the difference is not recoverable once the document is signed.
Most financing situations have more options than the borrower initially sees. A conversation is enough to map them. Submit your financing request at https://thaloscapital.com/contact.