The purchase price in an offer is rarely the amount that reaches the seller's account on completion day. Part of it is often paid later, only under certain conditions or in a different form. The structure determines who bears which risk, and it therefore deserves as much attention as the headline figure.
Headline price and cash at closing
Offers in the Mittelstand usually state an enterprise value excluding financial debt and surplus cash. Deducting debt, adding cash and adjusting for normal working capital then gives the price for the shares. Even of that amount, however, often only part is paid at closing. Other parts are deferred, linked to future results, placed in escrow or converted into a stake in the buyer. When comparing offers, the first question should therefore be how much is paid, when, and with what degree of certainty.
Fixed price: locked box or completion accounts
Under the locked box mechanism, the price is fixed on the basis of a balance sheet at a past reference date, such as the last annual accounts. From that date, the company is treated economically as belonging to the buyer. The seller undertakes that no value will flow to the seller or related parties before closing, for example through dividends, special payments or transactions on unusual terms. Permitted payments, such as the ongoing managing director's salary, are expressly allowed in the contract. Sometimes interest on the purchase price is also agreed for the period between the reference date and closing. The advantage is clarity: the seller knows the price at signing, and later disputes over closing accounts largely fall away. It does, however, require reliable accounts, ideally audited.
With completion accounts, a provisional price is paid first. A balance sheet is then drawn up as at completion day, and the price is adjusted for actual net debt and any deviation from the agreed working capital. This reflects the position at handover more accurately, but final certainty only comes after closing, and there is more room for disagreement, for instance over accounting questions. Contracts usually provide that an independent auditor decides such points as an expert.
Earn-out
With an earn-out, part of the purchase price depends on whether the company reaches certain targets after the sale, for example for revenue, gross profit or EBITDA. It helps when buyer and seller see the future differently: if the seller's plan is met, the seller receives the higher price.
The difficulties lie in the detail. The metric must be defined so precisely that no room for interpretation remains later, covering which accounting rules apply and how group charges, integration costs or add-on acquisitions are treated. Then there is the question of control. After closing, the buyer decides on prices, investment and staff and can therefore influence the result. Sellers often negotiate commitments to run the business within its existing scope, along with information and audit rights. The longer the term and the larger the share of the price at stake, the greater the potential for dispute. An earn-out is better suited where the seller still has influence over results during its term. How variable price components are taxed should be reviewed by a tax adviser.
Vendor loan
With a vendor loan, the seller defers part of the purchase price, which is then repaid with interest over several years. This is common above all in acquisitions financed largely with bank debt. The bank only funds part of the price, and the buyer does not always bring enough equity to close the gap. For the bank, the loan is also a sign that the seller believes in the company's future.
As a rule, the lending bank requires the vendor loan to rank behind its own facilities. Repayments, and sometimes interest, may then only be made as long as the bank is being serviced as planned. For the seller this means that if the business performs worse than planned, payment comes later or, in the worst case, not at all. If the seller also holds a stake in the acquiring company, under German insolvency law the loan may be subordinated as a shareholder loan (section 39(1) no. 5 InsO). An exception applies to non-managing shareholders holding 10% or less of the share capital (section 39(5) InsO). Interest, term, security and ranking should be negotiated with a lawyer.
Partial sale and re-investment
Instead of selling all shares, the owner can keep a portion or re-invest part of the proceeds in the acquiring company. This lets the seller share in future value development, and buyers see it as a sign of aligned interests. At the same time, the seller becomes a minority shareholder. What then matters are the seller's rights: information rights, consent requirements for major decisions, tag-along and drag-along provisions for a later sale, and rules on when and at what price the remaining shares can be sold. If the buyer itself plans a later sale, the value of the re-investment depends on the outcome of that sale. The tax differences between possible structures can be substantial and should be clarified with a tax adviser.
Retentions and liability caps
To make sure that warranty claims can actually be recovered, buyers sometimes retain part of the price or have it paid into an escrow account that is released after an agreed period. The seller's liability is limited by contract through minimum amounts, an overall cap and time limits. In some cases, warranty and indemnity insurance is also taken out, which can reduce or replace a retention. For the seller, what counts is how long the money is tied up and under what conditions it is released.
Comparing offers
The table below shows three invented offers for the same company to make the differences visible. The figures are not a market comparison.
| Hypothetical example, € million | Offer A | Offer B | Offer C |
|---|---|---|---|
| Headline purchase price | 20.0 | 18.0 | 19.0 |
| Paid at closing | 13.0 | 16.2 | 15.2 |
| Vendor loan, subordinated, five years | 3.0 | – | – |
| Earn-out based on EBITDA over the next three years | up to 4.0 | – | – |
| Escrow retention, released after 18 months | – | 1.8 | – |
| Re-investment in the acquiring company | – | – | 3.8 |
| Buyer's financing | bank approval pending | secured | secured |
At first glance, offer A looks best. Only €13.0 million is certain at closing, however. A further €3.0 million depends on the company being able to service its bank debt after the sale, up to €4.0 million depends on future results, and financing is still open. Offer B pays the most up front, and the retention is released provided no warranty claims arise. With offer C, a fifth of the price depends on future performance and a later exit, but in return the seller continues to share in that performance.
Beyond the headline figure, then, what matters is the certainty of each component, the timing of payment and the risks that remain with the seller. The conditions for completion are just as important: an offer with open financing or pending merger clearance is less certain than one that can be completed without reservations. Deferred amounts are also only as secure as the ability of whoever owes them to pay. The tax consequences of the individual components can differ widely and should be worked through with a tax adviser before a decision is made.
This article is for general information only and does not replace legal, tax or financial advice on your specific situation.