Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / Why Sellers Accept a Lower Multiple for All-Cash Deals
Transcript
- Lucas: A regional HVAC distributor in the Midwest, about twelve million in revenue, clean financials, recurring service contracts — by every measure a solid 7x EBITDA business. The owner got two offers. One at 7.2x, mostly in seller financing and an earnout tied to retention of the service team. The other at 5.5x, all cash, close in 45 days. He took the 5.5x. Luna: Left about a million dollars on the table, roughly. That's a big gap to walk away from. Lucas: Twenty-five percent less on the multiple. And when I asked him why, he said: 'I've seen too many earnouts turn into IOUs. I'd rather have the cash in my account and be done.' That sentiment is more common than people think. Luna: So the liquidity premium works in reverse here. The buyer is effectively paying less because they're offering certainty. Lucas: Exactly. In private company M&A, the all-cash offer has real structural advantages for the buyer — speed, no ongoing monitoring, no risk of the seller leaving or the business deteriorating post-close. But it also forces the seller to make a psychological choice. Do you trust the future promise or do you take the sure thing now? Luna: I've seen data that all-cash deals close about 30 percent faster than those with seller financing or earnouts. The due diligence is tighter, fewer conditions. Lucas: And the failure rate post-close is lower too, because there's no ongoing relationship between buyer and seller. That clean break is valuable to both sides. But the seller pays for it in the multiple. The question is: when does that trade-off make sense? Luna: Let's talk about who typically takes the all-cash discount. Lucas: In my experience, it's sellers who are either retiring and want a clean exit, or who have a specific use for the capital — a new venture, a real estate purchase, a family trust. They're not trying to maximize the headline number; they're optimizing for net proceeds after time and risk. Luna: And on the buyer side, who's offering all cash? Usually it's strategic buyers with strong balance sheets, or private equity firms that have dry powder and want to deploy it quickly. Lucas: Right. A PE firm might be willing to pay a lower multiple for cash certainty because they can close faster and move on to the next deal. For a family office or an individual buyer, the calculus is different — they might need seller financing to get the deal done at all. Luna: So the HVAC guy — he was 63, wanted to retire to Florida. The earnout would have kept him involved for another three years. He didn't want that. Lucas: And that's the non-financial side that often gets overlooked. The earnout might have paid out, but it would have required him to stay, to manage the transition, to possibly clash with the new owner. He valued his time and his peace of mind more than the incremental million. Now, is that always rational? Financially, maybe not. But it's real. Luna: Speaking of real — if this kind of practical breakdown is useful to you, it's exactly why we keep the show ad-free. If today's episode was worth a coffee to you, there's a link at buy me a coffee dot com slash fexingo. No pressure, just a way to keep these conversations going. Lucas: Appreciate that. And we're back to the math. Let's put some numbers on this. Say the business does two million in EBITDA. At 7.2x, that's 14.4 million. At 5.5x, it's 11 million. The difference is 3.4 million. But the 7.2x offer might have included 40 percent in seller financing and a two-year earnout for another 20 percent. Luna: So the seller only gets maybe 5.8 million at closing, with the rest tied up in notes and contingencies. Lucas: Exactly. The all-cash offer puts 11 million in the seller's pocket on day one. No collection risk, no performance risk, no future negotiations. When you discount the earnout and seller note for risk — say a 20 percent discount rate — the present value of the 7.2x offer might be closer to 11.5 or 12 million. Suddenly the gap is much smaller. Luna: That's the framework sellers need. Don't just compare multiples. Compare risk-adjusted present value of net proceeds after tax. Lucas: And tax is another factor. All cash at closing is usually taxed as a capital gain in the year of sale. An earnout can be structured as installment sale, spreading the tax liability. But that's a conversation with a CPA. The point is, the all-cash discount isn't always a discount once you factor in risk and time. Luna: What about the buyer's perspective? When does offering all cash make sense? Lucas: When you want to eliminate uncertainty. If you're a buyer who can fund the deal from your balance sheet, you can often negotiate a lower multiple because the seller values certainty. That's the leverage. The buyer says, 'I'll give you 5.5x, no financing contingency, no earnout, close in six weeks.' That's worth a premium to the right seller. Luna: And the buyer also avoids the hassle of monitoring an earnout, dealing with seller disputes, or having the seller become a reluctant employee. Lucas: Right. I've seen earnout disputes destroy value. The seller thinks they're entitled to the full amount, the buyer thinks the seller didn't perform. Legal fees eat up the difference. All cash avoids that entirely. Luna: So who should take the all-cash deal? Is there a rule of thumb? Lucas: I'd say if the seller is over 55, planning to exit completely, and doesn't have a high risk tolerance, the all-cash offer is usually the better choice even at a lower multiple. If the seller is younger, wants to stay involved, and believes the business will grow under new ownership, then an earnout can be a wealth-building tool. Luna: But the earnout has to be structured well. We've done episodes on that. Lucas: Yes, and the key is aligning incentives. But in the case of the HVAC distributor, the buyer was a larger competitor who planned to integrate the operations. The earnout metrics would have been hard to track once the businesses merged. So the all-cash offer was cleaner for both sides. Luna: Let's talk about the actual negotiation. How does a seller bring up the all-cash discount without signaling desperation? Lucas: It's not about signaling. The seller should have a clear understanding of their own preferences before going to market. If they know they want a clean exit, they can tell their broker: 'I'm willing to accept a lower multiple for an all-cash offer with a 60-day close.' That becomes a data point when evaluating bids. Luna: And the broker can use that to attract buyers who have cash and want speed. Lucas: Exactly. In the HVAC deal, the broker marketed the business at a 7x multiple, but also mentioned that the seller was motivated to close quickly. That brought in the all-cash buyer. The seller didn't have to lower his asking price upfront — he just had to be willing to negotiate when the right offer came. Luna: One more thing: how do you value the certainty? Can you put a number on it? Lucas: You can. Look at the probability of an earnout paying out in full. Industry data suggests that only about 60 to 70 percent of earnouts hit their targets. So if the earnout is worth 2 million, the expected value is maybe 1.3 million. Plus the seller note — if the buyer defaults, you might recover 80 cents on the dollar. Suddenly the 3.4 million gap is a lot smaller. Luna: So the all-cash offer might actually be worth more in expected value, even at a lower multiple. Lucas: For a risk-averse seller, absolutely. And that's the key insight. The multiple is only one dimension. You have to look at the structure, the counterparty risk, the time horizon, and your own personal goals. The HVAC owner made a rational decision once you account for all those factors. Luna: What about the buyer in that deal? Did they overpay? Lucas: They paid 5.5x for a business that was probably worth 6.5x in a normal process. But they got it done in 45 days, no financing risk, no ongoing seller relationship. For a strategic buyer with a strong balance sheet, that speed and certainty is worth the extra half-turn. So no, I don't think they overpaid. Luna: It's a classic win-win when both sides' preferences align. Lucas: And that's the art of dealmaking. It's not about maximizing every dollar — it's about finding the structure that works for both parties. The all-cash discount is just one tool, but it's a powerful one if you understand when to use it. Luna: Next time someone tells you they got a 7x multiple, ask them what the structure was. The headline number rarely tells the whole story. Lucas: Good place to leave it. Thanks, Luna. Luna: Thanks, Lucas.