Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / Why Cash Beats High Multiples in Business Sales
Transcript
- Lucas: So there's this landscaping company based outside Columbus, Ohio — does commercial grounds maintenance for office parks and apartment complexes. Nice little business, recurring contracts, about one million dollars in EBITDA. Luna: Sounds like the kind of thing that would attract a lot of interest. Lucas: Exactly. Two offers came in. One was from a regional roll-up platform: ten times EBITDA, all cash, close in sixty days. The other was from a larger competitor: fifteen times EBITDA, but half the consideration in an earnout tied to three-year performance targets. Luna: Fifteen times vs ten times — that's a huge headline difference. The seller must have been tempted. Lucas: You'd think so. But he took the ten-times cash deal. And this is the kind of conversation we keep hearing from business owners after they close — 'I wish I'd known what earnouts really cost.' Which is actually a good moment to mention that these conversations are only possible because of listeners who support the show. If these episodes have helped you think about your own business or a potential exit, buying me a coffee at buy me a coffee dot com slash fexingo is what keeps them ad-free and independent. A couple of bucks a month genuinely makes a difference here. Luna: Agreed. It's a small way to give back if you've gotten value. And honestly, that landscaping story is such a perfect example of why headline multiples can be misleading. Lucas: Right. So let's dig into why he made that call. First, the earnout structure: the buyer wanted him to stay on as a manager for three years, and the earnout paid out only if the business grew EBITDA by at least ten percent annually. If he left early, he forfeited everything. Luna: So he's basically trading liquidity for a performance bet. And he's locked into a job he might not want. Lucas: Exactly. And the numbers don't lie: according to a 2020 study by SRS Acquiom, about forty percent of earnouts fail to pay out in full. And in the lower middle market — say, businesses under ten million in value — the failure rate is even higher. People overestimate their control post-sale. Luna: Forty percent failure rate. That means the expected value of that fifteen-times multiple is effectively lower than ten times if you factor in the probability. Lucas: Bingo. Let's do the math. Fifteen times on one million EBITDA is fifteen million. But if half is in earnout — they said half, so seven and a half million base, seven and a half contingent. With a forty percent chance of zero, the contingent piece is worth four point five million on an expected basis. Total expected value: twelve million. Meanwhile, the all-cash offer was ten million guaranteed. So the premium for taking earnout risk is only two million — not five million as the headline suggests. Luna: And that's before you consider the time value of money, the hassle of staying on, and the emotional drain. Lucas: Precisely. Plus, the cash deal closed in two months. The earnout would have taken three years to fully realize. Discount that two million premium at even ten percent, and the net present value shrinks further. The guy did a back of the envelope calculation and said, 'I'd rather have ten million in the bank today than a chance at fifteen million over three years with strings attached.' Luna: It's a lesson in base rates. The path to actually collecting that full multiple is narrow. Lucas: And it's not just about earnouts. There are other ways a high multiple can be illusory — seller notes, escrow holdbacks, working capital adjustments. In one deal I saw, the buyer offered twelve times, but required a two-year non-compete with no compensation, and a consulting agreement at below-market rates. All those provisions effectively lower the net proceeds. Luna: So what should a seller do? How do you evaluate these trade-offs in real time? Lucas: First, get a broker who runs a 'net proceeds' analysis, not just a multiple comparison. Second, assign probabilities to earnout and escrow contingencies. Third, consider your personal goals: do you want to stay? Do you need liquidity for another venture? The landscaping owner had another business idea he wanted to pursue, so the cash was more valuable than the extra potential. Luna: That's the key: aligning the deal structure with post-exit life. The highest multiple on paper can be the worst deal in reality. Lucas: We've seen it time and again. There's a reason the old saying 'a bird in the hand is worth two in the bush' is so popular in M&A. The seller who took the ten-times cash is now happily running a different business, and the buyer who offered fifteen times? They ended up struggling to integrate and missed their targets anyway. Luna: So the real takeaway: don't chase multiples blindly. Understand the structure, the risks, and your own priorities. Lucas: Exactly. And if you're thinking about selling, run the numbers with a critical eye. The landscaping story isn't unique — it happens all the time. But many sellers get dazzled by the bigger number and only realize later what it cost them.