This piece addresses a critical challenge in business transactions: the gap between what owners believe their company is worth versus what investors are willing to pay. Rather than accepting lower valuations, owners should employ a “PROVE IT” strategy through performance-based deal structures.
Key Deal-Structuring Strategies
1. Earn-out Clauses
Part of the sale price or investment is tied to future performance, allowing owners to demonstrate growth potential. This structure bridges valuation gaps by rewarding achievement of specific financial targets or operational milestones.
2. Seller Financing
Owners finance portions of deals by accepting payments over time, reducing buyer risk while maintaining connection to business success. This approach demonstrates confidence in continued performance and creates alignment between parties.
3. Revenue-based Models
Compensation links directly to actual financial results rather than speculative projections. Revenue-sharing arrangements provide downside protection for buyers while preserving upside potential for sellers.
4. Equity Rollover
Owners retain minority stakes post-sale, aligning incentives with continued success. This structure demonstrates commitment to future performance and allows sellers to participate in value creation under new ownership.
5. Ratchet Mechanisms
Ownership adjusts based on performance targets, protecting owner interests if goals are met. Ratchets provide automatic value adjustment tied to objective performance criteria, reducing negotiation friction.
Core Message
Successful negotiations depend on strategic positioning, diligence, and recognizing that “everything comes down to a negotiation of risk and reward.” Performance-based structures benefit both parties by rewarding achievement while mitigating risk.
Rather than viewing valuation gaps as deal-breakers, sophisticated parties recognize these moments as opportunities to create alignment through creative structuring. The best deals often emerge when both sides commit to proving value through performance rather than debating projections.