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Selling a business, particularly one you’ve built yourself, can be both emotionally challenging, logistically complex, and downright mystifying. For many owners, it’s a once-in-a-lifetime experience. Without the right professional support, the process can quickly become overwhelming, and even small mistakes can disrupt what should be a defining milestone in an entrepreneur’s career.
What do sellers wish they had done differently when structuring a transaction or planning for life after closing? In this article, we examine the structural elements that shape post-transaction outcomes, and the questions sellers should ask to optimize the transaction.
Most transactions involve trade-offs. Outcomes depend on timing, market conditions, macroeconomic stability, and sometimes, luck. Even well-established companies struggle to close due to factors beyond their control like the 2008 financial crisis, the COVID-19 pandemic, or recent tariff-related volatility.
Since ideal conditions are never guaranteed, experienced sellers often spend months or years positioning so they are ready when favorable markets emerge. Legal, tax, accounting, and financial advisors typically begin their work well before a deal is on the table. Assembling the right team early significantly increases the probability of a smooth and successful close.
As investor interest builds, sellers should look beyond headline numbers and pay close attention to post-deal arrangements. These details are often what separate good deals from broken promises.
Understanding what happens after the deal closes is just as important as negotiating the terms leading up to it. While most transactions are energized by cash at closing, few deals are free of post-close obligations. Sellers should be prepared for the financial, operational, and strategic implications that follow.
Buyers are increasingly structuring deals so that sellers receive a significant portion of the purchase price—sometimes up to 50%—over time, often after they’ve relinquished control. It’s a leap of faith that can backfire.
Nearly one in four private equity (PE)-backed transactions includes contingent consideration paid out after closing. These post-closing payments include earn-out provisions, where deferred payments are tied to future performance metrics such as earnings before interest, tax, depreciation, and amortization (EBITDA), revenue growth, or margin improvement.
Sellers should be aware that new owners often influence how these metrics are calculated. Corporate allocations, management fees, lease obligations, capital expenditures, interest expenses, and new projects can all reduce earnings and affect payout calculations. Even exceptional year-over-year revenue growth may not translate into cash earnings if investments have extended payback periods that are not considered in the earn-out formula.
Seller Tip: Clarify how future investments, fees, and startup costs will be treated, and understand how financial measures like “adjusted EBITDA” may be modified to support specific narratives. If compensation depends on performance, it’s important to understand all inputs.
Sellers are frequently asked to reinvest a portion of the purchase proceeds into the new entity. While this can offer a second opportunity for value creation, it often comes with reduced influence, especially when holding a minority stake. Rolled equity tends to have limited liquidity, rights, and governance privileges.
In addition, buyers may introduce seller notes (unsecured, interest-bearing promissory notes that are subordinate or junior to bank debt). These notes often have long maturities and represent a deferred, risk-bearing claim on future cash flows. If the business fails to satisfy post-deal debt obligations, seller notes may lose value or require restructuring which further erodes the value of the notes.
Seller Tip: Before agreeing to roll equity or accept seller notes, ask detailed questions about governance rights, liquidity options, and debt structure. Understand where your claims rank in the capital stack and how repayment risks are managed.
Debt plays a central role in the private equity model and is often employed to balance the capital structure and amplify returns. While leverage can benefit both parties, it also introduces risk, particularly for sellers with deferred compensation. Debt ranks ahead of equity, seller notes, and earn-out payments, placing sellers near the bottom of the repayment hierarchy.
Every company has debt capacity so the effect of an overly leveraged balance sheet and related high interest costs can limit future investment. Most senior credit facilities are governed by financial covenants that, if breached, can disrupt operations. Covenants such as the relationship between debt levels and EBITDA and minimum levels of liquidity dictate the amount and availability of credit in future years. Unlike recurring costs such as rent or payroll, interest expense is frequently added back to EBITDA, which can distort the company’s financial picture. Interest is a real expense which must be served at regular intervals for borrowing companies.
Lenders, focused on capital preservation, secure their position with priority liens on assets and the ability to freeze funding, accelerate repayment, or even place the company into receivership. Since capital structure decisions rest with the new owners, sellers should ask pointed questions about leverage during negotiations. Lenders often identify multiple sources of repayment and collateral, and liquidation plays into this theme.
Seller Tip: Ask buyers to outline their debt strategy, including expected leverage ratios, interest coverage, and covenant terms. Understanding how debt will be used and how it could affect future cash flow can help you assess the risk to any deferred payments.
Escrow provisions are a standard part of most transactions, designed to protect buyers from unexpected liabilities. Sellers are typically required to warrant certain aspects of the business, such as the collectability of receivables, inventory valuation, or the resolution of past legal claims. To support these representations, a portion of the sale proceeds is withheld and placed in escrow.
Legal counsel usually serves as trustee, managing the release of funds and resolving any claims that arise. However, once funds are in escrow, sellers have limited control over how disputes are handled. Disagreements can emerge over the interpretation of terms or the application of withheld funds. With escrow amounts sometimes reaching up to 10% of the total sale price, the financial impact can be significant.
Seller Tip: Work closely with legal advisors to understand the scope of your representations and warranties, the timeline for fund release, and the process for dispute resolution. Clear documentation and well-defined terms can help minimize surprises and protect your proceeds.
In many transactions, sellers remain involved in the business post-close under formal employment agreements. While this arrangement can help ease the transition, long-term continuity is rare. Executive departures often occur due to performance issues or personal decisions.
Although initial negotiations may include optimistic plans for leadership continuity, new owners frequently restructure teams, adding roles such as CFO, head of sales, or business development leads. These changes can alter reporting lines and decision-making authority, making it wise for sellers to anticipate changes in leadership dynamics.
In addition to employment terms, most buyers require selling shareholders to sign restrictive covenants, including non-solicitation, non-compete, and non-circumvent agreements. These provisions significantly limit post-transaction flexibility. Some executives may find themselves weighed down with added corporate responsibilities, while others are placed in symbolic roles focused on compliance and board-level communication.
Seller Tip: Ask to meet the operating partner and key decision-makers from the investing entity before closing. Request executive references and clarify expectations around your role, reporting structure, and decision-making authority. Understanding the post-sale environment upfront can help you assess whether continued involvement aligns with your goals.
Selling a business is a major milestone, but it’s also the beginning of a new set of decisions. Many operating companies face barriers, such as limited capital, leadership gaps, or succession and talent challenges, which can stall progress. Sellers may face new responsibilities and misaligned expectations as buyers begin addressing the issues that previously constrained growth. Being prepared for these conversations helps enable a smooth and successful transition.
At Elliott Davis, we help sellers prepare for what comes next. Our team provides market insights, valuation support, transaction advisory, and due diligence services.
Contact us today to learn how we can support your next move.
The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.
