Exit Strategy & Solutions • 31 May 2026
Why the Number You Agree Is Rarely the Number You Receive
A founder agrees a £6.5m sale.
It feels like a strong outcome. Years of work validated. Deal agreed in principle.
Twelve months later, they’ve received £4.8m — and they’re still arguing over the rest.
Nothing “went wrong”.
The issue was simpler: they agreed a price, not the mechanics behind it.
Introduction
In most SME deals, the headline number is only the starting point.
What actually determines what lands in your account is:
- how that price is structured,
- how it’s adjusted,
- and how much of it is guaranteed.
Buyers know this. Founders often don’t — until it’s too late.
This is where deals quietly shift from “value creation” to value erosion.
1) Price Isn’t Price: Understanding the Two Main Mechanisms
Locked Box vs Completion Accounts
Almost every deal will use one of two pricing methods:
Locked box
- Price is fixed based on historical accounts
- Seller keeps cash generated after the “locked date”
- Buyer gets certainty
- Requires clean financial discipline
Completion accounts
- Price adjusts at completion based on actual cash, debt and working capital
- Buyer gets protection
- Seller takes risk on movements and definitions
On paper, both can deliver the same number. In reality, they often don’t.
Where Founders Get Caught
Completion accounts sound “fair”. But they introduce:
- debates over what counts as “normal”
- aggressive working capital assumptions
- post-completion disputes
- delayed final proceeds
Locked box sounds restrictive — but often gives:
- higher certainty
- cleaner execution
- fewer disputes
🚩 Diligence Flag: “The Working Capital Trap”. Buyers will propose a “normalised” working capital target — usually a trailing 12-month average. In seasonal businesses, or businesses that have been growing, that benchmark sits well above how you actually operate, and you end up funding their opening balance sheet to the tune of hundreds of thousands of pounds, with no offsetting increase in the price. Lock the definition, the formula, and the treatment of seasonality into the heads of terms, not the final SPA. By the time it’s buried on page 47 of a legal draft, you have no leverage to change it.
Action step: Don’t ask “what’s the price?” — ask “what mechanism gets me to cash, and how much can move?”
2) The Certainty Gap: How Much Is Actually Guaranteed?
Not All £6.5m Is Equal
A typical SME offer might look like:
- £4.5m at completion
- £1.0m earn-out
- £0.5m deferred consideration
- £0.5m held in escrow
Headline: £6.5m
Reality: £4.5m (certain), £2.0m (conditional)
The Problem with Earn-Outs
Earn-outs are not inherently bad — but they shift risk back to you:
- tied to future performance you may not fully control
- influenced by buyer decisions post-sale
- subject to accounting interpretation
Common issues:
- cost allocations reduce reported profit
- strategic changes affect performance
- targets set optimistically during negotiations
Deferred and Escrow: The Quiet Haircut
- Deferred consideration: paid later, often unsecured
- Escrow / holdback: withheld for warranties or claims
Both reduce immediate liquidity, certainty, and control.
Founder Insight: “Earn-Outs Test More Than the Business”. The hardest part of an earn-out isn’t hitting the numbers — it’s operating under someone else’s roof while still being measured. You’ll watch budgets cut on initiatives you championed, costs allocated from a parent group you don’t influence, and decisions made for “the wider business” that quietly erode your number. Negotiate the metric, the protections, and the dispute mechanism while you still have leverage. Once the deal closes, the buyer sets the rules.
Action step: Translate every offer into two numbers — “guaranteed cash at completion” and “at-risk consideration”. Focus negotiations there.
3) Hidden Risk: The Adjustments Founders Underestimate
Working Capital: The Silent Deal Lever
Working capital targets are one of the biggest value swing factors.
If the target is set too high:
- you effectively “fund” the business for the buyer
- the price is adjusted down
If definitions are vague:
- disputes are almost guaranteed
Debt and “Debt-Like Items”
Not everything labelled as “debt” is obvious:
- director loans
- unpaid bonuses
- leases
- tax liabilities
These are often deducted from the headline price.
Leakage in Locked Box Deals
Locked box protects price — but only if leakage is tightly defined.
If not:
- normal trading decisions can become disputes
- buyers may challenge payments post-signing
🚩 Diligence Flag: “Debt-Like Items Is a Stretchy Term”. Bonus accruals, holiday pay, customer prepayments, dilapidations, dormant tax exposures, leases — buyers will try to push every one of them into the “debt” column at completion, pulling your headline price down pound-for-pound. Get your accountant to model a realistic “net debt” position before you go to market, and write the exclusions into the heads of terms. By the time it lands in the legal drafts, you’re negotiating from the back foot — and every category you concede has a direct, quantifiable effect on cash to shareholders.
Action step: Treat definitions (working capital, debt, leakage) as financial terms — not legal footnotes.
4) Case Studies: How Value Actually Moves
Case Study 1: Completion Accounts Erosion
A £5.8m deal agreed on a completion accounts basis.
At signing: “normal” working capital assumed at £1.2m.
At completion: buyer recalculates “normal” as £1.5m.
Outcome: £300k downward adjustment.
Additional issue: £120k reclassified as “debt-like” (bonus accruals).
Final proceeds: £5.38m.
Nothing changed operationally. The shift came entirely from definitions and interpretation.
Case Study 2: Earn-Out Dilution
A £7.0m deal structured as:
- £5.0m upfront
- £2.0m earn-out over 2 years
Post-acquisition: buyer centralises marketing spend and allocates group overhead into the business.
Result: EBITDA drops below earn-out threshold.
Earn-out achieved: £600k.
Founder expectation: £7.0m.
Actual outcome: £5.6m.
The business performed well. But the measurement framework changed.
Case Study 3: Locked Box Done Properly
A £4.2m deal structured on a locked box basis.
Key features:
- tight leakage definitions
- permitted payments clearly agreed
- no completion accounts
Outcome: £4.2m received as expected, no post-completion disputes.
The trade-off: slightly lower headline than competing offer. But: higher certainty, faster completion, less distraction.
Lesson: certainty often outperforms a higher but uncertain headline.
5) Diligence Depth: Where Deals Are Really Tested
What Buyers Are Actually Doing in Diligence
Buyers aren’t just “checking numbers”. They are:
- testing sustainability of earnings
- identifying risks to future cash flow
- looking for reasons to adjust price
1) Revenue Quality
- recurring vs one-off
- customer concentration
- contract durability
Any perceived weakness feeds directly into earn-out logic or valuation pressure.
2) EBITDA Normalisation
Buyers will adjust for:
- “one-off” costs
- owner-related expenses
- timing differences
But what you see as normal, they may see as inflated.
Example:
- reported EBITDA: £1.2m
- buyer-adjusted EBITDA: £1.0m
That difference flows straight into valuation.
3) Working Capital Deep Dive
This is where most founders underestimate complexity. Buyers analyse:
- seasonality
- debtor days
- stock levels
- creditor practices
Then they define a “normalised” level.
The risk: they set a level higher than how you actually operate. Which means you must leave extra cash in the business, or take a price reduction.
4) Balance Sheet Scrutiny
Buyers look for:
- hidden liabilities
- provisions
- contingent risks
Common reclassifications:
- accruals → debt-like items
- tax exposures → price deductions
Where Founders Lose Control
The issue isn’t diligence itself. It’s:
- entering it without preparation
- reacting instead of shaping the narrative
- accepting buyer definitions late in the process
Founder Insight: “EBITDA Is a Negotiation, Not a Number”. Buyers don’t accept your reported EBITDA — they build their own. Every “one-off” you add back, every owner perk you strip out, every timing adjustment is up for debate. Walk into diligence with a quality-of-earnings analysis already done, a clear narrative for every add-back, and supporting evidence to hand. The founder who arrives prepared sets the anchor for the conversation. The founder who arrives unprepared watches the buyer set it for them — and the gap between those two anchors typically lands in the buyer’s favour by 8 to 15% of headline value.
Action step: Prepare a “defendable position” on EBITDA, working capital, and debt before diligence begins — not during it.
6) Why Buyers Focus on Mechanics (and You Should Too)
Buyers aren’t trying to be difficult. They’re trying to:
- manage risk
- protect downside
- align incentives
But that doesn’t mean the structure is neutral.
In competitive processes: sellers often get cleaner structures (more cash, less risk).
In unsolicited deals: buyers often dictate structure.
That’s the real issue. Not the price — the lack of tension behind it.
🚩 Diligence Flag: “Locked Box Leakage Definitions”. In a locked box deal, every pound that leaves the business between the locked date and completion is potentially “leakage” — and the buyer can claw it back. Bonuses, dividends, related-party transactions, even normal director expenses can fall into the net if the permitted-payments list isn’t carefully drafted. This is one definition where a few hours with your lawyer pre-signing saves six-figure post-signing disputes.
7) A Practical Way to Evaluate Any Offer
Before reacting to the headline number, break it down:
Step 1: Cash Profile
- What do I receive at completion?
- What is deferred or conditional?
Step 2: Adjustment Exposure
- Completion accounts or locked box?
- What can move, and by how much?
Step 3: Risk Allocation
- Earn-out dependencies
- Buyer control post-deal
- Escrow terms
Step 4: Downside Scenarios
- What happens if performance dips?
- What if there’s a dispute?
Then ask:
“What is the worst realistic outcome — and am I comfortable with it?”
Conclusion
Most founders negotiate price. Experienced sellers negotiate mechanics.
Because in SME deals:
- the headline number is marketing,
- the structure is reality,
- and the details determine what you actually take home.
If you’re assessing an offer — especially an unsolicited one — the biggest risk isn’t undervaluing your business. It’s misunderstanding how value is converted into cash.
If you want a clear, founder-side view of what an offer really means — before you commit — we can help you break it down quickly and pragmatically.
About Exit Strategy & Solutions
Exit Strategy & Solutions is a specialist advisory firm helping UK SME owners build optionality, maximise value, and reduce risk through strategic exit planning and execution.
Our approach combines deep market intelligence, strategic positioning expertise, and an unwavering focus on protecting your interests at every stage.
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- Email: [email protected]
- Phone: 0330 043 4689
- Website: www.exitstrategyandsolutions.com
Disclaimer
This article is provided for informational purposes only and does not constitute financial, legal, tax, or business advice. Examples cited are based on composite scenarios for illustrative purposes. Exit Strategy & Solutions is not responsible for decisions made based on information in this article.
