Value and structure frameworks | LOI strategy | The Acquisition Playbook

Three ways to frame value

Earnout

A portion of the transaction value paid after close, contingent on the business achieving specific performance targets. Typically 10 to 30% of total value, paid over 1 to 2 years, tied to a single verifiable metric like revenue or EBITDA.

Seller note

A loan from the seller to the buyer, repaid out of business cash flows over time. Typically 10 to 30% of transaction value, at market interest rates (5 to 7%), subordinated to senior lender debt.

Working capital peg

The agreed normal level of working capital the business needs to operate. Value adjusts dollar-for-dollar at close based on whether actual working capital is above or below the peg.

The quick rule on value framing

If the deal only works at a high multiple and perfect assumptions, do not force the multiple approach. Use a range or an earnout to keep the offer fair and protect your downside. Sellers can feel when a value requires everything to go right. Structure that shares the uncertainty honestly closes faster than a number that pretends it does not exist.

Multiple-based approach

One clear transaction value based on a market multiple of verified earnings. Use this when earnings are clean, stable, and well-supported by documents, and you want an offer that is easy to explain and easy to sign.

How to frame it to the seller: 'Based on the earnings we have reviewed, we are proposing a defined value That is roughly 4x your annual earnings, which is consistent with what similar businesses trade for and reflects the stability we validated.' The owner should be able to repeat that math to their spouse or advisor.

Range-based approach

A purchase valuation range that narrows after diligence confirms a short list of remaining items, plus the standard working capital adjustment at close. Use this when the deal looks real but a few items could move value meaningfully.

How to frame it: 'We are proposing a meaningful range The final number depends on confirming a few items in diligence and applying a standard working capital adjustment. The goal is to land on a fair number based on what the business needs to operate day to day.' This keeps you from locking into a number you later cannot defend.

Base plus earnout approach

Cash paid at closing plus additional value paid over time if performance holds. Use this when there is a real swing factor like customer concentration, heavy owner dependency, or an unproven growth story. This lets the seller reach full value if the business performs, while protecting you if it does not.

How to frame it: 'We are proposing a defined value paid at closing, plus contingent consideration over the next two years if the business hits clear targets. You get most of the value now, and the rest follows the results.' At LOI stage, keep the earnout directional. You will finalize the metric and mechanics in the purchase agreement.

The working capital peg

The working capital peg is one of the most important protections in your LOI. Most buyers do not fully understand it until something goes wrong at close.

What it prevents

Without a peg, a seller can pull cash out, slow down collections, or stretch payables in the weeks before close to make the business look better on paper. You end up funding the shortfall on day one without a mechanism to recover it.

An owner who knows close is in 45 days has every incentive to stop paying vendors, accelerate any receivables they can, and route any available cash out of the business. The peg is what prevents that from changing your effective transaction value.

How the adjustment works

Working capital equals current assets minus current liabilities (receivables, inventory, prepaid expenses, minus payables and accrued liabilities). The peg is the normal working capital level required to operate, set as a trailing average adjusted for seasonality. At close, actual working capital is compared to the peg, and the value adjusts dollar-for-dollar.

Example: Peg is set at the agreed amount At close, actual working capital is a representative amount because the seller let receivables balloon and stopped paying vendors. transaction value reduces by a representative amount This is a mechanical adjustment based on the agreed formula, not a negotiation.

How to handle it in the LOI

Establish the methodology and concept in the LOI. Finalize the specific peg amount during diligence once you have complete balance sheet history and can calculate the trailing average properly. Do not try to set a specific dollar amount in the LOI before you have the data.

Decision gate

Proceed

Value and structure are agreed in the LOI.

Reconsider

Seller wants a higher value. Use structure to bridge the gap rather than raising the number, or require better documentation for their claimed EBITDA.

Pass

Seller is more than 30% above your valuation and will not negotiate or provide data to justify their number.

Section takeaway

Structure that shares uncertainty closes faster than a number that ignores it

The LOI that wins is not the highest number. It is the most credible number with a structure that makes sense for the risks in this specific deal. Sellers and their advisors can distinguish between a structure designed to share risk fairly and one designed to protect the buyer from a bad deal.

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This course is operational guidance, not investment, legal, tax, or financial advice. SilverShore Partners is not a registered broker-dealer or investment adviser; in qualifying private-company transactions we may operate within the federal M&A broker exemption under Section 15(b)(13) of the Securities Exchange Act. Confirm specifics with your own advisors.