Two Offers, a Hundred Thousand Apart, and the Lower One Paid More

Offers are not comparable on price. They are comparable after tax, after fees, and after whatever part of the money arrives later or not at all.

Owners know this in principle and compare headlines anyway, because the headline is the number both buyers put in writing and the rest takes work.

What two identical prices can hide

Illustrative. An owner ran a specialty coffee roaster: a production plant, real inventory, equipment depreciated hard across twelve years, and a name people in her region knew. The company was a C corporation, set up in its first year because somebody told her to and never revisited.

Two buyers arrived within a hundred thousand dollars of each other. One wanted the stock. The other wanted the assets, with an allocation weighted toward her inventory and her equipment.

On the page it read as the same deal twice. After tax it was not close. The asset structure paid the corporate layer first and then paid her on what came out of it. The allocation pushed a large share of the gain into ordinary income, through recapture on the equipment and through the inventory. And goodwill, the class treated most kindly, was the residual, so it got what was left after the other classes had taken their fill.

She took the stock deal at the lower headline. The difference, after tax, was a little over half a million dollars in favor of the number that looked worse.

Nothing about the asset offer was aggressive. That buyer wanted the treatment that was good for them, which is what buyers do.

The four things that make a headline unreliable

Structure. Assets or equity, and in an asset deal, how the price is allocated across classes. This is routinely the largest single difference between two offers at the same price.

How much arrives at closing. A note, rolled equity, or an earnout is a claim on something that still has to happen. The headline counts it in full; your bank account does not.

The fee and the tax timing. Your advisor’s fee is calculated on all consideration, including the paper, and paid in cash at closing. Add the tax due on a gain you have realized without receiving all of it. Closing-day cash is lower than the headline by more than most owners expect, and the gap is largest in the deals that look most generous.

The conditions and the holdbacks. A price with four conditions nobody can be held to, and a fifth of it in escrow for eighteen months, is a different price from the same number paid clean.

Run the comparison before exclusivity, not during drafting

Illustrative. An owner of a three-location orthodontics group had a letter of intent in front of him with a number he was happy with. The structure line said asset purchase, and he read that as a detail.

His advisor asked him to get the after-tax math done before signing rather than after. It came back showing the asset structure put a layer of tax into the deal he had not accounted for, and that the number he was pleased with was not the number he would keep.

They went back. The buyer would not pay the headline for equity, because the basis step-up was worth something real to them and they were not handing it over for nothing. They came up most of the way. He signed the lower figure, and the proceeds after tax were higher than the deal he had been about to accept.

What made that possible was doing the work before the exclusivity clock started. Afterward, his only remaining option would have been to accept it.

The one thing that makes any of this negotiable

A second buyer.

In the food brand example, getting back out of a structure that had already been described as acceptable in principle was possible, uncomfortable, and only worked because there was another party. In the veterinary example the buyer came most of the way back because they knew what they would lose.

A single buyer has no reason to improve a structure you have already agreed to in concept. Which means the comparison is not only an analytical exercise; it is something you can only act on while you still have a field.

What to actually build

One page per offer, with the same lines on each.

Headline price. Structure, and in an asset deal the allocation by class. Cash at closing. Deferred consideration, with what it depends on and who controls that. Holdbacks and escrow, with release conditions. Conditions to closing, and how specific each one is. Fees. Estimated tax by component. Net cash at closing, and net total under a reasonable case and a poor case for the deferred piece.

Then the number you are actually deciding on, which is the last line, twice.

What getting it wrong costs

The gap between the offer that looked best and the offer that was best.

It is unknowable afterward, which is why owners who chose on headline tend to believe they chose well. The one in the food example would have been four hundred thousand dollars worse off and would never have had a reason to think so.

More on this: Same Price, Different Money: Selling the Assets or Selling the Company.

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This is what we do. Prism Edge builds the comparison on one page per offer, with structure, allocation, closing-day cash, fees, and estimated tax on each component, so the decision is made on the last line rather than the first. Your accountant supplies the treatment; the comparison has to exist before exclusivity, because that is the last point at which it changes anything.

The full chapter on structuring the transaction, and the chapter on the tax consequences of each type, are both in The Business Sale, free to download here.

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General information, not legal, tax, or financial advice, and no advisor relationship is created by reading it. Rules change and the specifics of your situation matter. Always consult your own attorney and accountant before acting.