Closing the Gap is our five-part series from John Barton on the structures that bridge the distance between a seller’s view of value and a buyer’s price: where each fits, where each breaks, and the one thing to get right before you sign. This article looks at the staged sale.
Earlier in this series
- Part 1 – Why the Gap Is About Risk, Not Value
- Part 2 – Why Earn-Outs Break Down and What Protects Your Payment
- Part 3 – Vendor Loans, and What It Costs to Finance Your Own Sale
- Part 4 – The Retained Stake, and What a Second Bite Really Costs
- Part 5 – The Holdback, and Why It Should Be the Smallest Bridge
Sell part of the business now and the rest later, at a price set by results you have not delivered yet. It is two deals, and you will have less leverage in the second than you have today.
A staged Sale – In Brief
A staged sale transfers a majority now, commonly fifty to seventy per cent, with the balance bought later at a price struck at that time.
How is it different from an earn-out? An earn-out prices the whole business today and makes part of that price contingent. A staged sale genuinely reprices the remaining shares later, so growth flows into the second tranche at a full multiple.
Where does it break? The valuation mechanism, and control. You have sold the majority, so the buyer now sets the strategy that determines what your remaining shares are worth.
What has to be nailed down? A named valuation methodology with a worked example, a put you can exercise, and a second tranche the buyer is actually committed and able to fund.
The staged sale is the most attractive of the five on paper. You take real money off the table now, you keep meaningful exposure to the growth you believe is coming, and unlike an earn-out the second tranche is priced on what the business is worth by then.
That is all true. It is also the structure that puts the largest sum of money into a negotiation you have not had yet, at a point where the other side owns the business.
The formula is the deal in a staged sale
“Fair market value at the time” is not a mechanism. It is a future argument with your own money on the table.
What belongs in the agreement is the method: what gets measured, whether EBITDA or something else, how it is worked out and over what period, the multiple or the range, and a worked example running the whole thing on last year’s numbers so both sides can see what the words produce. Then how a valuer gets appointed, named by qualification and chosen by a professional body if you cannot agree, and what happens if the two valuers land far apart.
Spend your negotiating capital here. Every other term in a staged sale is downstream of this one.
You are a minority holder in the meantime
Everything in Part 4 applies, with one difference that matters. In a retained stake you are along for the ride. In a staged sale the ride sets the price of your remaining shares, so the buyer has a direct financial interest in the business performing modestly right up until they buy the rest of it.
They will rarely act on that. Build the agreement as though they might. Operating covenants, information rights, a board seat, and a bar on the moves that most easily depress what the business looks like it earns: related-party charges, transfer pricing, shifting revenue to another entity in the group.
Can they actually pay?
A second tranche is worth what the buyer can fund when it falls due. Ask now, in writing: are they committed or do they hold an option, is the money there or does it depend on a facility they have yet to arrange, is there a parent guarantee, and what secures it if they cannot pay.
Then give yourself a trigger. A put you can exercise on a date certain is the difference between an exit and a hope. Without it you own a minority stake in a private company with one possible buyer, and you will take whatever they offer.
Where the series lands
Five bridges, and the same shape underneath all of them. Each one closes the gap by moving risk from the buyer to you, each one is settled in the drafting before you sign, and each one is worth exactly what that drafting is worth.
Which one suits you is a question about your circumstances, not about the structures. How much certainty you need now. How much control you can bear to give up. Whether you would still be all right if the deferred portion never arrived.
And the answer Part 1 started with still stands. If the buyer is discounting something real, the best structure is the one you do not need. Fix the problem, and come back in two years.
The information on this website is general in nature and is not intended to constitute financial, legal, or tax advice. It does not take into account your objectives, financial situation, or needs. You should seek appropriate professional advice before acting on any content. While we draw on our experience as business owners and corporate advisors, our insights are not a substitute for tailored advice.
