Sticker multiples shrink as retention and earnout clauses bite

The headline multiple an advisory firm announces at signing and the cash that eventually lands in the seller's account are two different numbers. Rich Chen, founder of Brightstar Law Group, turns that gap into a practical valuation lesson in a guest post on Kitces' Nerd's Eye View. His focus is the second time a firm's sale price gets set: the years after closing, as deferred consideration converts into cash.

Chen's starting point is that the all-cash-at-closing deal is nearly extinct: at best 80% of the purchase price changes hands at closing, in many cases the figure is 50%, and in some it is just 25%, with much of the remainder paid out over three to five years. That means a seller evaluating an offer needs a discount rate that captures both the time value of money and the risk of becoming a creditor of the acquirer, which is exactly what the arrangement makes the seller — an implicit creditor exposed to the buyer's fortunes without the remedies a lender would have.

The focus on going-rate multiples is understandable, since a multiple of revenue or EBITDA is easy to compare, easy to discuss, and easy to announce. But that multiple is computed against pre-transaction financials while a large portion of the price is paid against post-closing conditions, and the mismatch is the deal.

The deferral alone would be manageable if the money were guaranteed — it is not. The payout schedule is commonly loaded with retention requirements, under which the seller must keep a certain number of clients — or more commonly a certain percentage of revenue — in the fold for at least one year after closing, sometimes two to three. Sellers do not control everything that determines whether they meet that bar, because clients leave for reasons that have nothing to do with the transition, including a tax bill or a divorce, and they leave for reasons that have everything to do with it, including dissatisfaction with the new acquirer; each departure shrinks the retained-revenue base against which the deferred consideration is measured.

Chen's post is written for the current market of serial acquirers, whose offers commonly layer retention, earnout, and other post-closing contingencies on top of the deferred payout. The title gives the second mechanism its place: earnout growth contingencies, which condition part of the purchase price on the firm growing after the seller has handed over control. Retention protects the book the buyer paid for; earnout provisions pay for a book the buyer hopes will exist, and both are rational ways to allocate risk. The counterparty risk, however, sits entirely on the seller's side, so the seller who negotiates the headline multiple as though it were the price is the one mispricing the transaction.

The timing makes the lesson urgent: the advisory industry is in the middle of the great succession wave, with a third of advisors within ten years of retirement and most lacking a written succession plan, as this publication has argued, which means a cohort of owners is approaching the largest transaction of their careers with little experience pricing a deferred, contingency-laden payout. The learning curve is expensive.

The only multiple that matters is the net present value of the cash the deal actually pays, discounted at a rate that reflects collection risk and the time value of money. That is the number sellers should be negotiating, and when an offer is presented as a multiple of revenue or EBITDA, the disciplined response is to ask what percentage is paid at close, what is conditioned on retention or growth, what happens if the milestones are missed, and what the earnout is worth after discounting. The going-rate conversation, which dominates most sellers' preparation, is about the sticker; the actual price is a set of contingent cash flows.

Buyers structure these deals the way they do because it works: deferred consideration keeps the seller engaged, retention requirements protect the asset being purchased, and earnouts fund growth the buyer does not have to pay for in advance. None of that makes the structure predatory, but it does mean sellers need to come to the table with the same toolkit. A seller who walks in with a net-present-value model and pointed questions about the payout schedule is simply behaving like a counterparty. Every seller should ask the buyer for the net present value of the offer in the offer letter, and if the buyer cannot produce it, the seller should produce it themselves — before signing, not after.