TREP Advisors, LLC, a top 25 mergers and acquisitions (M&A) advisory firm, recently facilitated a successful retail business sale that overcame one of the most challenging valuation dilemmas in M&A: how to price a company whose recent performance was dramatically impacted by unprecedented external events.
This case study demonstrates how creative deal structuring can bridge valuation gaps and create win-win outcomes when buyers and sellers have fundamentally different views of a business’s future.
The Valuation Challenge: COVID-Era Performance
When this retail sales and service business came to market, it presented a unique challenge that many companies faced during and after the COVID-19 crisis. Unlike businesses that struggled during the pandemic, this company experienced significant growth. Sales surged as customer behavior shifted, and the business capitalized on changing market dynamics.
On the surface, this sounds like an ideal situation for a business sale. Strong recent performance typically commands premium valuations. But there was a complicating factor: potential buyers weren’t convinced the elevated performance would continue.
The owners believed the increased sales represented a permanent shift in their market and customer base. They felt the business had reached a new level of performance that would continue post-pandemic. The financial results supported their confidence—revenues had grown substantially and remained strong.
Prospective buyers, however, viewed the situation differently. They saw the COVID-era performance as an anomaly driven by temporary market conditions. While they recognized the business had solid fundamentals, they weren’t willing to pay a premium based on what they considered unsustainable pandemic-driven results. They wanted to base the valuation on pre-COVID historical performance.
This created a significant valuation gap. The owners felt undervalued based on current performance. The buyers felt overexposed if they paid for results they believed wouldn’t last. Traditional valuation approaches couldn’t bridge this divide—until TREP Advisors stepped in with a creative solution.
TREP’s Solution: Risk-Sharing Through Earn-Out Structure
Rather than forcing one party to accept the other’s perspective, TREP structured a deal that allowed both buyer and seller to be right. The transaction was designed around a base purchase price plus an earn-out component that would reward the sellers if their optimistic projections proved accurate.
The structure TREP negotiated accomplished something rare in M&A: it aligned the interests of both parties while fairly distributing risk and reward.
Base Valuation on Five-Year Average Performance
The purchase price was calculated using the average business performance over the previous five years. This approach gave the buyers confidence they weren’t overpaying based on temporary COVID-era results. It reflected the business’s stable, pre-pandemic baseline performance—a valuation the buyers considered fair and defensible.
For the sellers, while this base price was lower than what current performance would suggest, it provided guaranteed value at closing and eliminated the risk of the deal falling apart over valuation disputes.
Upside Earn-Out for Continued Performance
The innovative component was the earn-out structure. If the elevated sales levels continued post-acquisition, the sellers would receive additional compensation tied to performance benchmarks. This gave the owners the opportunity to be rewarded for the growth they believed was sustainable.
The earn-out terms were structured with clear, measurable benchmarks based on revenue or EBITDA targets. If the business maintained its current performance trajectory, the sellers would ultimately receive full value for the company at its elevated level. If performance reverted to historical norms, the buyers would have paid a fair price without overpaying for temporary results.
Minority Interest for Aligned Incentives
To further align interests and ensure success, the sellers retained a minority ownership interest in the business post-transaction. This created powerful incentives for everyone involved.
The buyers gained the benefit of sellers who remained financially invested in the company’s success. The sellers weren’t just walking away after closing—they had ongoing skin in the game and motivation to support a smooth transition and continued growth.
The sellers maintained upside exposure to the business’s continued success beyond just the earn-out. Their minority interest meant they would benefit from long-term value creation, making them motivated partners rather than just former owners collecting earn-out payments.
This structure created what both parties wanted: the buyers acquired a solid business at a fair, defensible valuation with motivated former owners still involved; the sellers received immediate liquidity while retaining upside potential if their growth thesis proved correct.
Why This Creative Structure Worked
This retail business sale succeeded because TREP understood that the best M&A deals don’t force one party to win at the other’s expense. When valuation gaps exist due to genuinely different perspectives on the future, creative structuring can bridge the divide.
The key elements that made this deal work were a fair base valuation that gave buyers confidence and downside protection, performance-based earn-outs that rewarded sellers if growth continued, and retained minority interest that kept both parties motivated for success.
The Results: A True Win-Win Transaction
The transaction closed successfully with both parties satisfied with the structure. The buyers acquired a retail sales and service business at a valuation they believed reflected normal economic conditions, protecting them against the risk of paying for unsustainable pandemic-era results. The sellers received fair compensation for historical performance with upside potential if current sales levels continued. And both parties became aligned partners with shared motivation to achieve earn-out benchmarks and grow the business.
What Business Owners Can Learn
This case demonstrates several important principles for business sales, especially when your business has experienced unusual recent performance—whether positive or negative.
Performance anomalies create valuation challenges. Whether your business was helped or hurt by COVID, industry disruption, or other external factors, buyers will scrutinize whether recent results represent a new normal or temporary deviation. Expert M&A advisors can bridge valuation gaps through creative structuring when both parties have legitimate perspectives. Earn-outs allow sellers to prove their thesis while giving buyers downside protection. And retaining minority interest creates powerful alignment between buyers and sellers for post-transaction success.
The TREP Difference in Complex Deals
This retail business sale required more than just standard M&A brokerage. It demanded creative problem-solving, deep understanding of both buyer and seller psychology, and the experience to structure deals that fairly distribute risk and reward.
TREP Advisors’ 125+ years of combined business ownership experience meant the team understood both perspectives. They’d been in buyers’ shoes worrying about overpaying, and in sellers’ shoes believing in their business’s future. That dual perspective enabled them to craft a structure both parties could embrace.
Is Your Business Ready for a Strategic Sale?
Whether your business has experienced unusual recent performance or you’re simply exploring your options, TREP Advisors can help you understand your value and structure a transaction that achieves your goals.
Contact TREP Advisors today for a free, confidential consultation about your retail business sale options.