If you haven't listened to episode one of this series, go back and start there. We covered why the SBA model is under pressure, how the capital stack actually works, and why seller notes are frequently the most underestimated tool in a buyer's deal stack.
This episode goes one level deeper.
Because here's what happens after people hear the phrase creative financing for the first time. They assume it means unconventional. They assume it's a polite word for lowball. They assume sophisticated buyers write checks and everyone else invents workarounds.
That assumption is wrong, and it's costing people deals.
Peter Baldwin has closed transactions ranging from under a million dollars to eighteen and a half billion. Across all of them, the same principle applies. Creative deal design is not a gimmick. It is the disciplined practice of matching what you pay for to what the business is actually going to deliver — and structuring the consideration around the risks you've identified in doing that.
That is what this episode is about.
What "Creative" Actually Means
When Peter Baldwin hears the term creative financing, he doesn't think unconventional or complex. He thinks responsive.
You are taking the attributes of what you see in diligence — the predictable revenue, the concentrated client, the founder-dependent sales engine — and you are designing the deal around those things. If something is predictable, you can attach fixed recurring obligations to it. If something is uncertain, you should not be paying for it upfront. You should be linking the consideration to the period of risk.
That is not clever. That is disciplined.
The distinction matters because there is real stigma attached to creative deal structures in some corners of the market. At a recent live event, a broker called one of our mentees a bottom feeder for proposing a structure that deferred a portion of consideration to performance. The implication was that cash at close signals seriousness and anything else signals that you're not a real buyer.
What it actually signals is that you've done the work. You've looked at the risk register. You've identified the things that look stable but aren't. And you've structured the deal to account for them rather than pretending they don't exist.
The Risks That Don't Show Up in the P&L
Peter Baldwin spent his early career in corporate restructuring — the kind of work where you have to understand exactly where value can go wrong and build structures that survive it. What he looks for in agency acquisitions is often invisible on the surface.
You can see what looks like a healthy P&L with consistent growth. Strong margins. Long-tenured clients. And then you start to decompose the revenue and you discover that one client represents 55% of total billing. Or that every sale the company has made in the past four years is traceable to a single person who has no equity incentive and no contractual obligation to stay.
Those are not problems the financial statements will show you. You have to dig for them.
And when you find them, the answer is not to walk away. The answer is to design a deal that doesn't leave you exposed to them.
That is the actual meaning of creative deal structure.
Seller Notes vs. Earn Outs: Understanding the Spectrum
Most people approach deferred consideration as a binary choice. You either give the seller a seller note, which is a fixed obligation, or you give them an earn out, which is entirely contingent on future performance.
Peter Baldwin sees both of those as positions on a continuum, not two discrete options.
The seller note, in its basic form, behaves like debt. There is a principal, a payment schedule, and an obligation that doesn't disappear if the business has a rough quarter. Sellers like it because it offers certainty. They get a number and a timeline.
The earn out, in its basic form, lives entirely on the come line. The seller gets paid only if the business hits negotiated targets. Buyers like it in theory because it transfers performance risk back to the seller. In practice, it creates a different set of problems.
The better approach, in most deals, is to find somewhere on the spectrum between those two poles that works for both parties — and then build the specific instrument to match the specific risk.
Why Most Earn Outs Fail
There's a reality about earn outs that most first-time buyers discover too late: they get missed more often than they get hit.
Baldwin's view is that this is the rule, not the exception. And there are structural reasons for it.
The first problem is misaligned incentives. If the earn out is tied to the performance of a specific book of business or client set, the seller has no incentive to be a team player once the deal closes. They will resource-protect. They will hoard their accounts. They will resist any integration move that might dilute their EBITDA calculation. Peter Drucker said it better than anyone: what gets measured and compensated gets managed. Everything else gets pushed aside. That applies here too.
The second problem is cultural collision. The day-to-day reality of operating inside an acquired business is different from owning it. The control is gone. The decision-making is different. The culture of the acquirer is present in ways that were never part of the negotiation. Sellers who were told nothing would change discover that everything has changed. And a meaningful percentage of them leave before the earn out period ends — which means they lose the payout, and the buyer loses the integration.
The third problem is the liquidity hit. A well-designed earn out, in theory, is self-financing. Every month you get closer to paying out the earn out, you should be setting aside proportional reserves. In practice, that's either an underutilized pile of cash earning treasury rates, or it's a cash call at a future moment you weren't prepared for.
There's a fourth problem that's more subtle. Earn outs create friction even when they're designed well. The debate is almost always less about the dollars and more about the underlying message: the buyer is saying show me you deserve what you're asking for, and the seller hears that as I don't trust the business I just bought.
That friction is intrinsic. You can design around it. But you can't eliminate it.
The Case for Preferred Equity Instruments
This is where Peter Baldwin's background in investment banking, venture finance, and restructuring gives him something most agency buyers don't have: a full universe of instruments to draw from, and a track record of using them.
Most buyers think about their deal stack in two tiers: cash at close and some form of deferred consideration, whether that's a seller note or an earn out. Baldwin thinks in capital stack layers, the same way a restructuring attorney or a CFO designing a leveraged recapitalization would.
Between debt and equity, there is a world of hybrid instruments. And the most useful category for agency acquisitions is preferred equity.
Here is what makes preferred equity interesting in this context. It gives the seller something that anchors to a number — which is what sellers actually want, because sellers anchor on valuation, on a dollar amount they've arrived at and circled in their head. The liquidation preference embedded in a preferred instrument is exactly that: a stated claim value, just like the principal on a note, that the seller can point to and say, this is what I'm owed if something goes wrong.
But unlike a seller note, preferred equity is not debt. It does not necessarily conflict with an existing SBA covenant. It does not require a payment that ignores what the business is doing in a given period. And it can be designed with enormous flexibility: cumulative or non-cumulative dividends, payment gates tied to DSCR thresholds, conversion features that give the seller the option to participate in the upside if they'd rather keep their money in the business than take cash out.
When a seller pushes for certainty and a buyer needs flexibility, preferred equity is often the instrument that creates room for both.
How This Works in Practice: An 800K EBITDA Example
Take an agency running $800,000 in EBITDA. It does $2 million in revenue at healthy margins. One client represents 40% of that revenue — and the founder has been the face of that relationship for years.
At a 3x multiple, the purchase price is $2.4 million.
That client concentration and that founder dependency are real risks. They are visible in diligence. And they need to be reflected in the structure.
What the deal cannot have is a heavy fixed obligation at close, because the moment that founder relationship changes — if integration goes poorly, if the client relationship moves with them, if the transition isn't managed carefully — you need room. A rigid amortization schedule doesn't give you that.
What the deal needs is a limited cash component at close, a seller note with payment mechanics tied to business performance, and a deferred consideration layer that is explicitly linked to client retention, transition milestones, and the effective handover of that key relationship. Year one: the seller is first chair on that account, actively introducing a new account manager. Year two: the seller has stepped back to a support role. The equity instrument that represents their deferred consideration vests against that transition, not against a financial metric that incentivizes them to hoard the relationship.
You can also separate the revenue quality. Not all of the $800K in EBITDA carries the same risk profile. The revenue tied to that one concentrated client should be treated differently in the deal stack than the rest of the book — different instrument, different terms, different vesting logic. That is what classes of preferred can do: they let you design the consideration to reflect the actual composition of what you're buying.
The Purchase Agreement Is Both a Marriage Contract and a Pre-Nup
One of the most important things Peter Baldwin said in this conversation was about timing, not about instruments.
Every deal has uncomfortable conversations baked into it. What happens if the seller leaves early? What does a smooth transition actually mean in practice? Who decides what resources go to which accounts during the integration period? What happens if a key client doesn't renew?
Those conversations need to happen before the deal closes, not after. Not because they're easy, they're not, but because how a seller responds to them is itself diligence.
If a seller can't have a direct conversation about what happens when the relationship changes, that tells you something. If they push back hard on any structure that ties their consideration to the future performance of the business they just told you is excellent, that tells you something. If they spring a last-minute request to change deal terms because of a personal circumstance, and they frame it as non-negotiable, that tells you something too.
Every interaction in the deal process is diligence. The way someone responds when you raise an uncomfortable term is more informative than anything in a data room. People tell on themselves. The purchase agreement, with all of its governance provisions and contingency terms, is your best opportunity to surface those signals before they become post-close surprises.
A Note for Buyers Already Operating with SBA Debt
One of the questions from our Slack community came from Mark, who asked: if I already have an SBA loan from a prior acquisition, what are my financing options for future deals?
The SBA is not designed to be a serial acquisition vehicle. Once you have an SBA loan in place, you're dealing with debt service coverage ratio requirements, lender covenants, and constraints on additional debt that make layering in another SBA deal difficult or impossible.
The options worth understanding are: acquiring the new business inside a separate special purpose vehicle to ring-fence the risk and keep it outside your existing borrowing entity; using seller-heavy structures where preferred equity and earn-ins replace traditional debt; bringing on equity partners, with the understanding that the SBA's rules around equity holder involvement have tightened; and recycling operating cash flow from the existing business to fund a portion of future deal consideration.
Preferred equity instruments are particularly useful in this context because they don't behave like debt to the bank. But the operative word there is don't surprise your lender. Socialize the structure. Tell your banker what you're doing before you do it. Bankers are many things, but they are uniform in their dislike of surprises. The one you spring on them is the one that triggers a covenant review you didn't need.
What's Coming in Episode Three
Episode two was about mechanics: the instruments, the failure modes, the illustrative deal, and the underlying logic of preferred equity.
Episode three will be a Q&A: direct questions from my agency M&A Slack community, covering creative deal structures with and without SBA considerations, cross-border acquisitions, and the real-world edge cases that don't fit neatly into the standard playbook.
The Bottom Line
Creative deal financing is not a workaround for buyers who can't write a check. It is the approach that sophisticated buyers use when they have done their diligence honestly and they want to pay for what the business will actually deliver, not what it looked like on a spreadsheet before they dug into it.
The risk in an agency acquisition does not disappear because you close the deal. It migrates. The question the deal structure has to answer is: who holds that risk, in what form, for how long, and what does the business have to do to resolve it?
The founders who understand how to design around that question, who know the difference between a seller note and a preferred instrument, who can articulate why an earn out creates friction even when it's well designed, who structure their deals so that seller incentives stay aligned through integration, are the ones who are still closing deals when everyone else is waiting for the lending market to be friendly again.
The tools exist. The frameworks are available. You do not have to be a private equity CFO to use them.
But you do have to be willing to stop thinking about deal financing the way you think about a mortgage and start thinking about it the way you think about risk.
That's what this series is for.
