Deal Structure

Why structure matters

Two deals at the same headline price can produce dramatically different outcomes for buyer and seller depending on structure. A $100M asset deal paid in cash with a $15M escrow has different tax treatment, different residual liability, and different post-closing risk than a $100M stock deal paid 60% in cash and 40% in buyer stock. Structure is where most of the real negotiation happens after price is agreed in principle.

The two foundational choices

Legal form

Asset purchase — the buyer acquires specified assets and assumes specified liabilities. Buyers prefer this for control over what they take and a stepped-up tax basis. Sellers usually receive less favorable tax treatment (often ordinary income on depreciated assets), and consent is needed for non-assignable contracts.

Stock purchase — the buyer acquires the equity of the company. Everything moves: assets, liabilities, contracts, employees. Cleaner for the seller, often gets capital-gains treatment. Buyers carry historic liability and don’t get a stepped-up basis without a 338(h)(10) or 336(e) election.

Merger — the target merges into the buyer or a buyer subsidiary. Used when shareholder approval and clean equity treatment matter. Forward, reverse, and reverse-triangular variants each carry distinct tax and liability profiles.

Consideration mix

All cash — simplest from a tax standpoint, gives the seller a clean exit. Requires the buyer to fund the full price (cash on hand, debt, or both).

Stock-for-stock — the buyer issues shares to the seller. Can qualify for tax-free or tax-deferred treatment under specific IRS sections. Aligns seller incentives if they remain involved, but ties their realized value to buyer share performance.

Cash + stock — common in strategic deals where the buyer wants to conserve cash and the seller wants continued upside.

Earn-out — a portion of consideration deferred and tied to post-closing performance (revenue, EBITDA, milestone achievement). Bridges valuation gaps but is a frequent source of post-closing disputes.

Debt assumption — the buyer assumes the seller’s debt, reducing cash consideration by an equivalent amount.

Other structural choices

Beyond legal form and consideration, structure includes:

• Escrow and holdback — a percentage of price held back to secure indemnification claims, typically 5–15% for 12–24 months
• Representations and warranties insurance — third-party insurance that backstops the seller’s reps, increasingly replacing large escrows in mid-market deals
• Rollover equity — the seller (often the founder or PE owner) rolls a portion of proceeds into equity of the post-closing entity
• Working capital adjustment — the price is adjusted at closing for actual working capital vs. a negotiated target
• Net-debt adjustment — the price is reduced for net debt at closing

Real-world example

A founder-owned industrial services company is sold to a private equity sponsor at $180M headline price. Structure: stock purchase (cleaner tax treatment for the founder), 80% cash plus 20% rollover equity in the post-closing entity (alignment), 10% escrow for 18 months, working capital peg of $14M with dollar-for-dollar adjustment, and a 3-year earn-out paying up to $30M based on EBITDA milestones. The headline $180M masks the real economics: $144M cash at closing, $18M rollover (subject to PE value creation), $18M escrow, and up to $30M of contingent earn-out — making the realized seller economics highly dependent on post-closing performance.

Common mistakes

• Negotiating price before structure. Headline price means little without the structure attached. Sophisticated sellers price the structure, not just the number.
• Overusing earn-outs. Earn-outs are negotiable in principle but litigation-prone in practice. Use them only when measurement criteria are clean and post-closing control is well defined.
• Ignoring tax until late. Structure has massive tax consequences for both sides. Bring tax advisors in at the LOI stage, not later.
• Underestimating the escrow’s cost to the seller. Escrow held for 18 months at modest interest is real opportunity cost that should be priced into negotiation.