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When selling a company, most owners focus on the purchase price. It’s the number that gets announced, remembered, and celebrated. But in mergers and acquisitions, that number rarely tells the full story. How the deal is structured—how much is paid at closing, what’s contingent on future performance, and what’s tied up in ongoing ownership—often determines how much value a seller actually receives.
Buyers use structure to manage risk and align incentives. Sellers use it to secure liquidity, minimize taxes, and maximize total value. Between those two objectives lies the art of the deal. Understanding the major components of structure before negotiations begin helps business owners protect their interests and make informed trade-offs.
Deal structure defines the mix of cash, debt, and equity that makes up the purchase consideration. It also determines the timing of payments and the degree of risk the seller retains after closing. While no two transactions are identical, most follow a similar pattern that includes an upfront cash payment and one or more contingent elements such as an earnout, a seller note, or an equity rollover.
Each element serves a purpose. Upfront cash provides certainty. Contingent consideration aligns post-closing performance. Equity rollovers and seller financing bridge valuation gaps when buyers and sellers see value differently. Together, these pieces balance risk and reward between both parties.
An earnout is a deferred payment tied to the future performance of the business after it has been sold. Typically, the buyer pays a portion of the purchase price upfront and agrees to make additional payments if the company meets specific revenue or profit targets during a defined period, usually one to three years.
Earnouts often arise when buyer and seller disagree on future growth prospects. If the seller believes the company will continue to grow, but the buyer wants proof, an earnout allows both sides to move forward. If the business performs as expected, the seller receives full value. If results fall short, the buyer is protected.
For sellers, earnouts can be both opportunity and risk. They create upside potential but also require relinquishing control while remaining financially exposed. Disputes often emerge over how performance metrics are calculated, especially when the buyer integrates the acquired company into a larger organization. Clear definitions, independent accounting, and consistent reporting standards are critical to avoid conflict.
Earnouts work best when the seller remains involved post-transaction, has confidence in the buyer’s operational integrity, and believes the targets are achievable with reasonable effort. They can turn an impasse into a win-win solution, but only if structured transparently and monitored closely.
A seller note—also known as seller financing—is a loan from the seller to the buyer to cover a portion of the purchase price. Rather than receiving the full amount at closing, the seller agrees to be paid back over time, typically with interest, through a promissory note.
This structure is common in lower-middle-market transactions where lenders may require the buyer to share financing risk. From the buyer’s perspective, a seller note demonstrates confidence in the continued success of the business. From the seller’s standpoint, it can make the deal possible when bank or private equity financing doesn’t fully cover the agreed price.
Seller notes generally carry modest interest rates and repayment periods of three to five years. They are often subordinated to senior debt, meaning that bank loans get repaid first. This subordination increases the seller’s risk, but it can also provide a path to a higher total valuation by facilitating the buyer’s ability to close.
For sellers, the key is balance. The note should be large enough to bridge financing needs but not so large that it jeopardizes post-closing security. Clear repayment schedules, defined default terms, and collateral provisions can protect the seller’s position.
In many modern M&A transactions—especially those involving private equity buyers—the seller is asked or encouraged to “roll over” a portion of their proceeds into equity in the new entity. This means that instead of taking all cash at closing, the seller retains an ownership stake and participates in the company’s future upside.
Equity rollovers can be powerful wealth-creation tools. When the acquiring investor grows and later sells the business, rolled equity can yield significant additional returns. For sellers who believe in the company’s long-term potential, maintaining a minority stake aligns interests and can multiply total proceeds.
However, rollovers require careful evaluation. The new ownership structure may include different governance rights, distribution priorities, or exit timelines. Sellers should understand whether their equity will be common or preferred, what liquidity options exist, and how future capital raises might dilute their position. Legal and financial advisors play a vital role in reviewing these terms.
Equity participation works best for sellers who are confident in the buyer’s strategic plan and willing to stay engaged after the sale. It’s a bet on future growth—but one that can pay handsomely when structured correctly.
Deal structure is a balancing act. Buyers seek protection against overpaying for performance that might not continue, while sellers want assurance that they’ll be fully compensated for the value they’ve created. The ideal structure aligns both sides’ interests and keeps incentives intact through the transition period.
For business owners, the goal is to evaluate structure as carefully as price. A slightly lower headline price with favorable terms can deliver a better financial result than a higher price burdened by unrealistic earnout targets or excessive risk exposure. Cash timing, tax implications, and security provisions often matter more than the number printed on the term sheet.
Negotiating structure also requires understanding the broader financing environment. When capital is plentiful and competition among buyers is high, sellers have more leverage to negotiate upfront cash. When credit tightens or market uncertainty rises, buyers lean more heavily on deferred components. Awareness of these dynamics can help sellers know when to push and when to compromise.
Different forms of consideration carry different tax treatments. Earnouts are usually taxed when payments are received, which can spread out the seller’s tax burden over several years. Seller notes generate interest income that is typically taxed as ordinary income. Equity rollovers may qualify for tax deferral under certain conditions, allowing sellers to postpone recognition until the eventual exit of the buyer’s entity.
Tax efficiency should never dictate structure on its own, but it should inform negotiations. A structure that appears less lucrative on paper may result in higher after-tax proceeds once timing and character of income are considered. Sellers should involve tax advisors early to model various outcomes before signing a letter of intent.
Navigating deal structure is one of the most technical aspects of selling a business. Investment bankers, M&A attorneys, and tax specialists each play a critical role in helping sellers understand their options and negotiate fair terms.
An experienced M&A advisor not only analyzes valuation but also models how different structures impact cash flow, tax exposure, and long-term value. They can benchmark deal terms against market norms, identify potential pitfalls, and ensure that key provisions—such as performance definitions in an earnout or default protections in a note—are clearly defined.
Advisors also help maintain objectivity when emotions run high. Selling a business is often personal, but structure decisions are strategic. Having professionals who can quantify trade-offs enables owners to make choices grounded in data rather than instinct.
In every sale, the deal structure is where numbers meet reality. The way payments are timed, financed, and conditioned determines not just what a seller earns, but when and how securely they receive it.
For owners preparing to sell, understanding the interplay between earnouts, seller notes, and equity rollovers is essential. Each element can either enhance or erode total value depending on how it’s negotiated. Thoughtful planning, expert advice, and a clear grasp of your own risk tolerance will ensure that when the deal closes, the value you worked to build is fully realized.
M&A Solutions helps business owners navigate the complexities of valuation, negotiation, and structure to achieve successful exits. If you’re considering a sale, our team can help you evaluate offers, model outcomes, and negotiate terms that protect your long-term goals. Contact us to learn how strategic structuring can unlock the true value of your business.
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