The Deal Structure That Could Save You Millions

Mergers and acquisitions (M&A) can be exhilarating. You’re on the cusp of merging with or acquiring a business that could help you leapfrog the competition or expand your market reach. But amid the excitement and anticipation, there’s a critical piece that often determines whether you walk away feeling like a winner or lamenting what could have been: your deal structure. 

Crafting the right structure can save you millions—yes, literally millions—by addressing tax implications, aligning incentives between buyer and seller, and hedging against uncertain future outcomes. If you’re not entirely sure how to approach it, you’re far from alone. Many entrepreneurs, business owners, and even seasoned executives find M&A structures a bit daunting.

Below, you’ll get a closer look at what deal structure entails, the factors that can swing it in your favor, and the different ways you can set things up to keep more money in your pocket. As always, consult your financial and legal advisors to determine what works best in your specific scenario. But read on, and you might pick up insights that, at minimum, empower you to ask the right questions in that next all-important meeting.

Deal Structure 101: What Is It, Exactly?

When we talk about “deal structure,” we’re talking about how the entire transaction is put together. This includes identifying exactly which assets (or shares) are changing hands, determining who’s responsible for existing debts or liabilities, figuring out how the buyer will pay for the acquisition—cash, stock, seller financing, or a combination—and hammering out critical sign-on angles like non-compete agreements.

Deal structure is the blueprint that shapes all these elements so that, ideally, both parties find a comfortable balance of risk and reward.

Asset Purchase vs. Stock Purchase: The Classic Fork in the Road

One of the most common structural choices in M&A is whether the buyer should purchase the target’s assets or its stock. These two approaches have huge implications.

Asset Purchase

The buyer acquires specific assets—like equipment, intellectual property (IP), customer contracts, or inventory—and may cherry-pick which liabilities they’re willing to take on. Often, this route can provide tax advantages to the buyer because they might step up the tax basis in the purchased assets, allowing for higher depreciation or amortization.

That can translate into future tax savings. However, sellers can sometimes lose out because they might face double taxation—once at the corporate level and again at the individual level—depending on how the company is organized.

Stock Purchase

The buyer acquires the company’s shares and essentially takes over ownership of the entire business entity, including assets and liabilities. Sellers often prefer this option because it may allow them to treat the deal as a capital gain event. Buyers, on the other hand, might end up inheriting unwanted risks or liabilities.

And from a tax standpoint, the buyer doesn’t necessarily get a fresh basis on all assets, which can curb some potential tax breaks. Choosing between these two isn’t always straightforward; it’s all about weighing tax considerations, liability constraints, and the negotiating power each side brings to the table.

The Magic of Earn-Outs: Sharing Risk and Reward

Imagine you’re a buyer who believes the target company will skyrocket if certain milestones are hit. But what if those milestones remain just out of reach? That’s where an earn-out can be your secret weapon. An earn-out is a contractual provision where the seller, after closing, can earn additional payouts if the business meets specified performance goals—like revenue targets or profit margins—over a set period.

It’s a powerful tool to keep the seller motivated if they stay involved, ensuring they continue pushing the business to succeed. It also transfers some of the risk to the seller (since part of their total compensation is contingent on performance), which might let the buyer pay a bit less upfront. If done right, earn-outs can save you millions by preventing overpayment for a company that, for whatever reason, doesn’t deliver on big promises.

But be careful: if you’re the buyer, you need clear benchmarks and a transparent way to measure performance. If you’re the seller, be sure you’re comfortable with how these milestones are defined and that you have enough control or influence post-acquisition to actually achieve them.

Rollover Equity: When Both Parties Have Skin in the Game

Another structure to consider is rollover equity, where the seller retains an ownership stake in the business even after selling the main portion. For instance, a seller might sell 70% of the company but hold onto 30%, effectively “rolling over” that portion to the new ownership structure. What’s in it for you, the buyer? For one, a seller who still owns a chunk of the company has a vested interest in seeing it flourish under new management.

That can translate to smoother transitions, committed knowledge transfer, and fewer disputes down the line. Plus, from a financing standpoint, you might be able to reduce the initial purchase price. On the flip side, a seller who believes in the future growth of their company might see an even bigger payday later if the business thrives and that 30% stake soars in value. It can be a win-win if trust runs deep between both parties and if each side’s interests are aligned for post-deal success.

Tax-Advantaged Structures: Reducing Uncle Sam’s Take

An M&A deal is as much about tax strategy as it is about combining business synergies. With the right moves, you may be able to minimize or defer taxes, keeping more capital in your pocket for future growth. Some might consider a Section 338(h)(10) election, where the acquisition of a company’s stock, for tax purposes, is treated almost like an asset sale. It can offer the buyer the benefits of stepping up asset values, yielding significant depreciation benefits, while giving the seller capital gains treatment.

But it’s not always a walk in the park, as the specific circumstances—like the tax classification of the entity—need to align. It pays to work with accountants and tax lawyers who understand federal as well as state tax implications, especially if you’re doing a cross-border deal. A seemingly simple mismatch in tax laws in different jurisdictions can transform what looked like a neat structure into a messy one, whittling away your margins.

Financing: Cash, Seller Notes, or Third-Party Lenders

Don’t overlook how you plan to finance the acquisition. Even if you have the perfect structure in mind, it won’t do you much good without the capital to execute. Some buyers come to the table with straight cash, but others opt for:

• Seller Financing: The seller lends you part of the purchase price, and you repay them over time. In this scenario, the seller often commands a moderate interest rate, while you get to keep more cash on hand to run the business post-acquisition.
• Third-Party Loans: Banks or private lenders might step in to finance a portion of the deal. However, borrowing from lenders can bring covenants or restrictions, plus interest rates that fluctuate depending on market conditions and your creditworthiness.
• Equity Financing: Bringing on co-investors or a private equity firm to bankroll your acquisition can reduce your personal risk, though it means giving up some control or future upside.

Each financing route has pros and cons, and your final decision can dovetail with your preferred deal structure. For instance, if you’re giving the seller a note, you may pair that with an earn-out or a rollover equity scenario, further balancing the buyer’s and seller’s interests.

Common Pitfalls and How to Avoid Them

Though the right deal structure can literally save you millions, you’re not out of the woods just by drafting a slick contract. Here are a few pitfalls:

• Vague Language Around Milestones: If you incorporate an earn-out or future performance metrics, define them with razor-sharp clarity. Ambiguities breed disputes, which can erode trust and spark costly legal battles.
• Overlooking Integration Plans: Even a perfect structure loses its luster if you can’t integrate the business effectively post-close. Plan for cultural integration, consolidate systems where possible, and create a joint roadmap for the first 90 days.
• Ignoring Regulatory Hurdles: In certain industries, you might need approval from government agencies. Failing to address these from the outset can delay or even derail the acquisition altogether.
• Underestimating Working Capital Needs: Make sure you have a realistic sense of the target’s day-to-day financing needs. Getting blindsided by a sudden cash crunch can shatter your well-intentioned structure.

Why This Matters: Every Dollar Counts

Time and again, M&A deals fall apart or underperform because the parties involved treated the deal structure as an afterthought. Maybe someone assumed “the lawyers will figure it out,” or they rushed to close without thoroughly modeling the tax ramifications. A slightly more thoughtful approach, hammered out in consultation with experts, can keep more money where you want it: fueling business growth or supporting your own investment objectives.