deal structure in business plan

• What is an M&A Deal Structure?
• Basics of an M&A Deal Structure
• Ways of Structuring an M&A Deal

Modeling Deal Structures

• Creating a Proper M&A Deal Structure

Related Readings

M&a deal structure.

A binding agreement that outlines the rights and obligations of both parties in an M&A deal

What is an M&A Deal Structure?

An M&A deal structure is a binding agreement between parties in a merger or acquisition (M&A) that outlines the rights and obligations of both parties. It states what each party of the merger or acquisition is entitled to and what each is obliged to do under the agreement. Simply put, a deal structure can be referred to as the terms and conditions of an M&A.

• An M&A deal structure is one of the steps in a merger or acquisition. It is important to create a proper deal structure, taking the top-priority objectives of the parties involved into account.
• There are three well-known methods of M&A deal structuring: asset acquisition, stock purchase, and merger, each with its own merits and potential drawbacks for both parties in the proposed deal.
• A proper deal structure will lead to a successful merger or acquisition deal.

Basics of an M&A Deal Structure

Mergers and acquisitions involve the coming together (synergizing) of two business entities to become one for economic, social, or other reasons. A merger or acquisition is possible only when there is a mutual agreement between both parties. The agreed upon terms on which these entities are willing to come together are known as an M&A deal structure.

Deal structuring is a part of the M&A process ; it is one of the steps that must be taken in a merger or acquisition. It is the process of prioritizing the objectives of a merger or acquisition and ensuring that the top-priority objectives of all parties involved are satisfied, along with considering the weight of risk each party must bear. Initiating the deal structuring process requires all parties involved to state:

• Their stance on the negotiation ;
• Observable latent risks and how they could be managed;
• How much risk they can tolerate; and
• Conditions under which negotiations may be canceled.

Developing a proper M&A deal structure can be quite complicated and challenging because of the number of factors to be considered. These factors include preferred financing means, corporate control, business plan, market conditions, antitrust laws , accounting policies, etc. Employing the right kind of financial, investment, and legal advice can make the process less complicated.

Ways of Structuring an M&A Deal

There are three well-known traditional ways of structuring a merger acquisition deal although, in recent times, business entities have engaged in other, more creative and flexible deal structuring methods. The three traditional ways of structuring an M&A deal are asset acquisition , stock purchase, and mergers. The methods can also be combined to achieve a more flexible deal structure.

1. Asset Acquisition

In an asset acquisition, the buyer purchases the assets of the selling company. An asset acquisition is usually the best deal structure for the selling company if it prefers a cash transaction. The buyer chooses which assets it wants to purchase.

Advantages of an asset acquisition may include:

• The buyer can decide which assets to buy from the seller and which not to.
• The selling company continues as a corporate entity after the sale, containing the remaining unsold assets and liabilities.

Disadvantages of an asset acquisition include:

• The buyer may not be able to acquire non-transferable assets, e.g., goodwill.
• An asset acquisition may lead to high-impact tax costs for both the seller and the buyer.
• It may also take more time to close the deal, compared to other deal structures.

2. Stock Purchase

Unlike an asset acquisition, where there is a direct transaction of assets, assets are not directly transacted in a stock purchase. In a stock purchase acquisition, a majority amount of the seller’s voting stock shares are acquired by the buyer. In essence, it means control of the seller’s assets and liabilities are transferred to the buyer.

Advantages of a stock purchase acquisition:

• Taxes on a stock purchase deal are minimized, especially for the seller.
• Closing a stock purchase deal is less time-consuming since negotiations are less complicated.
• It may be less expensive.

Disadvantages of a stock purchase acquisition:

• Legal or financial liabilities may accompany a stock purchase acquisition.
• Uncooperative minority shareholders may also be a problem.

Though the term “merger” is commonly used interchangeably with “acquisition,” in a strict sense, a merger is the result of an agreement between two separate business entities to come together as one new entity. A merger is typically less complicated than an acquisition because all liabilities, assets, etc. become that of the new entity.

In structuring a deal, the advantages and disadvantages must be considered along with other influencing factors to reach a conclusion on which method to adopt.

Below is a screenshot from CFI’s M&A Model Course , which has an assumptions section that includes various deal structures.

Creating a Proper M&A Deal Structure

To create a great deal structure, aim for a win-win scenario, where the interests of both parties are well represented in the deal and risks are reduced to the barest minimum. Most often, win-win deal structures are more likely to lead to a sealed merger or acquisition deal and may even reduce the time required to complete the M&A process.

There are two important documents that are used to delineate the M&A deal structuring process. They are the Term Sheet and Letter of Intent (LOI).

• Term Sheet : A Term Sheet is a document stating the terms and conditions of an intended financial investment, in this case, a merger or acquisition. Term sheets generally are legally binding unless otherwise stated by the parties involved.
• Letter of Intent (LOI) : As the name implies, a Letter of Intent (LOI) is a document outlining the understanding between two or more parties that they intend to formalize later in a legally binding agreement. Like the term sheet, an LOI is usually not intended to be legally binding except for the binding provisions included in the document.

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:

• Definitive Purchase Agreement
• M&A Considerations and Implications
• Share Exchange Ratio
• Types of Mergers
• See all valuation resources
• See all equities resources
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M&A Deal Structure

Outlines the rights and obligations of the buyer and seller in a transaction

What Is M&A Deal Structure?

Ways of structuring an m&a deal.

• Creating A Proper M&A Deal Structure
• Examples Of M&A
• Benefits And Drawbacks Of M&A Deals

The rights and obligations of the buyer and seller in a transaction are outlined in an M&A deal structure.

The type of consideration in the transaction, the role of management on both sides after the deal closes, the requirements that must be met for the deal to close (such as regulatory clearance), and other contingencies are typically considered.

Any successful merger will depend heavily on the agreement's structure and outlined protocols/processes, which include how the arrangement will create value for all parties.

Much of the time in M&A deal structuring is dedicated to thoroughly analyzing unforeseen future risks, sometimes spanning several years. Stakeholders need to clarify several issues, including:

• How are these entities funded, and how is that process broken down?
• Ensure all contractual agreements stated are met by all parties for the transaction to occur smoothly
• Ensure all conditions are clear if the deal goes through with only some parties. (e.g., failure to achieve regulatory clearance)
• A timeline for activities and ensuring all milestones are addressed and agreed on
• Plans to handle potential deal risks

While the basic structure of merger deals has remained consistent over time, there's been a trend toward greater creativity to ensure all parties are satisfied. Over time, the foundational aspects of mergers have evolved to become more innovative, aiming to satisfy all parties involved.

Key Takeaways

• M&A deal structure outlines buyer and seller rights, covering payment type, post-deal management, and closing conditions. It's crucial for creating value and involves thorough risk assessment.
• Common approaches include asset acquisitions, stock purchases, and mergers, each with unique pros and cons. Selection depends on transaction specifics and goals.
• Aim for mutually beneficial outcomes, minimizing risks, and addressing key aspects like profit distribution and taxes. Key documents include Term Sheets and Letters of Intent.
• M&A drives expansion and efficiency but involves risks and integration complexities. Thorough due diligence and strategic planning are essential.

Asset acquisitions, equity purchases, and mergers are the three conventional M&A deal structures. These techniques can also facilitate the creation of a more adaptable contract structure.

1. Asset Acquisitions

Buyers often have greater control in this process as they selectively purchase the selling company's assets.

The advantages include:

• The buyer may choose which assets they want to purchase for themselves
• The selling company continues as the same corporate entity after the sale, holding the remaining unsold assets and liabilities as its own

On the other hand, the disadvantages are:

• The buyer cannot purchase non-transferable assets such as goodwill
• Taxes can be a significant consideration for both the seller and buyer, potentially adding substantial costs to transactions involving major assets, corporations, or stocks

Time is a critical factor; the official closing of such mergers can take months or even years to complete

2. Stock Purchase

Conceptually, buying stocks is easier than buying assets. Consequently, it's generally a simpler, less complicated transaction.

The acquirer purchases the target's stock and assumes its assets and liabilities without alteration. The majority of contracts that the target is bound by, such as leases and permits, pass automatically to the new owner.

For these reasons, choosing a stock buy over an asset purchase is frequently more straightforward.

3. Merger

Although "merger" and "acquisition" are frequently used interchangeably, a merger happens when two or more parties reach a legally binding agreement. The goal of the merger is to combine two businesses into one huge organization.

While liabilities and assets are typically transferred to the new business, a merger may not always be less complicated than an acquisition, depending on the deal's specifics.

Creating a Proper M&A Deal Structure

Aim for situations where both parties are always happy, both sides' interests are fairly represented in the agreement, and where risks are kept to a bare minimum while designing a great deal structure.

Transaction designs aiming for win-win outcomes often result in successful mergers with high closure rates. Two important documents are used in the M&A deal structuring process. These documents are known as the Term Sheet and Letter of Intent ( LOI ).

• Term Sheet: In this example, a merger or acquisition, the terms and conditions of an anticipated financial investment are stated in a term sheet. Term sheets are usually legally binding documents, subject to specific conditions or provisions, which may vary by jurisdiction
• Letter of Intent (LOI): A letter of intent (LOI) outlines the agreement between parties to formalize it later into a legally binding contract

Successful mergers often involve drafting contractual agreements that address aspects such as profit/loss splits and tax considerations.

Examples of M&A

Some of the most known M&A examples are:

• Verizon and Vodafone: Verizon  Communications and  Vodafone  implemented a merger back in 2014. Verizon acquired 45% of Vodafone's shares. As mentioned in the article, larger companies typically acquire smaller companies; as we all know, Verizon is a much larger organization than Vodafone.
• Heinz and Kraft: Heinz, like the ketchup we use on our fries, and Kraft, like the mac and cheese we all love, merged together back in 2016 and named themselves " The Kraft Heinz Company ." The merger was valued at $100B. Although this sounds like a merger to implement, we are still looking for the combined companies at our favorite consumer stores.  
• Pfizer and Warner-Lambert: In 2000,  Pfizer  acquired  Warner-Lambert  for $90 billion. This example is sophisticated because both companies operate in the pharmaceutical industry, providing increased synergies and issues of too much market share .
• Google and Android: Google  and  Android  back in 2005 for a whopping $50M. This is another example of how the larger company executes the acquisition process. Although Google is a large company, Android provided features and tech that Google could not compete with, hence the reason for this acquisition. 
• Exxon and Mobil: Exxon and Mobil  merged back in 1998. The deal was closed at $80B. Exxon and Mobil are considered among the most successful mergers in history. Although Exxon and Mobil are considered the largest oil producers nationwide, executing this merger raised investor stakes by 293%, thus allowing investors to reinvest. 
• AT&T and Time Warner: AT&T  and  Time Warner  merged back in 2018. The two companies joined at a price point of $85.4B after receiving approval from the regulatory sector in the legal system.  

Benefits and Limitations Of M&A Deals

Here are some of the benefits of M&A Deals:

• M&A is a tried-and-true strategy for business expansion, enabling the newly created company to increase market share, expand geographically, overtake or buy out rivals, and acquire new talent, technologies, and assets. 
• The adage "two heads are better than one" holds true in mergers and acquisitions , as two businesses can realize beneficial synergies and generate considerably more value together than they could separately.
• By combining, two businesses may potentially streamline operations and eliminate redundant roles, systems, and licenses.

Some of the limitations of M&A Deals are:

• M&A transactions might take a long time to complete. The lengthy and labor-intensive M&A process might take months or even years to complete. Due diligence , a laborious manual process, detracts from key personnel's regular duties, hampering productivity and impacting involved businesses.
• An M&A transaction involves a lot of risk. Due diligence must be performed properly to ensure that the acquiring company has a complete understanding of the target company, which is why it is customary for businesses to hire outside consultants to assess the deal's risk. 
• Uniting two organizations with differing missions and cultures can be challenging, often resulting in integration difficulties for many merger and acquisition deals.

Everything You Need To Master M&A Modeling

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To continue learning and advancing your career, check out these additional helpful  WSO  resources:

• Acquisition Structure
• Asset Acquisition
• Asset Purchase vs Stock Purchase
• Capital Raising Process
• M&A Project Names

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How to Put Together a Business Plan for an Acquisition

Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.

What is Acquisition Planning?

Acquisition planning is when the acquirer identifies and builds relationships with potential targets. More specifically, these targets meet the acquirer’s predetermined, strategic criteria.

‍ The strategy behind acquisition planning leads to stronger outcomes for both sides of the deal and must, therefore, be the foundation of acquisition plans.

Acquisition plan templates often include a summary of this overarching strategy, criteria for potential targets, a list of potential targets, timelines, risk management and due diligence materials, as well as integration planning materials.

We at DealRoom work with many companies helping them organize their M&A process . So let's start with the overview.

How to create an acquisition plan

One of the principal errors that many M&A practitioners make before making an acquisition is not putting together a business plan. The business plan is an invaluable asset when planning M&A.

It creates a roadmap for what you’re looking for from a business acquisition , as well as providing reassurance to those funding the deal that the rationale behind it is solid and that the decision to acquire is not being made on a whim.

The format of the business plan for an acquisition has a similar structure to that of a business plan for a startup and includes many of the same sections.

When writing either of these documents, you should be asking yourself ‘does what I’m writing sell the opportunity?’

If the answer to that question is ‘ no ,’ you need a rethink, maybe not just for the document, but perhaps for the acquisition itself.

Having said all that, here’s a typical outline of how a business plan for an acquisition should look:

1. Executive Summary

Even though it comes at the beginning, most how-to guides on business acquisition plans suggest leaving the summary of an acquisition transaction until you’ve written everything else.

While this is pretty sound advice, a good rule of thumb is that, if what you’re proposing is compelling enough, you should have a rough draft of the executive summary in mind before even beginning.

A good executive summary should cover a page and sell the opportunity as best as possible, covering its target market, your strategy and summary financials. This is often the only page that investors read before skipping to the financial projections, so make sure it’s strong.

2. Target Description

This section of acquisition plan outlines the business you’re acquiring and why it’s worth what you’re proposing to pay for it. Be as thorough as possible here. If there are weaknesses that you see in the business, introduce them and talk about how you can iron them out and generate value.

At a minimum, include details such as

• headline financials
• a breakdown of the company’s long-term assets (factory, head office, facilities, stores, etc.) and liabilities
• a SWOT analysis
• corporate structure.

If the company operates in a different segment to your own, show how you can make this work in your favor.

3. Market Overview

A common error when looking at the market overview is to think globally.

Startup investor Peter Thiel refers to this, whimsically noting that someone owning a restaurant could say that they’re entering a trillion dollar industry, when in reality, their market is a five mile radius around the location of the restaurant.

The more granular the detail here, the better.

• How many customers does the target have, and what kind of customers are they?
• Will you lose their business if the current owner moves on?
• What kind of demand is there for the business outside of its current customer base?

4. Sales and Marketing

This section provides an overview of the sales for each of the target’s products and services. It should show their pricing strategy and how it compares to your own, and how the company currently conducts its marketing.

For example, if it uses mailing lists to contact customers, is that something you could leverage for your own products and services?

Or perhaps you feel it’s not investing enough in marketing and that you could increase sales by investing in this area. In either case, outline the ‘quick wins’ that you can exploit here after acquiring the business.

5. Financial History and Projections

When looking for financing for an acquisition, this section is the one which will make or break the deal. Thus, you should be as thorough as possible here, analyzing the target’s past financial performance.

At a minimum, this should involve three years of financial statements and tax returns but five or more is even better.

The analysis should be comprehensive and honest. It should raise issues that may conflict with your own business - for example, different credit arrangements with customers or a significant difference in capital structure.

Once this has been completed, you can look at projections for the business. These projections should tie in everything you’ve written until now; if you plan to increase sales and marketing, this should show in the income statement; if you’re going to use income from the acquired business to pay down debt, this also needs to be accounted for.

There is no right answer for how much your growth projections should be, but it should be justified by the vision that you’ve laid out until now.

An interesting, if potentially complex, sub-section to add to the financial analysis are the gains from synergies and losses from cannibalism that you see emerging from the deal.

Synergies might come from cutting some admin or sales staff or merging sales channels (for example, online or direct mail) after the acquisition.

Cannibalism arises when you’ve got one of your sales reps selling the new, wider product range, and the customer ends up choosing the target’s product over your own.

It’s easy to fall into the proverbial rabbit hole with this section, but it’s still a useful exercise to make you think about where gains (and losses) will be made from the acquisition.

6. Transition Plan

This is typically a brief section that shows how the business will move from the control of the current owners to your own. This is not purely about ownership, however.

It should also detail how current sales relationships, contracts, and intellectual property are dealt with in the transition.

You can minimize the disruptive influence of the acquisition by getting this section right. If there are complex processes at the target company, know who performs them and how this will be dealt with.

Thousands of acquisitions are botched every year by undervaluing seemingly small processes which generate value right across the business.

7. Deal Structure

The topic of deal structure has been covered well elsewhere [link], and these articles can be of assistance when adding this section.

Having put together a failsafe case for acquiring the target company, now you show the financial structure you will use to do so.  

8. Appendices/Supporting Documents

A major difference between writing a business plan for a startup and one for a business acquisition is the variety of supporting documents attached.

At a minimum, this should include copies of tax returns and licenses, but could go into greater depth and show contracts with large customers, auditors’ letters and any other legal documents deemed relevant.

Using a merger and acquisition proposal sample can provide helpful guidance when determining which supporting documents to include.

Download acquisition plan/proposal templates

• Business acquisition proposal sample template
• Acquisition strategy sample template (m&a strategy template)
• Business acquisition plan template

While there is room for some variation in sections of each business plan, one thing every plan should have in common is its ability to convince the reader of the merits of the acquisition. Each section should be detailed and compelling.

If you’re not willing to put in the groundwork on a business plan, an investor is entitled to ask, ‘ why should I give a million dollars to someone who can’t write 20 pages? ’

By spending time on the business plan, and taking a critical perspective, you maximize the chances of your acquisition finding a funder, and simultaneously creating a strategy for the acquisition that primes it for success.

Get your M&A process in order. Use DealRoom as a single source of truth and align your team.

Mergers and acquisitions (M&A)

• Mergers and acquisitions (M&A)
• What is a merger & acquisition (M&A)?
• M&A deal structures
• M&A strategies
• Private equity M&A

Deal preparation

Modeling deal outcomes, due diligence.

• M&A tax implications
• When should I tell Carta about my M&A?
• Download Carta M&A FAQ

Congratulations! Your company or client is considering an M&A—often the pinnacle of a company’s lifecycle. M&A transactions, while exciting, require a substantial lift from the management team, in-house legal team, external legal team, and tax and other external advisors to prepare for, negotiate, and close the deal. This guide will help direct you through your M&A transaction.

Carta has a number of resources in place that can help companies moving through an M&A, and this guide will direct you to those resources. It is important to emphasize that M&A transactions of any size are complex, and likely have significant tax and legal implications for the buyer, target, and stockholders of the target.  

An important note before we dive in: Make sure to consult legal and tax professionals every step of the way to ensure you are optimizing for your objectives in the deal. Nothing in this guide should be viewed as supplanting legal and tax guidance during an M&A deal, but instead are resources that can supplement the process to make it easier and more efficient.

What is a merger & acquisition (M&A)?

M&A stands for “mergers and acquisitions” and is used colloquially to describe transactions where one company (the buyer) purchases all or a portion of another company (the target). Leveraged buyouts , consolidations, acqui-hires, or restructurings are all terms that you may have heard that fall under the broader umbrella concept of M&A. 

M&A deal structures

There are three common structures for M&A transactions: a stock sale, an asset sale, and a merger. The type of transaction structure informs the level of due diligence, and the definitive documents and types of consents (both from stockholders and third parties) that will be required. (See how founders can navigate the M&A process .)

A stock sale is when the target company’s stockholders sell their stock to the buyer, such that the target becomes a wholly owned subsidiary of the buyer. 

An asset sale occurs when the target sells all or substantially all of its balance sheet assets to the buyer, and then typically the company dissolves and pays the proceeds of the sale to the stockholders in the company wind-down process. 

In some cases, partial asset sales can also involve the acqui-hire of specific teams (through new offers of employment with the buyer) and associated intellectual property. Any parts of the target company that were not sold off would continue to exist and operate without the acquired teams and associated IP.

→ Learn more about asset sales and stock sales

A merger occurs when two companies merge together to form one company. There are many different strategic motivations for mergers, and mergers can be financially and legally structured in different ways and even in combination with other deal types. 

Some common financial and legal structures for M&A include:

A reverse triangular merger , where the buyer forms a new subsidiary that merges with the target company, resulting in the target surviving the merger and becoming a wholly owned subsidiary of the buyer. This is the most common structure for corporate M&A.

A recapitalization , where the current owner sells a majority or controlling stake to a private equity firm and changes its structure of debt and equity. 

A leveraged buyout or leveraged recapitalization , a type of recapitalization where a private equity firm acquires a company with the help of debt funding, with the assets of the acquired company serving as collateral for the debt.

A divisional carve-out or spin-out , where a company wants to divest a business line or set of assets, contributes the business line or set of assets into a new entity, and then sells the entity via a stock sale or merger.

M&A strategies

In terms of strategic thinking behind a deal, some of the most common rationales for acquisitions include: 

Horizontal acquisitions , where companies in the same industry, performing similar distribution or production processes, consolidate in order to achieve economies of scale and synergies (similar to roll-ups, described below). 

Vertical acquisitions , where companies in the same industry, with expertise at different stages of the distribution or production processes, consolidate in order to reduce costs across the supply chain and increase overall efficiency in bringing the product or service to market. 

Concentric acquisitions , where companies with different products, but similar customer bases, consolidate to gain an advantage in distribution, including increased cross-selling capabilities. 

Conglomerate acquisitions , where companies in different industries and/or in different geographies consolidate in order to extend corporate territories or product offerings to the customer.

Roll-ups , a strategy traditionally used by private equity firms but increasingly used by others including venture capital, buy-and-build entrepreneurs, and search funds, where a firm acquires a platform company and consolidates multiple businesses in the same industry into the platform company to achieve economies of scale and find cross-selling opportunities.

Bolt-ons or tuck-ins , where  a private equity firm acquires one or more smaller companies and merges them with a larger, more established portfolio company. The acquired company or companies typically complement the offerings, products, or geography of the current portfolio company. 

Private equity M&A

Private equity firms (or private equity sponsors) are a type of professional investor that often specializes in buying and selling companies through M&A, typically taking at least majority control. PE firms use their expertise in governance, finance, strategy, and execution to improve the performance of the companies they acquire, with the aim of  later exiting their investment through a sale or IPO and generating (hopefully) a competitive return on capital for their investors. Because of this investment strategy, management teams at PE portfolio companies can expect a hands-on, growth-oriented approach from the buyer throughout the lifecycle of the investment, including in the preparation and execution of the M&A deal.  

While the deal structure and overall transaction timeline of private equity M&A will be consistent with the information in this article on other M&A deal types, a company being acquired by a private equity firm should be familiar with some additional considerations:

Private equity firms typically have different motivations and incentives than corporate acquirers. A PE firm is less likely to be a permanent home, because the firm will eventually need to exit its investment and realize a gain from the investment. Management of a target company should understand how the PE firm’s plans to accelerate growth and/or achieve operational efficiencies may impact the company’s long-term future.

Because a PE firm typically acquires control of a portfolio company, it is generally the case that the entire capital structure of the portfolio company is restructured in the acquisition, including using borrowed money to finance the acquisition in a  leveraged buyout (see above).  The cost of debt in a leveraged buyout should be relatively low, because target companies for PE firms tend to have a history of operations, forecastable cash flows, and assets that can act as security for loans.  In addition, debt can be favorable to the target company as a tax shield, as interest payments on debt can be deducted against corporate income.  However, the target must maintain the necessary cash flows to make timely payments on the debt. Failure to make payments on the debt could lead to default, which can further lead to higher interest rates, insolvency, or ceding control of the company to the debt lenders. 

Some private equity transactions lead to changes in management. If the company’s existing management is staying in place, acquisition of a company by a PE firm is often a chance for existing managers to get liquidity for their holdings in the target company, while also retaining optionality to recognize the potential upside of a future exit.

So you are going through an M&A and you’ve determined your deal structure—now what? Carta can help with due diligence preparation, “delivering” stock certificates or other cap table information, and offboarding from Carta (if the company is sold and no longer needs to manage a cap table ). Read more below, and then reach out to your company’s customer success manager or a member of the Carta support team .

Here are some other key areas where Carta can help you prepare before the process begins: 

Carta’s scenario modeling allows you to visualize the expected payouts by shareholder or share class based on exit value, expected non-convertible debt, and preferential payment terms to any preferred stock .  While this doesn’t replace an allocation spreadsheet or “ waterfall ” (prepared in accordance with the terms of the definitive agreement governing the terms of the transaction), you’ll be able to get an understanding of anticipated returns based on deal size. This information is key as you enter into term sheet negotiations, so that you understand your breakeven valuation.  

In most cases, Carta’s scenario modeling and cap table management software can serve as the starting point in constructing the allocation spreadsheet so your business team, investment bank, or law firm doesn’t have to model from scratch. 

For more information, see:

Scenario modeling for companies on Carta’s corporations platform

Scenario modeling for VC investors contemplating an exit for a portfolio company

Scenario modeling for private equity M&A

Due diligence is a comprehensive review of the activities of a business, including financial, commercial, and capitalization matters. Due diligence in an M&A deal is typically the most time-consuming part of the process, given the information asymmetries that could result in a buyer assuming unknown liabilities in the deal. Also, the buyer could be taking on new stockholders or investors if buyer stock is to be used as consideration in the deal, so the buyer (and potentially the target) will want to diligence those new stockholders to understand who they are and the existing rights that they have in the target company. 

M&A due diligence will be much more robust than the diligence experienced to date for a typical venture-backed company—think a diligence request list with at least 10 pages of categories, versus a two to three page diligence request list in a typical venture financing.  

The goal for the buyer is to leave no stone unturned and to bridge the information asymmetry through a combination of diligence and robust representations and warranties in the transaction document. Sellers need to be organized and prepared for what may seem like endless document and information requests which can be challenging when trying to operate the business and work on other parts of the transaction (e.g., negotiating the transaction documents, working on employee transition plans, etc.).

See an example of a M&A due diligence request list, provided by one of Carta’s partner law firms, and a leader in the M&A space, Goodwin .

Capitalization diligence

Capitalization diligence is a big part of the larger due diligence effort, so auditing your cap table before the M&A diligence process kicks off will save a lot of time and questions down the road. The buyer will typically review the target company’s capitalization table to “tie out,” or confirm the accuracy of, the ownership history of all past and present security holders.

Some common capitalization diligence issues that arise in M&A transactions include:

Lack of documentation, or unexecuted documentation, for equity issuances—particularly to founders, early employees and early investors

Lack of proper or accurate approvals for equity incentive plan increases

Failure to update capitalization table for stockholder name changes or employee departures

Options with a strike price not based on a valid 409A valuation report

Failure to comply with Rule 701 disclosure requirements

Carta’s cap table reports can expedite the “tie out” process, serving as the target company’s main repository of documents, valuation reports, equity award documents and stock ledgers. You may also need to prepare and assemble capitalization-related materials for a disclosure schedule, including equity paperwork, ledgers or full capitalization table reports that are attached as annexes to the disclosure schedule. All of these can be downloaded from the Carta cap table.

→ Learn how to download capitalization diligence materials from your Carta account

Financial diligence

The buyer and the target will be asked to share recent financial statements , with the target’s financials particularly scrutinized. Carta automates your expense accounting, including ASC 718 stock compensation expense reports that can be delivered to the buyer as part of diligence. 

→ Learn more about financial reporting on Carta

M&A tax implications

Both the buyer and target should engage tax professionals to advise regarding tax structuring and tax implications of the transaction. However, there are also tax implications for most security holders of the target company if they receive a payout upon closing, resulting in potentially significant tax liabilities for rank-and-file employees , who may not be prepared for the out-of-pocket tax costs that result from that type of tax event. 

The target company’s stockholders may have equity that is eligible for the qualified small business stock (QSBS) tax benefit, allowing them to exclude up to 100% of federal capital gains tax. Carta can help the target company and its stockholders determine what securities are eligible for the QSBS tax benefit.  

→ Learn more about Carta's QSBS attestation letters .

To ensure your employees have sound tax advice and understand the financial implications of the exit , Carta offers personalized tax advice for employees. Our equity advisory services include company-wide educational sessions and unlimited, confidential one-on-one sessions with a tax advisor. 

→ Learn more about equity advisory services .

When should I tell Carta about my M&A?

Generally, the earlier we get involved, the better, so we can coordinate with external legal counsel on deliverables and offboarding (if appropriate). Notifying the target company’s customer success manager or Carta’s support team once the letter of intent is signed, and a proposed closing date has been set, can make for a smoother process as you move toward closing. This is particularly important in a stock sale or merger, when there are likely closing deliverables related to equity. 

Download Carta M&A FAQ

Get answers to your M&A questions and a comprehensive list of how Carta can help.

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Thought Leadership  •  October 14, 2022

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What Are Mergers and Acquisitions (M&As)?

Mergers and acquisitions make news headlines all the time. While many think they know what these deals are, there are several kinds of business transactions that fall under the label of 'mergers and acquisitions'.

Catch up on the different types of mergers and acquisitions, discover why they happen, and learn about the various components to these deals. Last, find out the best way to stay organized when preparing for a merger or acquisition.

Types of Mergers & Acquisitions

Mergers and acquisitions, often shortened to M&A, is an umbrella term that is applied to many types of corporate consolidations. These terms are sometimes used independently and interchangeably. However, mergers are different from acquisitions.

For clarity's sake, it is important to know the different types of M&A transactions and how they differ from one another. Here are the most common types of M&A deals:

• Merger: In a merger, two companies decide to come together. Once shareholders approve of the deal, the companies combine as a new entity, which may keep the name of one of the parties. One example is Citigroup, the entity created by the merger of Travelers Insurance Group and the financial entity Citicorp.
• Acquisition: In an acquisition, one company acquires a second company. The two parties keep their business names and structures, which can be useful if both have strong brand followings. A well-known example of an acquisition is when Omrix Biopharmaceuticals was acquired by pharmaceutical giant Johnson & Johnson.
• Tender Offer: In a tender offer, a business offers to purchase another firm's stock at a special price, typically below the market rate. The company that receives the offer can ask for shareholder approval, bypassing the board of directors.
• Acquisition of Assets: Here, one company purchases the assets of another. This is often a side effect of liquidation or bankruptcy dealings when a company must sell its assets to settle debts.
• Management Acquisitions: Also known as a management-led buyout, this structure refers to the purchase of a controlling stake in a public company by its executives, who then take the company private. These transactions must be approved by shareholders. An example is when Dell's founder bought out the computing company, which had previously been a publicly traded company.

Types of M&A Deal Structures

Mergers and acquisitions can be completed using several structures. These are terms used to categorize the structure of a deal:

• Horizontal: This describes a merger between direct competitors that share the same niche or consumer market.
• Vertical: A vertical M&A describes a hierarchical relationship, such as between a company and its supplier or a company and its customer.
• Congeneric: A congeneric deal is one between two companies that serve the same market in different ways, such as athletic wear and sneakers.
• Conglomeration: This describes a merger between companies when there is no business overlap.

Why Do M&As Happen?

You might be wondering why companies would agree to a merger or acquisition if they are thriving on their own.

The two main drivers for M&As are growth and competition. Businesses want to grow, so they tend to think “M&A” when they believe it will help them do so. With competition, businesses may decide to join forces to unite against an industry-leading foe. Alternately, a major player may scoop up a smaller player if market conditions are right.

Keeping these motivations in mind should help you understand why mergers and acquisitions take place, but let's review more examples:

• Seeking opportunity for stronger growth: By purchasing another company, a business can instantly boost revenue and broaden its audience without having to grow organically (which tends to take a long time). Likewise, a business can purchase another company that offers a service or product it does not have. The M&A process is a shortcut to in-house development because the acquiring company can offer that service or product without having to build it themselves.
• Seeking synergistic/complementary company: M&As sometimes happen when two companies realize that they can form a single company that is worth more than the individual businesses. Other times, companies realize they can reduce expenses by joining forces due to economies of scale.
• Diversifying business endeavors/involved markets: Markets move in a cyclical manner where industries experience hot and cool cycles. A business might want to take on a company in a different industry to avoid these ebbs and flows.
• Increasing market power/financial authority: Larger companies tend to have more power and influence, such as to negotiate a favorable price with a supplier. By combining, smaller companies can increase their market power and financial authority.
• Tax benefits: There are some tax benefits to M&As. A business may decide the time is right to look for a deal if they want to gain taxable income or carry a tax loss forward, reducing tax liability. Note, however, that this is more of a perk than the main driver for an M&A — it would be surprising for a company to undertake an M&A just to skip out on taxes!

Determining Company Valuation During an M&A

During the M&A process, both parties will have to agree on a price for the business that is being purchased. The company valuation process is complex and depends on variables such as tangible and intangible assets; recently completed deals; business history and reputation; and other factors. Typically, a business appraiser is called to review the documentation and come up with an independent valuation for the company, so the deal can proceed.

There are three common M&A valuation methods an appraiser can use for the company valuation: discounted cash flow, market, and cash value.

Once the appraiser chooses the method appropriate for the deal, she or he will then review the various factors to come up with the valuation. For example, she or he might determine the value of all assets held by the business, then subtract debts and liabilities to arrive at a valuation. Alternatively, the appraiser might look to precedent, which is the price of recently completed M&A deals in the same niche.

Components of an M&A Agreement

Most M&A agreements include these clauses:

• Representations and warranties: This is a summary of facts related to the deal as of the closing data — sort of like a legal assessment of what is known to be true. Information found in this section includes attestations of business taxes paid; known issues with employees; or notification of any pending legislation. This is intended to establish good faith on both sides.
• Covenants: Covenants set conditions by which the parties must adhere for a short time before and after the closing. For example, a seller might have to agree to continue business operations as normal and hold onto any business assets leading up to the merger. They would be prevented from selling any business assets and pocketing the cash before the M&A closes.
• Conditions: Conditions are terms that must be met before the deal can close. If these conditions are not met, either side can cancel the deal.
• Deal protections: This clause specifies certain terms that must be met for the deal to go through. For example, there may be a "breakup fee" where one party must pay the other party to get out of the deal.
• Schedules: Here, schedules reflect an updated list of what the buyer is selling to the acquiring company. For example, the business might list all outstanding contracts or all outstanding debts and creditors.

Forms of Acquisition and Payment Methods

Finally, both sides will need to determine the financial structure of the deal. A company might put up cash to purchase another business. If the business being acquired is in debt, the company taking over might pay off that debt as a form of acquisition. A company could also use stock shares to purchase the business. Often, companies will use a combination of these methods for an M&A transaction.

Underpinning these deals is M&A due diligence, where both parties reveal business information, including finances and proprietary information. The due diligence begins once an M&A letter of intent is signed, and it continues until the sides negotiate a deal.

These days, most M&A deals rely on a virtual data room to upload and organize documents for the due diligence phase of the transaction. If you are seeking a virtual data room vendor, discover how DFIN's purpose-built software can help protect security, organize information seamlessly, and help complex deals move forward.

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Strategic Deal Structures for M&A Success in a Dynamic Business Landscape

Mergers and acquisitions (M&A) have become a common strategy for companies looking to expand, increase market share, or gain a competitive edge. However, the success of these deals relies heavily on the strategic deal structures put in place during the negotiation and implementation process.

Table of Contents

Strategic deal structures refer to the specific arrangements and agreements made between the parties involved in an M&A transaction. These structures determine the terms, conditions, and objectives of the deal, ensuring that both sides benefit and the desired outcomes are achieved. In this blog post, we will explore the importance of strategic deal structures in M&A success and discuss key considerations, such as understanding the dynamic business landscape, choosing the right deal structure, structuring the deal for value creation, managing risks and uncertainties, implementing effective integration strategies, and measuring and evaluating deal success.

Importance of Strategic Deal Structures

When it comes to M&A deals, strategic deal structures play a crucial role in determining the overall success of the transaction. They provide a framework for aligning the interests of both parties, ensuring that the deal is mutually beneficial and meets the strategic objectives of the companies involved. Without a well-thought-out deal structure, the chances of failure, conflicts, and missed opportunities increase significantly.

Furthermore, strategic deal structures help create a clear roadmap for post-merger integration, enabling companies to navigate the complexities and challenges that arise during the process. By defining the roles, responsibilities, and expectations of each party, these structures facilitate effective decision-making, communication, and collaboration, ultimately leading to a smoother integration and the achievement of synergies.

Overall, having a strong and well-designed deal structure is essential for M&A success, as it sets the foundation for a productive and mutually beneficial partnership between the merging entities.

Understanding the Dynamic Business Landscape

In order to create effective strategic deal structures, it is crucial to have a deep understanding of the dynamic business landscape in which the M&A transaction is taking place. The business environment is constantly evolving, influenced by factors such as technological advancements, economic trends, regulatory changes, and competitive forces.

To navigate this dynamic landscape, companies must conduct thorough research and analysis to identify potential risks, opportunities, and market trends that may impact the success of the deal. This includes understanding the competitive landscape, customer preferences, industry regulations, and any potential disruptors or emerging technologies.

By gaining insights into the business landscape, companies can tailor their deal structures to capitalize on opportunities, mitigate risks, and ensure that the transaction is aligned with the long-term strategic goals of the organization. This understanding also helps companies anticipate and respond to any challenges or changes that may arise during the integration process.

Key Considerations for M&A Success

When designing strategic deal structures, there are several key considerations that companies must take into account to ensure M&A success. These considerations include:

• Strategic Fit:  The deal structure should align with the strategic objectives and long-term goals of both companies involved. It should create synergies and add value to the combined entity, enabling it to gain a competitive advantage in the market.
• Financial Considerations:  Companies must carefully evaluate the financial implications of the deal structure, including the valuation of the target company, the financing options available, and the potential return on investment.
• Legal and Regulatory Compliance:  It is essential to ensure that the deal structure complies with all relevant laws, regulations, and industry standards. This includes obtaining necessary approvals and clearances from regulatory authorities.

By considering these key factors, companies can design deal structures that are well-aligned with their strategic objectives, financially viable, and legally compliant.

Choosing the Right Deal Structure

Choosing the right deal structure is a critical step in ensuring M&A success. There are several deal structures to choose from, including stock acquisitions, asset acquisitions, mergers, joint ventures, and strategic alliances. Each structure has its own advantages and disadvantages, and the choice depends on various factors such as the strategic fit, financial considerations, and regulatory requirements.

For example, a stock acquisition involves the purchase of a target company’s shares, allowing the acquiring company to gain ownership and control. This structure is often used when the acquiring company wants to retain the target company’s brand, customer base, or intellectual property.

On the other hand, an asset acquisition involves the purchase of specific assets or business units of the target company. This structure is commonly used when the acquiring company is interested in acquiring specific assets or wants to avoid assuming certain liabilities or risks.

By carefully evaluating the strategic fit, financial implications, and regulatory requirements, companies can choose the deal structure that best aligns with their goals and maximizes the chances of success.

Structuring the Deal for Value Creation

Structuring the deal for value creation is crucial in any M&A transaction as it aims to benefit both parties involved. Value creation can manifest in various ways, such as cost synergies, revenue synergies, market expansion, increased market share, and enhanced capabilities.

Cost synergies refer to the reduction in expenses achieved through the consolidation of operations, elimination of duplicate functions, and economies of scale. For example, when two companies merge, they can combine their purchasing power to negotiate better deals with suppliers, resulting in cost savings. This allows the newly formed entity to allocate resources more efficiently and ultimately increase profitability.

Revenue synergies, on the other hand, entail leveraging the combined customer bases and distribution channels of the merging entities to generate additional sales. For instance, if a software company acquires a hardware company, they can bundle their products together and cross-sell them to their respective customer bases, leading to increased revenues for the merged entity.

Market expansion is another form of value creation that arises when the merging companies can enter new markets or geographies that were previously inaccessible to them individually. This expansion can be achieved through leveraging the distribution networks and market knowledge of the other entity. For example, if a company based in the United States merges with a company based in Europe, they can gain access to each other’s markets and tap into new customer segments.

Increase in market share is often a desired outcome of M&A transactions, as it can provide a competitive advantage and enhance the company’s position in the industry. By combining forces, the merged entity can capture a larger portion of the market, enjoy economies of scale, and exert greater pricing power. This increased market share can translate into higher profits and improved shareholder value.

Enhanced capabilities refer to the additional resources, expertise, or technologies that can be acquired through a strategic deal. For instance, if a technology company acquires a startup with cutting-edge artificial intelligence capabilities, they can leverage these new capabilities to develop innovative products or improve existing ones, thereby creating value for the merged entity.

To structure the deal for value creation, companies should focus on identifying and leveraging synergies between the merging entities. This entails conducting a thorough analysis of the potential synergistic benefits, such as cost savings, economies of scale, increased operational efficiency, and access to new markets or technologies. By aligning their objectives and strategically integrating their operations, the merging companies can maximize the value created from the transaction and ensure a successful outcome for both parties involved.

Managing Risks and Uncertainties

Managing risks and uncertainties in M&A transactions is essential for ensuring a successful outcome. The first step in this process is to identify and understand the potential risks involved. This can be done through conducting thorough due diligence on the target company. For example, a company considering an acquisition might examine the target’s financial statements, market position, and legal history to assess the financial risks associated with the deal. By gaining a clear understanding of the target’s financial health and potential liabilities, the acquiring company can make a more informed decision about the transaction.

Another important aspect of managing risks in M&A transactions is assessing the compatibility of the merging entities’ cultures. Cultural clashes can lead to significant challenges during the integration process, affecting employee morale and productivity. For instance, if one company has a hierarchical and rigid management style, while the other has a more flexible and collaborative approach, conflicts may arise. To mitigate this risk, companies should conduct cultural assessments to identify potential areas of misalignment and develop strategies to address them. This could involve holding joint workshops or training sessions to facilitate understanding and create a shared vision for the future.

Once the risks and cultural factors have been identified, companies can develop a comprehensive integration plan. This plan should outline the steps and timelines for merging the operations, systems, and processes of the two entities. For example, if the target company operates in a different geographic region, the integration plan may involve consolidating facilities, harmonizing IT systems, and aligning supply chains. By carefully planning and executing the integration process, companies can minimize disruptions and ensure a smooth transition.

Communication is also crucial in managing risks and uncertainties in M&A transactions. Establishing clear communication channels and engaging in open dialogue with all stakeholders can help address concerns and mitigate potential issues. For example, communicating the benefits of the transaction to employees can help alleviate fears and resistance to change. Similarly, involving key customers and suppliers in the integration process can help maintain important relationships and ensure business continuity.

In conclusion, managing risks and uncertainties in M&A transactions requires a proactive approach. By identifying potential pitfalls, conducting thorough due diligence, assessing cultural compatibility, developing a comprehensive integration plan, and maintaining open communication channels, companies can increase the likelihood of a successful outcome and maximize value creation.

Implementing Effective Integration Strategies

Implementing effective integration strategies is crucial in ensuring the success of any merger or acquisition deal. Without a well-planned and executed integration process, the merging entities may face challenges and obstacles that can hinder their ability to operate as a cohesive organization.

One key aspect of effective integration strategies is the development of a detailed integration plan. This plan serves as a roadmap for the entire integration process, outlining the specific milestones, timelines, and responsibilities for each phase. For example, if two companies are merging, the integration plan may include milestones such as the consolidation of financial systems, the migration of data, and the alignment of reporting structures.

Culture integration is another critical aspect that should be addressed in the integration plan. When two organizations with different cultures come together, there is often a need to align their values, norms, and behaviors to create a unified culture. For instance, if one company has a more formal and hierarchical culture, while the other has a more informal and collaborative culture, the integration plan should outline strategies to bridge these cultural differences and create a shared identity.

IT systems integration is also a key consideration in the integration process. This involves merging or aligning the technology systems and infrastructure of the merging entities to ensure seamless operations. For example, if one company has a robust customer relationship management (CRM) system, while the other relies on a different CRM platform, the integration plan should outline the steps to integrate and harmonize these systems to avoid data duplication and inefficiencies.

Customer and employee retention should also be addressed in the integration plan. It is essential to communicate with customers and employees about the merger or acquisition and reassure them about the continuity of services and job security. The integration plan should include strategies to retain key customers and employees, such as personalized communication, retention incentives, and clear career development opportunities.

Communication strategies are vital throughout the integration process. Open and transparent communication helps to manage expectations, alleviate concerns, and build trust among all stakeholders. The integration plan should outline the communication channels, frequency, and key messages to ensure consistent and effective communication. For example, regular town hall meetings, email updates, and dedicated integration websites can be used to keep employees and other stakeholders informed about the progress and upcoming changes.

In order to successfully implement these integration strategies, companies should establish a dedicated integration team. This team should consist of individuals with the necessary expertise and experience in areas such as project management, change management, and cultural integration. By bringing together the best talent from both organizations, the integration team can effectively lead and execute the integration plan, ensuring a smooth transition and alignment of the merging entities.

Measuring and Evaluating Deal Success

Measuring and evaluating the success of an M&A deal is essential for companies to assess the effectiveness of their strategic deal structures and integration strategies. This evaluation allows companies to identify areas of improvement, learn from their experiences, and make informed decisions for future deals.

Companies can use various metrics and indicators to measure deal success, such as financial performance, customer satisfaction, employee retention, market share growth, and operational efficiency. For example, in terms of financial performance, companies can assess the impact of the deal on their revenue, profit margins, and return on investment. They can compare these financial metrics against their pre-deal targets and industry benchmarks to determine if the deal has met or exceeded expectations.

Customer satisfaction is another important metric to evaluate deal success. Companies can conduct surveys or gather feedback from customers to understand if the deal has positively impacted their experience with the company. For instance, if an M&A deal resulted in improved customer service or a wider range of products and services, it is likely to contribute to higher customer satisfaction levels.

Employee retention is a crucial aspect of measuring deal success. High employee turnover can be disruptive and costly for companies, so it is important to assess whether the deal has affected employee morale and retention rates. Companies can analyze employee feedback, turnover rates, and engagement levels to determine if the deal has had a positive or negative impact on the workforce.

Market share growth is another key indicator of deal success. Companies can evaluate if the M&A deal has resulted in an increase in their market share or if it has helped them penetrate new markets. By comparing market share data before and after the deal, companies can assess the effectiveness of their market expansion strategies.

Operational efficiency is also a critical metric to consider when evaluating deal success. Companies can analyze if the deal has streamlined processes, reduced costs, and improved overall efficiency. For example, if the integration of two companies resulted in the elimination of duplicate functions and improved supply chain management, it indicates a successful deal in terms of operational efficiency.

Additionally, companies should conduct a comprehensive post-deal review to identify any gaps or areas for improvement. This review should involve analyzing the integration process, communication strategies, cultural alignment, and any unexpected challenges faced during the deal. By conducting a thorough review, companies can learn from their experiences and incorporate the lessons learned into future deals, ultimately enhancing their ability to achieve deal success.

Final thought on M&A Deal Structures

In a dynamic business landscape, strategic deal structures play a crucial role in driving M&A success. By understanding the dynamic business landscape, considering key factors, choosing the right deal structure, structuring the deal for value creation, managing risks and uncertainties, implementing effective integration strategies, and measuring and evaluating deal success, companies can increase their chances of achieving their strategic objectives and creating value for all parties involved. With careful planning, execution, and continuous improvement, companies can unlock the full potential of M&A transactions and position themselves for long-term growth and success.

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Knowledge Base

Knowledge base topics.

• General Information
• 1 - Preparation
• 2 - Valuation
• 3 - Exit Options
• 4 - M&A Team
• 5 - Marketing
• 6 - Letter of Intent

7 - Deal Structure

• 8 - Due Diligence
• 9 - Closing
• 10 - Transition

Before you accept a letter of intent, it’s important to learn the basics of deal structure. In this section, we cover the components of the purchase price, such as cash, stock, earnouts, and seller financing, and how your taxes could be impacted by your transaction’s legal framework.

Legal Deal Structure

When a business changes hands, most buyers expect the seller to sign a non-competition agreement (non-compete) at closing. Few buyers will purchase a business without a commitment from the seller to not compete with them after the business is sold.

While deciding upon the sale of your company, selling only a portion of your business may cross your mind. You may have questions about the process, such as whether it’s wise or common.

The type and amount of taxes that must be paid are directly impacted by whether your company is a sole proprietorship, partnership, or corporation.

When buying or selling a business, an M&A transaction can generally take one of two forms: An asset sale or a stock sale. Fundamentally, there are few differences between the two transaction structures.

On the heels of many seemingly smooth business deals, a buyer may have doubts. Sometimes they question whether certain details of the business meet regulatory standards. They may also be concerned with fraudulent issues. To quell their apprehension, a buyer will sometimes request a holdback.

Financial Deal Structure

When selling my business, can I cash out at closing? Is it possible to sell my business for all cash? Or do I need to finance a portion of the purchase price?

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Tax Implications

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Deal Structure Basics: What Sellers Need to Know

Deal structure clearly defines what will occur during and after the sale of your business. You have put years of hard work into building your company. The deal structure outlines how the merger or acquisition will occur, how much cash you can expect to receive as a result, and when you will receive those funds. 

It will also determine the role you will have (if any) in the company moving forward and your obligations toward your existing debts and liabilities. Furthermore, the chosen structure has significant tax implications for both buyers and sellers . The structure defines how both entities are treated by the IRS after the deal is complete. 

Because of this, it’s essential to hire experienced advisors and attorneys to help with the M&A transaction. Professionals in this field have experience with various types of deal structures and they can help determine which is best for you. 

Remember that the merger and acquisition process is a negotiation between a buyer and a seller. The deal structure and terms may not be perfect, and you may have to compromise on some issues. But you should not lose out on the deal either. 

Do Your Due Diligence When Structuring Your Merger or Acquisition

When going through the M&A process , there are numerous details to determine, from figuring out how much cash the seller will receive upfront to how much working capital is left in the business, or whether they need to sign a consulting agreement to complete the transaction. 

The deal structure is one of the most critical components needed to complete the sale. Experienced advisors and attorneys can help determine which type of deal structure is ideal for your situation. 

You can have an asset sale , stock sale , merger, or a structure completely unique to your situation. Unlike real estate, there is no standardized method for selling a business: Every deal is different. Hiring experienced professionals to help you through the M&A process can help protect you and the company you’ve worked so hard to build.

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What is ‘Deal Structure’ in Business Transactions

• Updated: December, 2023

Deal structure plays a pivotal role in business purchase transactions, serving as the architectural framework that defines the terms, conditions, and financial intricacies of the deal. Deal structure involves determining how the purchase price ( enterprise value ) will be paid , whether through cash, rollover equity, or a combination of both, and establishing the timeline for payment. 

The deal structure also addresses the allocation of risks and responsibilities between the buyer and the seller, often utilizing mechanisms such as holdbacks/ escrow accounts and earnouts and transition service agreements to ensure a smooth transition and safeguard both parties’ interests. 

Moreover, deal structure can be tailored to take into account tax implications, aiming to optimize the financial outcome for both the buyer and the seller. Crafting a well-balanced deal structure requires a nuanced understanding of the businesses involved, their financial positions, and the broader market conditions, ultimately contributing to the success and sustainability of the acquisition.

Sample M&A Deal Structure

Here is a sample deal structure that may be received on an LOI for a business transaction. In this hypothetical scenario, the buyer is paying a multiple of adjusted EBITDA. 

Most LOIs are 2-3 pages and lay out the purchase structure and key considerations. However, the more structure in the deal, the longer and more arduous the drafting and finalization of the purchase agreement is. It is not uncommon to have 5 pages of escrow agreements, 10-15 pages to outline the terms of a seller note and 20+ pages to detail an earnout.

While most of the purchase price is paid in cash at the time of closing, below are some key deal structure points along with commentary from the experts at Raincatcher .

1. Holdback

A holdback in a business transaction involves withholding a portion of the purchase price for a specified period (often-times 1 year). This is typically to cover potential liabilities or unforeseen issues that may arise after the deal is completed.

The withheld amount, often held in escrow, serves as a form of insurance, ensuring that the buyer has recourse if post-closing concerns emerge, such as undisclosed liabilities or breaches of representations and warranties by the seller.

Holdbacks provide a financial safeguard for the buyer, encouraging the seller to address any outstanding issues promptly and protect the buyer from unexpected financial risks associated with the acquired business.

Raincatcher’s thoughts on holdbacks:

Holdbacks (often just called escrows) are very common and included in 90% of full buyout deals.

The only deals that don’t involve a holdback are deals where there are other financial assets that a buyer could claw back for the seller’s wrongdoing, such as rollover equity or seller notes.

2. Seller Note (seller financing)

Seller financing is a transaction arrangement where the seller of the business provides debt financing to the buyer.

In this scenario, the buyer makes principal and interest payments directly to the seller over time, in addition to or instead of obtaining a traditional loan from a third-party lender.

Seller financing is often used when buyers may face challenges securing conventional financing or when the seller wants to make the deal more attractive by offering flexible payment terms.

Seller financing can benefit both parties by facilitating the sale of the business and providing the buyer with an alternative financing option. However, because the seller’s paper is subordinate to other, senior lenders, it carries some risk.

Raincatcher’s thoughts on seller financing:

For competitive deals, it is uncommon for our sellers to accept a deal that has any seller financing. However, there may be a buyer who is willing to pay a premium for a company if the seller is able to finance a portion of it.

Related Content

If you’re looking into deal structures, you may be interested in our business valuation calculator . It’s a great way to share your information with us and hear from our professionals on the value of your company.

3. Rollover Equity

Rollover equity, also sometimes referred to as retained equity is a strategic approach in mergers and acquisitions where existing owners elect to retain a portion of their ownership stake in the the company. Since the buyer is forming a new company, they are essentially exchanging their shares (or partnership units) in the old company for shares/units in the new company. This act is called rolling over.

This financial arrangement is designed to maintain a sense of continuity, as the original stakeholders continue to hold a vested interest in the ongoing success and performance of the combined entity. 

Raincatcher’s thoughts on rollover equity:

Rollover equity is used commonly used in two different scenarios:

• The seller(s) are staying in place and continuing to run the company. They sell either a majority or minority of the business to diversify their wealth and bring on an investor as a partner.
• The seller is exiting the business completely, but greatly believes in the direction of the business moving forward and wants to take part in the growth that the buyer will enjoy. 

An earnout is a payment arrangement in business sales where a portion of the purchase price is contingent on achieving future milestones. These milestones can be a cliff, where the seller gets all or none of the contingent payment based on achieving this, or a step, where there are various payouts for various outcomes.

This aligns the interests of the buyer and seller, especially in uncertain growth scenarios or when the seller is staying in place to operate the company through a period of time with a high-growth forecast.

Raincatcher’s thoughts on earnouts:

Earnouts can be helpful to bridge a perceived gap in valuation between a buyer and a seller. If the seller has a high level of belief in the future success of the business, they may be willing to take a portion of that payment contingent on future outcomes of the company’s operations.

Earnouts are often used in cases of high-growth companies and/or when the buyer is paying an above-market valuation multiple .

When Is Deal Structure Used in M&A

We provided our thoughts on when each type of structure is used above in the “Raincatcher thoughts” section. To summerize those thoughts, deal structure is used to reconcile a gap in valuation held by a buyer and seller and to align their go-forward interests .

It is also common for deals in soft markets to have more structure (less cash paid at close) than deals in strong, seller markets. This is because buyers have more leverage in purchase negotiations.

• Mark Woodbury

We help entrepreneurs buy and sell remarkable companies.

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How to Structure Your Business Acquisition: An Insider’s Guide

• Posted on July 25, 2022

Table of Contents

Found a business you might want to buy? Congrats! It’s exciting to consider all the potential growth and profits you could see from this business acquisition. 

But first, you’ve got to agree with the seller on how you’re going to buy this business–and that means you have to decide how to structure your acquisition deal. 

The fine points of structuring deals often get overlooked in the rush to finalize an acquisition. But deal structure gives you important options that can minimize your risk.

What Does “Buying a Business” Mean?

Acquisition structure describes how your deal is organized, and how the company will operate post-sale. 

Financially, how will you compensate the seller and acquire the business? And after you buy it, how will it be run? Your acquisition structure provides the answers to these questions.

3 Main M&A Transaction Types

There are three main types of business acquisition deal structures that are commonly used today. Let’s take a look at each one in depth:

Stock Purchase Agreement

If the company you’re buying has issued shares of stock, you can acquire the business by purchasing all or a majority of the stock shares. With private companies, these shares may be difficult to value. 

But a stock-purchase agreement can pave the way for a smooth transition. Often, current leadership may remain in place operating the business. 

Note that in a stock purchase acquisition deal, the buyer acquires all the outstanding liabilities of the business. Do careful due diligence to make sure you understand all the debts and other obligations that come with this acquisition.

Also, if you retain minority shareholders in the stock-purchase deal, they may have their own opinions on how things should be run. 

Asset Purchase

Many businesses diversify what they do over time, and end up with a variety of different income-generating activities. In an asset purchase, the buyer acquires only a specific set of assets. 

The seller’s business may continue on, but without the assets they sold to you. For instance, as I write this, Bed Bath & Beyond was contemplating selling off its baby-gear focused Buybuy Baby division. Its main BB&B retail empire isn’t on the block, just that division.

An asset purchase deal allows you to pick and choose exactly what you’re buying, allowing you to cherry-pick the best parts. Assets may include intellectual property such as patents or trademarks, an operating website, retail locations, warehouses, trucks, and more. 

Make sure your agreement is highly specific about exactly what comes to you in the sale. You don’t want to realize later that you didn’t get all the assets you wanted.

In a merger, your existing company comes together with the seller’s company to form a new, third company. There may be tax advantages here in forming a new entity instead of continuing under your existing corporate structure, and combining the two companies may make it easier to operate. 

For instance, your company may buy products from the business you’re acquiring. Once you’re merged into one company, you’ll pay just the cost of goods without a markup.

One advantage of structuring your acquisition deal as a merger is that if the company you’re buying has shareholders, the move only requires approval from a majority of the selling company’s shareholders.

Acquisition Deal Structure Examples

Interested to see how acquisition deal structure works in practice? Here are recent examples of each of the three basic deal structure types:

Stock purchase: Publicly held Zendesk was purchased by a private investor group for $10.2 billion in June 2022. The new owners acquired the company by buying up Zendesk’s stock shares, thereby taking the company private. Zendesk shareholders received a price per share that was 34 percent above the stock’s price at the announcement date.

Asset purchase: Barcelona-based marketing firm PICKASO developed a platform for selling apps back in 2017. Known as TheTool, the platform was sold to app-marketing firm App Radar four years later in a six-figure asset purchase. PICKASO continues to offer clients SEO, design, and content marketing services, but this single tool is now part of App Radar’s offerings. 

Merger: In Feb. 2022, Frontier Airlines and Spirit Airlines announced their merger in a deal valued at $6.6 billion. The merger made Frontier the majority owner of the new company, with Spirit retaining a 48.5-percent stake in the new company. Frontier gave Spirit stockholders roughly 2 Frontier stock shares plus $2.13 cash for each Spirit share owned. A new name for the combined company was expected to be announced in late 2022.

Other Acquisition Deal Structures

There are a few other ways that acquisition deals get structured, but they’re used less often because they have distinct disadvantages.

Seller financing: In this deal structure, the seller doesn’t get their full cash sale price at closing. Instead, they essentially become your bank and finance the remainder. This isn’t ideal because the interest rate will usually be high–and if you default, the seller owns the business again. A last resort some buyers use if they can’t obtain a bank loan.

Equity financing: This one’s for experienced buyers with deep ties to the investor community. The buyer creates a public or private stock offering and sells shares to investors, using the proceeds to fund the purchase. However, your stock offer may not sell out, leaving you short of the needed cash for your acquisition–and now you’re only a part owner, with investors having a say in operations.

Leveraged buyout. Remember leveraged buyouts from the ‘80s ? In this deal structure, the buyer borrows money – sometimes at elevated interest rates – to make the acquisition, using the assets of the business to be acquired as collateral . Luckily, things have changed a lot since the “corporate raider” days of the 1980s. Today, this is one of the most popular and successful deal structures.  Many of our clients engage in leveraged buyouts as part of their acquisition strategy.  

Factors To Consider When Determining the Right Deal Structure

Which deal structure is right for you? The best option depends on several factors: 

• Tax consequences –One deal structure may be more advantageous than another when April 15 rolls around. Be sure to consult with a qualified accountant to maximize your tax savings.

Creating Your M&A Deal Structure

Once you’ve decided on the type of acquisition structure you’ll be using, you need to hammer out your agreement. Is this a merger, an asset purchase, a stock purchase, or something else?  For an asset purchase or merger, you’ll need to outline what money will go to the seller, and at what point.

Unless you’re buying this business with existing shares of your own company’s stock, you’ll also need to come up with the funding to make this acquisition. 

If you don’t have the cash on hand–or don’t want to use the cash you have–you’ll need to find, borrow, or raise the money. We’ve got a detailed rundown on different ways to fund acquisitions here . You can also postpone some of your cash payout by structuring your deal as an “earn out.” 

”Cash at Close” vs Earn Outs

In an earn out, only some of the cash is paid at closing. A schedule of payments across the next 1-3 years is mapped out to pay out the balance. 

Often, those earn-out payments are dependent upon the business continuing to perform well–if it doesn’t, the amounts may be reduced. An earn-out deal structure reduces the buyer’s risk because if the business flounders post-sale, you won’t owe as much to the seller.

This is one of the biggest sticking points in acquisition deals. The seller would like to receive their entire valuation in cash at close. And the buyer would like to put 100 percent of the payouts into an earn out to protect their downside. 

Usually, a compromise is found. The devil is truly in the details here–make sure you carefully define what triggers a full payout and what would reduce the earn-out payments. You want to protect yourself in case the business does poorly after the sale closes.  

Get Savvy About Structuring Deals

There are a lot of factors to consider in structuring acquisition deals. You’ll want to build a team of M&A experts to guide you in selecting the right structure for your business purchase. If you need help, check out the DueDilio network of M&A professionals.

Get In Touch

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DueDilio connects you with a network of highly vetted M&A service providers and partners.  The independent professionals and boutique firms that we work with specialize in M&A advisory, due diligence, and post-acquisition value creation.

(866) 376-5544

Email: [email protected]

Written by Roman Beylin

Roman Beylin is the founder of DueDilio, a leading online marketplace to assemble an M&A deal team. Our large and growing network of highly vetted independent professionals and boutique firms specialize in M&A advisory, due diligence, and post-acquisition value creation.

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Deal Structure

by Holly Magister, CPA

• Latest Posts

• Maximizing After Tax Proceeds When Selling Your Business - June 7, 2024
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• Which is Best – Business Broker, M&A Advisor, or an Investment Banker? - October 2, 2023

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Deal Structure Objectives

The key objectives for a successful deal structure include coming to a fair agreement on price (including meeting the seller’s price expectations) and ensuring that the buyers will be capable of operating the business in line with their current financial goals.

No two deal structures will be exactly the same, or include the same terms, and the buyer and seller should come to an agreement based on the unique elements of that particular business transaction. The buyer and seller, the industry, the economy, the financial market, and, of course, the business itself all will play a role in defining the deal structure.

Deal Structure Terms

There are a number of terms that will need to be agreed upon in order for any deal structure to be effective. Paramount to the success of a deal structure is the business purchase price agreement, but a number of other factors are also critical to the deal structure. These terms may include, but are not limited to, the following:

• The amount of the buyer’s down payment
• Whether the transaction is to be structured as an asset or stock sale
• The seller’s financing terms
• Any holdback of the purchase price as defined in an earnout agreement
• Consulting and/or non-compete agreements with the seller and any of the business’ key employees
• Terms related to any seller-owned real property used by the business

Financial Requirements

There are also a number of financial requirements that will affect the success of the deal structure, including factors that are both debt and equity/capital related. Some of these factors include:

• Expected compensation for the new ownership
• Debt service coverage ratio that is expected by the lenders
• Payback period on the buyer’s down payment
• Short term capital needs, post-closing
• Capital Availability post-closing to the business and its new owners

I(sole owner) have a mix used building in San Diego, worth about 1.2 to 1.4 million. I am 62 years old with no heirs.. would like to structure a deal where I get approximately $600,000 and when I pass away the property would go to the investor of the 600,000.. I know there’s quite a few questions that still need to be answered, but I was wondering if this is a possibility to structures such a deal?

Hi Mary, As long as your arrangement is legal, you can structure a deal any way that works for your investor and you. Hire an experience business attorney who understands the tax ramifications (now and when you pass away) to help you structure your deal is my best advice! All the best…

Selling a restaurant/tavern in New York state as a asset sale: How to breakdown the equipment, building, realty, goodwill, non-compete in the selling price to the ideal benefit of the seller ? Appreciate your advice, Thank you

Louis When you sell the assets, the buyer and seller need to agree in writing to the allocation of the selling price. In fact, you’ll have a document that needs to be sent to IRS. So, what is better for one party may not be in the best interest of the other, which is why it must be agreed in writing.

The buyer wants the ability to depreciate the assets while the seller prefers long term capital gains.

I strongly advise you to obtain the services of both a tax advisor and attorney prior to negotiation of the terms.

Do You only deal with US sales/acquisitions?

Hi Keith, We handle deals in the US and abroad. If you need assistance or have questions, feel free to set up a call with me here .

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Deal Structure

Table of Contents

What is a deal structure.

A deal structure in subscription sales defines the terms and conditions under which a customer subscribes to a company’s products or services. This typically includes price, licenses, and contract duration. Deal structures are essential in sales as they outline the framework of an agreement between the seller and the buyer.

• Contract terms
• Agreement structure
• Subscription terms
• Sales agreement

Why is a Deal Structure Important?

A well-defined deal structure is important for establishing successful business relationships and facilitating smooth transactions when selling SaaS products and other subscription services. Here’s why it’s important:

Clarity and Transparency

A clearly articulated deal structure helps prevent misunderstandings by providing explicit terms that both parties agree upon. This transparency ensures that all stakeholders are on the same page regarding the expectations and deliverables.

Flexibility

Deal structures offer the flexibility to customize agreements based on specific customer needs. This adaptability enhances customer satisfaction by aligning the deal with each client’s unique requirements, fostering stronger business relationships.

Revenue Management

Deal structures enable companies to predict and manage revenue streams over the contract period by defining the terms of the agreement. This predictability is imperative for financial planning and stability leading to better revenue management .

Competitive Advantage

Innovative deal structures can differentiate a company from its competitors. By offering tailored solutions, businesses can attract and retain customers more effectively, gaining a competitive edge in the market.

Common Types of Deal Structures

Different deal structures cater to varying customer needs and business goals, offering flexibility and strategic benefits.

Straightforward Deal

In this type of deal, the customer purchases a fixed number of licenses for a specified period at a set price. This simplicity makes it easy to manage and understand. For instance, a software company might offer 100 user licenses for its product at $10,000 annually. This transparent, straightforward pricing model is often preferred by small to medium-sized enterprises that need predictable costs.

Staggered Activation Deal

Here, the customer commits to a total number of licenses, which are activated and paid for in stages over time. This structure helps manage cash flow and scalability for both the vendor and the customer. For example, an enterprise might agree to a total of 300 licenses but only activate and pay for 100 licenses every six months. This gradual activation allows the customer to scale up as needed without an immediate financial burden.

Price Ramp Deal

This deal structure involves an initial purchase of a fixed number of licenses with the price increasing at predetermined intervals. This approach is beneficial for customers who expect the usage and value derived from the product to grow over time. For example, a company might start with 50 licenses at $20 each per month, with the price increasing by $5 every year. A ramp deal pricing model supports businesses that anticipate growth and can justify higher costs as their reliance on the product increases.

How to Implement Effective Deal Structures

Effective deal structures require strategic planning and a deep understanding of customer needs.

Understand Customer Needs

Knowing what customers want helps create deals that match their goals and constraints. Salespeople should actively listen to clients and ask insightful questions to grasp their requirements. For example, understanding a client’s growth projections can help in proposing a staggered activation deal that aligns with their expansion plans.

Use Technology

Leveraging CRM (Customer Relationship Management) and CPQ (Configure, Price, Quote) tools can streamline deal structure design, management, and tracking. These tools provide valuable insights and automation capabilities that ensure accuracy and efficiency. Salespeople should become proficient in using these technologies to enhance their proposal capabilities and build customer relationships during deal negotiation.

Set Clear Guidelines

Establishing clear policies for creating and approving deal structures ensures consistency and profitability. Sales teams should follow a standardized process that includes predefined discount limits, approval workflows , and compliance checks. This practice helps maintain deal integrity and profitability.

Train Sales Teams

Continuous education and training equip sales teams with the knowledge and skills to effectively propose and negotiate various deal structures. Regular workshops, role-playing scenarios, and access to updated market data can empower salespeople to present compelling deals. Sales training should also cover negotiation tactics and objection handling to prepare salespeople for diverse customer interactions .

Common Challenges and Solutions

Navigating deal structures can present several challenges, but with the right strategies, these obstacles can be effectively managed.

Complexity in Negotiation

Negotiations can become complicated when deal terms are intricate, and thus, it becomes increasingly important to simplify the negotiation process by clearly defining terms and ensuring mutual understanding. Salespeople should focus on transparency and use straightforward language to explain the deal. For instance, providing a detailed breakdown of costs and benefits can help simplify complex contracts for the customer.

Ensuring Profitability

Ensuring that deal structures remain profitable requires careful financial forecasting. Utilizing financial models to project the profitability of various deal structures is essential before making final decisions. Sales teams should work closely with finance departments to evaluate the long-term financial impact of proposed deals, adjusting terms as necessary to protect margins.

Customer Adaptation

Customers may resist unfamiliar deal structures, preferring what they know. To overcome this, salespeople should provide detailed explanations and real-world examples highlighting the proposed structure’s benefits. For instance, presenting a case study where a staggered activation deal helped a similar company manage growth effectively can alleviate customer concerns and illustrate practical advantages.

Differences vs. Related Terms

Understanding the nuances between deal structures and related terms can help clarify their unique roles in sales agreements. Listed below are some associated terms:

Deal Structure vs. Contract

A deal structure outlines the key terms of an agreement, such as price, number of licenses, and duration, setting the framework for the deal. In contrast, a contract is a formal, legally binding document encompassing these terms and other legal stipulations and obligations. While the deal structure defines the business arrangement, the contract ensures legal enforceability and compliance.

Deal Structure vs. Pricing Strategy

Deal structure focuses on the overall framework of the agreement, detailing how the deal will be executed and managed over time. Pricing strategy , however, involves setting the specific price levels within that framework. Pricing strategies consider market conditions, competitor pricing, and perceived value to determine the optimal price point. For example, a pricing strategy might decide that a software license costs $50 per month, while the deal structure might determine how and when those licenses are activated and paid for.

Key Takeaways

Deal structures define how customers subscribe to products or services by outlining prices, licenses, and contract duration. They provide clear terms and the flexibility to tailor agreements to customer needs. Typical structures for SaaS contracts include fixed deals, staged activation, and price increases over time. Implementing effective deal structures requires understanding customer needs, using technology, setting clear guidelines, and training sales teams. Key challenges involve simplifying negotiations, ensuring profitability, and helping customers understand new deal types. Grasping these basics helps create practical and customer-friendly sales agreements.

People Also Ask

What factors influence the choice of a deal structure.

Several factors influence the choice of a deal structure, including the customer’s business needs, budget constraints, and growth projections. Additionally, understanding market conditions, competitive intelligence , and the selling company’s strategic goals can help tailor the deal structure to offer the best value to both parties.

What are some examples of innovative deal structures in sales?

Innovative deal structures often include flexible payment plans, performance-based pricing, and usage-based models. Consider a software company that might offer a pay-as-you-go model where customers are billed based on actual usage rather than a fixed fee. Another example is a performance-based structure where pricing is tied to the achievement of specific customer outcomes, such as cost savings or increased efficiency.

How can technology assist in managing different deal structures?

CRM and CPQ tools can revolutionize the process of designing, tracking, and managing deals efficiently. CRM systems store customer information and track interactions, while CPQ tools automate the configuration, pricing, and quoting processes. This integration ensures accuracy, speeds up the sales cycle, and provides valuable insights for optimizing deal structures .

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M&A Negotiation: A Walk-Through M&A Deal Structure | Sell-Side Advisor

M&a negotiation.

• Win-Win Tactic
• Hardball Tactics

Win-Lose Tactics

M&A negotiation: we'll discuss important negotiating takeaways in a mergers & acquisitions deal. This is for lower middle market business owners to learn how to strike a favorable deal.

There is a lot to think about and a lot to consider when you're thinking about selling your business. You probably wish you could be dispassionate about selling your business, but it represents your life's work.

Knowing how to begin the selling process might be challenging, even if the moment is ideal.

• How can you and your team best get ready ?
• When valuing your company, How do you know what price is right ?
• How serious are potential purchasers likely to be about making a purchase ?

Passing the reins of your business to a new leader is a significant life event, especially if it has been a major part of your life up until this point. The sale of a business is not a quick and straightforward process and negotiating the deal may take anywhere from five to 10 years.

A merger or acquisition is one of the most common ways for a company to be sold.

Two of the most misunderstood terms in business are "merger" and "acquisition." Both names may be used to describe the coming together of two businesses, but there are important distinctions between them.

Any time two or more organizations join forces to form a single one, we call it a merger. In contrast, an acquisition is the process of one company acquiring another. To increase profitability for stockholders, some businesses engage in mergers and acquisitions to broaden their customer base or increase their market share. M&A negotiations are different from most types of negotiations you have done before. 

In this piece, we'll discuss the importance of negotiating in a Mergers & Acquisitions deal and provide advice on how to strike a favorable deal. Knowing how to negotiate business deals and use various M&A negotiation tactics will help you achieve your goals.

Win-Win Tactic  

To negotiate in a way that benefits both parties, or "win-win," one must first thoroughly investigate their position and that of their counterpart to reach an agreement. It's a win-win situation if both parties feel they came out ahead in the transaction.

Win-win transactions occur when both parties are willing to give and take, like in the case of buying and selling. If this is not possible and one of you has to make way, it is reasonable to discuss payment for the inconvenience. In spite of it, everyone involved should be satisfied with the result.

Types of Win-Win Strategies

Here are some of the most common types of win-win strategies used during negotiations:

Managing Expectations

Keeping everyone's hopes and fears in check during a deal negotiation is a sure way to reach a mutually beneficial agreement. In a win-win negotiation, it's crucial not to raise the other party's expectations by making major concessions too soon. You may increase the likelihood of a positive result from contract negotiations by making only minor compromises at the outset.

Just being patient might help you moderate your expectations for the result. The opposite party to a transaction may second-guess the offer's quality if it is accepted right away. Simply letting the other party know that you've reviewed the arrangement or making a few little adjustments may go a long way toward ensuring that everyone is happy with the final result.

Outcome Perception

In a negotiation, each side looks out for its own interests while also considering those of the other participants. It's common for parties to be amenable to compromise so long as they each get something out of it. To establish a win-win scenario, it's necessary to talk modestly about your advantages and thank the other party for their effort to preserve a favorable atmosphere for everyone involved.

Presentation of Multiple Offers

One winning method is to provide many options that are, in your opinion, equally good. Giving your opponents a choice between different offerings might help you figure out what they care about most. This knowledge is vital for future talks. This tactic will also help you stress your adaptability, openness, and willingness to satisfy the needs of the other parties involved in the negotiation.

Hardball Tactics  

In a negotiation, hardball techniques are employed to immediately establish a combative atmosphere. To use pressure in a negotiation is to try to persuade or otherwise influence the other side into altering their goals, expectations, or stance.

As a general rule, hardball strategies are not well welcomed during negotiations and should be employed rarely. However, these tactics might be helpful in one-time transactions if neither party hopes to establish a long-term partnership.

In addition, unique competitive techniques used as part of a mix of cooperative activities may be beneficial and not negatively perceived.

Types of Hardball Tactics

• Extreme demands are followed up by small, slow concessions. This strategy, which may be the most popular hard-bargaining method, is meant to prevent the parties involved from giving too much ground too soon. However, it might prevent parties from reaching an agreement and prolong commercial conversations needlessly.
• Commitment tactics. It's possible your opponent may claim he can't do anything to bargain with you because of external factors. Take any and all measures necessary to verify the authenticity of these declarations of devotion. It's possible that you'll need to bargain with a higher-up in order to close a deal.
• Take-it-or-leave-it negotiation strategy. Offers shouldn't usually be non-negotiable. In order to neutralize this hard-bargaining strategy, you should disregard the tone of the request and concentrate on the substance instead, after which you should make a counteroffer that satisfies the requirements of both sides.

Getting your way in negotiation might be perceived as driving a hard bargain or even defeating the other party. While negotiating may help one party accomplish its goals in the near term, it is ultimately a lose-lose strategy.

Because of this, when one side triumphs, the other loses, and their relationship may suffer as a result. Relationships are more likely to terminate, individuals are more likely to walk away or refuse to work with the "winners" again, and the negotiation process is more likely to finish in a harsh argument.

Most people are at least somewhat acquainted with win-lose negotiations. Each party decides what they want and then takes a hard stance, such as demanding more from the other side than they are willing to give.

Win-lose tactic examples

A win-lose situation can happen in a number of ways.

• When one side focuses only on its own success, without considering the other's interests, a win-lose dynamic may develop.
• It might also happen if one side believes that reaching any form of compromise is their last hope, in which case they could be pushed beyond their breaking point or be convinced to bargain against their own interests.
• It might also be the consequence of other causes, such as coercion or a disparity in the facts known by the parties. As a result, one side will have greater weight and, in most cases, emerge victorious.

If any of these conditions or circumstances exist together, a win-lose scenario is almost certain to develop. Reluctance to cooperate, with each side looking out for their own interests until one side wins or loses, is a common early indicator of such a scenario. In addition, distributive negotiations, where parties are bargaining for a fixed sum of money or on one interest, are particularly prone to win-lose scenarios since each loss for one side is again for the other.

Ten Tips To Get Your M&A Negotiation in Ship-Shape

Here are ten tips for becoming a master negotiator. 

Know Your Business 

Before going into any negotiation, it is crucial to have a thorough understanding of your business and its strengths and shortcomings. You should be ready to explain why your business is important and what steps are necessary to finalize a merger or acquisition.

The company you're doing business with will be better able to use your strengths and benefit from your resources if they have a thorough grasp of your organization. It simplifies things immensely.

Have a Realistic Valuation in Mind

If you want to sell a business, it's crucial that you set realistic goals for its valuation. Frustration on both sides of the bargaining table might result from you overestimating the worth of your company. 

Two common examples of it.

• You may have very low valuation expectations.
• You may have valuation expectations that are way too high.

In the first scenario, you don't put enough value on your business and accept the first offer that comes your way. Further complicating things is the fact that you likely will accept a contract structure that prioritizes the buyer's interests above your own due to your lack of familiarity with such topics. You take two blows at once!

In the second scenario, you may be missing out on some excellent bargains because your valuation standards are so much higher than the market is willing to bear. When your pride and ego are hurt by what you regard to be "lowball" proposals, you may quit negotiating with someone who may be a great acquirer for your company.

But at the end of the day, a business is only worth as much as the present value of the cash flows that are expected in the future . An independent appraisal can help you see through the hype and give you the confidence to move forward with a fair and reasonable offer.

Have a solid financial foundation: 

Any business intending to negotiate an M&A deal must have a solid financial base. A prospective buyer will want to see that you have a clean financial slate and can prove it with correct books and records.

The financial success of your business is a crucial means to verify and quantify value and so define and agree upon a price to be paid and is thus irrelevant in almost all transactions. Current and future financial performance is often more influential than other factors (such as market position, maturity, sector, IP, etc.) in determining the price.

There has to be uniformity in the accounting practices used across all financial reports to provide an honest depiction of the finances of the company . It is important to clarify any discrepancies between the Management Accounts and the Statutory filed Accounts before a prospective buyer asks about them.

Stay Organized

Keeping track of all the critical information about your business can be challenging, but it's a must if you want to successfully negotiate an M&A deal. Collect all the required paperwork , such as tax returns, contracts, and a list of your clients and suppliers.

Make sure your buyer can quickly find whatever details they need to make a choice, regardless of how you've organized the data. Success in an M&A deal also depends on clearly articulating your company's approach to operations. 

Have a Clear Vision for the Future: 

Buyers want to be confident that they are acquiring a company with a solid plan for the future. Be prepared to articulate your long-term vision for the business and how you see it growing in the future. 

Making use of papers like market analysis , competition analysis , and others that may back up your firm's vision, you can create a corporate road map that lays out where you want to take your organization.

Building a detailed and well-thought-out roadmap will help you map out the steps to actually implementing the ideas in your company strategy. The big picture is visible to both stakeholders and individual contributors.

Build Relationships With Potential Buyers: 

Business is about relationships. It is crucial to building relationships with potential buyers well before you start negotiations. This will help ensure that you have a number of interested parties when it comes time to sell. 

Ways you create a great relationship with your potential buyers.

• Communicate: Communication is the cornerstone of every successful business engagement with potential buyers.
• Identify How You Can Provide Additional Value: Discover areas of agreement and consider how you could use each other's time, money, or knowledge.
•   Focus On Mutual Success Give genuine effort to helping others succeed. Working with someone who is just interested in themselves is a turnoff. Business relationships flourish when both parties are committed to their mutual success.

Stay Informed About Industry Trends

Keeping tabs on industry trends will help you stay ahead of the curve and be better positioned for potential negotiations. Knowledge is power, so make sure you know as much as possible about the market conditions affecting your industry.

Two ways you can keep updated on industry trends:

• Take advantage of industry research and trends reports. Reading research papers or solution guides is an easy way to improve your ability to spot trends. If you take the time to read beyond the executive summary, you can usually always discover something valuable and relevant to what's happening right now in your market in a report compiled by industry professionals who conducted original research.
• Use different tools and analytics systems to identify the direction trends are heading. Various tools and metrics will be helpful to you in identifying trends depending on your sector, audience, objectives, and even business size.

Have Realistic Expectations: 

Remember that not every deal will result in a perfect fit for both parties involved. It is important to remain flexible throughout the negotiation process and be willing to compromise on specific points.

Be Prepared for Bumps in the Road: 

Deals can often get derailed during negotiations due to unforeseen circumstances. Make sure you have a backup plan in place in case things go awry and are prepared for potential roadblocks along the way. 

Hire an Experienced M&A Advisor: 

Having an experienced sell-side advisor by your side can be invaluable during the negotiation process. They will have extensive knowledge of the industry and can help guide you through every step of the negotiation process. 

Hiring an M&A counsel will free up your time to concentrate on expanding your business rather than searching for investors or communicating with potential buyers. 

Moreover, lower middle market business brokers may help you do the following: 

• Overcome difficulties in the deal. 
• Help you reach a wider audience of potential customers.

M&A Negotiation Process 

The process of negotiating a sell-side M&A deal is typically a long and arduous one. It can often take months, or even years, to negotiate all the various terms and conditions of the sale. The following is a brief overview of the key steps in the M&A negotiation process: 

Initial Inquiry

The first step is for the seller to receive an inquiry from a potential buyer. This can come in the form of a letter of interest or a more formal proposal. 

In mergers and acquisitions, a letter of intent (LOI) is a non-binding contract outlining the general terms and conditions of a potential company transaction between a buyer and a seller. It is essential that both parties sign the LOI before the buyer can go on with the "due diligence" phase of the purchase process.

Confidentiality Agreement: 

Once both parties have agreed to move forward, they will enter into a confidentiality agreement to keep the details of the negotiations confidential. 

Due Diligence

The next stage is for the buyer to undertake due diligence on the firm. To authenticate all material facts and financial information and to verify anything else brought up throughout the M&A transaction or investment process, due diligence is the process of verification, inquiry, or audit. Before a sale is finalized, the buyer does due diligence to gain confidence in the transaction.

M&A Negotiation of Terms

Once due diligence is complete, the parties will begin negotiating the M&A deal structure. This can include things like the purchase price, closing date, and any warranties or representations that the seller will make about the business. 

The Signing of the M&A Agreement: 

Once all the deal structuring is complete, both parties will sign a definitive agreement formally finalizing the sale . 

If you are a  retiring business owner  looking to exit your lower middle market business in California, here are five tips to get you started:

1.  Don't wait until the last minute to  start planning your exit .  The process of selling a lower middle market business can take a long time, so it's important to start early.

2.  Have a clear idea of what you want to get out of the sale.   Know your goals  and what you're willing to negotiate.

3.  Choose the right type of buyer .  Not all buyers are created equal, so do your research and find the right one for your business.

4.  Be prepared for a lot of due diligence.   M&A buy-side due diligence is when buyers will want to know everything about your business, so be ready to provide documentation and answer questions.

5.  Be flexible with the terms and conditions of the deal.  It's important to be open to negotiation to get the best possible deal for your business.

Rogerson Business Services, also known as, California's  lower middle market business broker  is a  sell-side M&A advisory firm  that has closed many of lower middle-market deals in California. We are dedicated to helping our clients maximize value and achieve their desired outcomes. 

We have a deep understanding of the Californian market and an extensive network of buyers, which allows us to get the best possible price for our clients. We also provide comprehensive support throughout the entire process, from initial valuation to post-closing integration. 

Our hands-on approach and commitment to our client's success set us apart from other firms in the industry. If you consider selling your lower middle market business, we would be honored to help you navigate the  process  and realize your goals.

If you have decided to value and then sell your lower middle market business or still not ready,  get started here , or  call Andrew Rogerson , Certified M&A Advisor, so we can understand your pain points better and prioritize your inquiry with Rogerson Business Services,  RBS Advisors .

This is part of  hiring an  M&A deal team   tips to answer some FAQs about  the deal structure & transaction  series ->

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Knowing what an M&A deal structure is and it’s role factors into the process is key to performing a successful transaction. Yes, it’s a complex issue, but the more work that is put into this will result in a smoother, more streamlined proceeding, one that will save both time and money for all the parties involved.

Table of Contents

What Are Mergers and Acquisitions?

Mergers and acquisitions (commonly abbreviated as M&A) is an umbrella term for several different types of consolidations between companies. There are many different types of M&A, with the most common ones being asset acquisitions , stock purchases and mergers. Although the terms are quite similar and are often lumped together, they have quite different meanings in the business world.

What Is an M&A Deal Structure?

An M&A deal structure is pretty much exactly as it sounds; it’s a binding agreement between the target company and the acquiring company (the two parties involved in the M&A transaction ) that spells out all the particulars of the deal, namely the rights and obligations of all parties involved. It takes into consideration all aspects of the deal, the role of the company’s management (on both sides of the table) that need to be accomplished in order for the deal to be finalized. In short, the deal structure is a document of the terms and conditions of the M&A transaction .

Deal Structuring 101

As described above, there are different types of M&As as well as different reasons for companies to come together or synergize. Of course, an M&A can only be possible when all the parties involved come to an agreement on all the terms of the transaction. The process of putting this together is commonly referred to as “deal structuring.”

Deal structuring is a vital part of any M&A process; without it, there simply won’t be an outline of the transaction or finalization of the deal. Deal structuring is the prioritizing of all the steps and objectives in an M&A and confirming that all parties involved in the transaction are satisfied and in agreement. Of course, this is often the most difficult part of the entire process, as factors such as financing, corporate control, business plan, legal and tax issues as well as adhering to antitrust laws are involved here.

3 Different Ways To Structure an M&A Deal

Generally, there are three ways that M&A deals are structured , though sometimes these transactions can be a hybrid version of a couple of different methods. They include:

1. Asset Acquisition

Exactly as the name sounds, this is where one company acquires all types of assets of a target company . Th e asset acquisition deal is quite common in bankruptcy situations.

2. Stock Purchase

Unlike an asset acquisition deal , there are no assets (tangible or intangible) involved here. A stock purchase is strictly a financial transaction; the advantage of a stock purchase is that the seller reaps tax benefits and that it is usually a less complex (and less costly) type of transaction.

A merger is when two companies combine to form a new third company. Though “merger” and “acquisition” are often used interchangeably, a true merger is an agreement between two companies to combine as a new company.

In addition, there are a few more types of M&As, including tender offers, consolidations and management acquisitions.

Best Practices for a Proper M&A

The goal is to satisfy all parties involved in the deal . The better (and more thorough) the transaction structure is, the faster (and less costly) the entire deal will eventually be. However, in the M&A deal structure, there are two vital documents that are to be considered a top-tier priority. These are:

• Term Sheet : A term sheet is a nonbinding agreement that outlines the terms and conditions of a business deal or investment. Once both parties have agreed on these terms, a more formal, binding contract is drafted.
• Letter of Intent : Commonly referred to as LOI, a letter of intent is the commitment stating that one company has the intent to do business with a second company. It may have similar content to the term sheet but is less fact and figure based and serves more as a way to outline the main points of the business deal.

Where a Virtual Data Room Comes Into Play

A Virtual Data Room (VDR) is a necessary tool in virtually every M&A transaction. A VDR is a secure , online location where companies involved in the M&A process can store and share the documentation that is required for the transaction. The features of a sophisticated VDR consist of secure access (which includes enterprise-level encryption ), multiple layers of security and user-friendly admin controls. In addition, there are customizable rights management that will grant only certain parties access to certain documents, all of which allow all parties to be able to shorten the entire M&A timeline.

The CapLinked Solution

CapLinked, an industry leader in the VDR space, provides secure virtual data rooms for all types of business transactions. CapLinked VDRs features a user-friendly interface that is compatible with virtually every OS, and, because of that, it gives users the ability to upload and download documents from virtually any type of computer, tablet or smartphone from anywhere around the globe. Learn more about how CapLinked can help smooth out your M&A process with a free trial .

Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.

References:

McKinsey & Co. – Building the right organization for mergers and acquisitions

JWB Real Estate Capital – Deal Structuring Guide for Beginners

Investopedia – Virtual Data Room (VDR)

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How To Structure An Acquisition Deal

by Alejandro Cremades

How to structure an acquisition deal? Acquisition deals have become extremely common in the past decade with high-profile acquisitions making international news. However, acquisitions are not simple and they require a lot of preparation and expertise. The acquisition process involves more than just signing a few legal documents to walk away victorious from the deal. With that said acquisition is definitely beneficial for both parties involved granted that it is completed successfully.

The selling party that has invested their blood sweat and time in their business wants to get the most value for their efforts during an acquisition, while the buying party wants to make sure they are investing in a solid business with a potential for returns. Every stakeholder in an acquisition deal plays their role be it the decision-makers, lawyers , accountants, or the owners to make an acquisition successful.

With that being said, it is important to make sure that all the efforts you are making towards your business sale or purchase are taking you in the right direction. That is where an acquisition deal structure comes in. If you have never closed a deal before or are not used to the merger and acquisition process, then you’ve landed in the right place. In this article, we will take an in-depth look at what an acquisition deal structure is, how you can structure an acquisition deal, and what you can do to help swing the deal in your favor. So without further ado, let’s dive straight in.

Remember that mastering the storytelling side and how you are positioning your business is critical when it comes to engaging and speeding up the process. This is done via your acquisition memorandum. This is super important to reach a successful acquisition. For a winning acquisition, memorandum template take a look at the one I recently covered ( see it here ) or unlock the acquisition memorandum template directly below.

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Here is the content that we will cover in this post. Let’s get started.

• 1. What is an acquisition deal?
• 2. What is an acquisition structure?
• 3. Why is an acquisition deal important?
• 4. Outlines the rights and obligations:
• 5. The flow of capital:
• 6. The input of experts:
• 7. Revenue growth.
• 8. Open to new markets:
• 9. Market shares:
• 10. Structure of an acquisition business deal
• 11. Create a rough draft:
• 12. Detailed description:
• 13. Elongate the market details:
• 14. Focus on sales and marketing:
• 15. Summarize:
• 16. Plan the transition carefully:
• 17. Supporting documents:
• 18. Features of an acquisition
• 19. Focus on these 6 factors:
• 20. Is it worth it?
• 21. Conclusion

What is an acquisition deal?

An acquisition is a financial deal between two parties. Interest or shares in a company may be traded by one party in exchange for shares in the other party. Or it may be an all-cash or partial cash deal.

If an entrepreneur manages to close an acquisition deal, they can potentially get an early retirement or leave the business to grow a new startup. The acquisition means the seller can rid themselves of most if not all responsibilities of running the business as it then becomes the responsibility of the acquiring party (buyer).

A quick Google search can show tons of companies that flourished after they acquired a company, one of the most popular being Pixar getting acquired by Walt Disney Co . So in short, an acquisition can result in a solid business structure for the acquiring party. However, just like most business aspects, a successful acquisition requires both parties to come together to make sure the transition goes as smoothly as possible.

What is an acquisition structure?

Understand that you must structure an acquisition deal before it can be closed. Without a formal acquisition structure, it will be difficult to transfer the ownership of the business. In short, an acquisition that lacks a formal structure may end up damaging the interests of the buyer or the seller.

So, an acquisition structure is a business structure carefully planned to carry out the sale or purchase of a company or a business asset. It refers to an overall system where the company’s approach is broken down into cash and non-cash components.

You can also include other transaction details in the structure, such as shares or selling of assets, stocks (if any are to be transferred), material items, and other terms and conditions along the transfer journey.

The acquisition structure also has terms about future liabilities, customer lists, trademarks , brand names, property, and tangible items in its inventory. All these points are crucial so that the transfer is done smoothly and in favor of both parties.

The most critical facet o structuring an acquisition deal is knowing how to value your company. That’s how you ensure you get the best price for it. Not sure how? Check out this video I have created explaining in detail how that’s done.

Why is an acquisition deal important?

Knowing how to structure an acquisition deal has the following benefits.

Outlines the rights and obligations:

When you structure an acquisition deal correctly it allows both the buyer and the seller to work together and decide the rights and obligations of both the buyer and seller. Since it is a binding agreement both parties are then bound to fulfill their obligations making the acquisition process much easier.

The flow of capital:

Many business people believe that an acquisition is the same as a merger or takeover; however, the distinction lies in the movement of funds. Capital flow is often from one side because a larger corporation acquires the smaller one.

The smaller company may not be able to arrange finance or take out loans. The higher value business makes decisions about enabling the business and taking it to new heights.

The input of experts:

When small companies join more prominent entities, they can access a team of experts for advice on key aspects of the acquisition. The experts can not only help you overcome any hurdles but can also provide valuable insight to help improve the acquisition process. Once acquired the acquired business may benefit from many new experts helping to grow the business.

Revenue growth.

When a new company or business is formed after the acquisition deal , revenue and other competencies may rapidly grow. The long-term financial position of the new company gets better. Imagine plunging in the product of a startup to Google, which could result in reaching billions of new customers overnight.

Open to new markets:

The acquisition process may lead your business to new markets nationally and internationally. Since a team of experts will be working on market research and development of the products, your firm will likely acquire a new and broader range to the target audience than the previous one.

Market shares:

When a company is formed through an acquisition, there is a probability of taking over the relative field by storm. The acquisition structure clarifies what to do about the competitive edge and challenges faced in order to climb the ladder faster.

Apart from the obvious benefits, you can tailor other ideas into a structure that can suit your financial needs. It will lead to new horizons and fulfill the purpose of the acquisition.

Structure of an acquisition business deal

The formulation of a comprehensive acquisition deal structure is one of the most important steps in the acquisition process. The goal is to provide a solid foundation so that the results of one’s judgments, choices, and decisions do not have unintended consequences.

Generally, an acquisition structure is based on the following phases.

1. Create a rough draft:

It is the first rule of how to structure an acquisition deal is to create a rough draft of the business acquisition plan. If the rough draft is compelling enough, you can quickly move on to the next step. Don’t forget to include financial data , as well as strategies for reaching your target audience and launching products or services into the market.

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2. Detailed description:

This section clearly outlines why you want to acquire the company. It also includes the calculations of what you are willing to pay. It will help you identify all weaknesses to rectify and iron them out to generate value.

You can include financial headlines, a breakdown of the company’s assets, corporate structure, and a SWOT analysis .

There are a lot of different ways that you can amend the details at this stage, but it is dependent on the brand in question as well as the policies of the firm. Document each and every aspect of the task so that it may be verified afterward.

3. Elongate the market details:

Whether you are an entrepreneur, founder, or director, you must study the market before you leap into it. You may be thinking about global competitors and base all your decisions on the global market, where in reality you are operating a smaller business and have less competition.

Focus on the granular details like the target customers, demand for the product, franchise, and business launch. It will help you save not only time but also resources and a significant amount of money along the way.

The phase in which you structure an acquisition deal will clarify all financial policies and highlight their loopholes.

4. Focus on sales and marketing:

The fourth phase of the acquisition structure deals with the sales and marketing of the company or product. You can review the sales of each product and compare them to your products. You will have a clear idea of what the customers require. Moreover, you can list the hot selling products and market them accordingly

In addition, if the findings of your research indicate that investment in a certain stream of marketing, for example, social media advertising , is insufficient, then you should maybe focus your efforts on email marketing instead. There are many techniques where you can tactically reach your target audience and approach them with your service or product.

5. Summarize:

At the end of the process, summarize the acquisition structure details. It will help you understand the shortfalls and the strong points of the acquisition. Moreover, the final projections are the starting points of any future transactions; hence it is essential to understand them and work on them with utmost care and caution.

6. Plan the transition carefully:

This phase will determine how to transfer from the previous owner to the new owner. It is all about who will control the business and company. Since the transitional phase is often extensive, keep an eye on the financial structure, customer relationship, and ongoing contracts.

There are hundreds of stories of successful acquisitions. Yet, the vast majority of deals fail in the integration stage.

7, Supporting documents:

Paperwork and record keeping are a part of running a successful business. Therefore, it makes sense that both parties (especially the seller) have to produce all the documentation to make sure that the transaction of business and assets runs as smoothly as it possibly can. Sellers will have to maintain a record of previous tax returns, audits, customer sales, and ongoing expenses because the transaction method and structure will depend massively on these. So, take the time to understand how to structure an acquisition deal.

Keep in mind that in fundraising, storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel ( see it here ) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

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Features of an acquisition

Acquisition features depend on a few essential elements for both parties concerned. Keep them in mind when figuring out how to structure an acquisition deal.

Focus on these 6 factors:

• All details must be transparent to both sides. There will be problems later on if there are hidden glitches, and the process can turn problematic. Moreover, there will be a strain on the finances as you’ll have to spend money to hire a different team of experts to help solve the problems.
• The two parties should communicate regularly, possibly daily during the acquisition process. Communication is one of the only ways to help ensure that the process runs smoothly.
• Have some defined goals before you go to purchase another company. If there are no defined goals, how would you run the company? Hence, it is necessary to plan for the future and merge it into the structure. Talk to experts or your legal team about this process and clear any doubts that you may have.
• Hire a qualified team that can manage the transition with excellent execution. Due to the extensive amount of paperwork required, this is a procedure that should be left to the professionals. There are also legal processes and papers that you have to sign, so it’s critical that you employ a strong legal team.
• Don’t forget branding. Forming a new company may not be ideal in every single acquisition, and it is possible to align the target company with the functions of the acquiring firm. You can create a shared vision with the team of board members and generate better value for the company. In some cases, if the acquired company had a stronger brand , that may be adopted.
• Planning is another component and an essential feature of the acquisition process. Know the steps, all the way through the closing, integration, and any vesting periods.

Is it worth it?

Acquisitions can be great. Yet, without a structure, there will be problems, and the process will not go as hoped. Moreover, there could be people who are prepared to take advantage of the structure’s weaknesses and drain you of your hard-earned resources and progress.

Learning how to structure an acquisition deal will give you an exact idea of how to take things ahead. It will clarify all steps along with the legal procedure.

The acquisition structure will give a clear idea of what steps to take at each milestone and alternative options in the case that something does not work out during an M&A deal.

If you are buying or selling a business, structure an acquisition deal plan first. You will be able to tell the difference in the process. Spending time on the acquisition structure will allow you to sail more smoothly through the transaction, and what comes next.

You may find interesting as well our free library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here .

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What Is a Deal Structure?

A deal structure is a term used to describe the terms of the agreement between a buyer and seller that apply in a given business deal. The term is commonly associated with investment activities and refers to the rights and responsibilities that both the investor and the issuer of those securities undertake as part of their ongoing business relationship. A deal structure is present in just about any transaction that involves the establishment of some sort of covenant between the parties involved, including venture capital schemes and company acquisitions that require all parties to perform certain tasks in order for the deal to be considered complete.

While the provisions found in any type of agreement will vary based on the assets involved and the intentions of all parties concerned, there are a few basics found in just about every deal structure. One has to do with the identification of the asset that is being traded or sold. The contract provisions will include a description that is exact and helps to identify the asset without question.

A deal structure will also address the circumstances under which the buyer is allowed to assume control of the asset. This often relates to the terms of payment that are spelled out in the contract. For example, a business owner may sell a company to a buyer, with the provision that a certain percentage of the purchase price as a down payment is tendered by a specific date, with a series of monthly or periodic balloon payments to occur according to a predetermined schedule thereafter. Assuming the down payment is tendered on time, the seller relinquishes control of the company to the buyer, who at that point becomes responsible for the operation of the business.

The deal structure will also often include specifics regarding the rights of the seller in the event that the buyer does not live up to the commitments made in the contract. This means that if the deal structure calls for the remittance of payments at specified intervals over a period of time and the buyer fails to tender those payments, the owner may have the ability to declare the agreement null and void, and take action to recover the asset. At the same time, the terms of the agreement may offer some protections to the buyer, such as a grace period to catch up past due payments before the deal is considered void.

The general idea of a deal structure can be related to the sale of all sorts of assets, beginning with shares of stock and moving all the way through to a business acquisition. In each situation, the structure will provide all parties concerned with certain rights that enable them to benefit from the transaction, and also certain responsibilities that they must manage in order to continue enjoying those benefits. Failure to do so can mean that the deal collapses, leaving one or more parties with some type of loss that may or may not be easily recovered.

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Deal Structure 101: Components to Understand Before Selling Your Business

Home » News/Articles » Deal Structure 101: Components to Understand Before Selling Your Business

As a business owner, it’s essential that you do your homework, engage in plenty of pre-sale planning , and get the advice of experts before making the biggest business decision of your career – selling your company. This includes having an understanding of the different forms an M&A offer can take and the way they will function as you move forward. Knowledge about the components of a deal structure will help you maximize value during the negotiation process. Let’s discuss the basic components of deal structure and how they align with various seller objectives.

Cash is King in Any Deal Structure

The old adage “cash is king” is more than a tired cliche; it’s a good guideline when negotiating an M&A deal. If you’ve owned a business for 30+ years, you have an illiquid asset. Selling it is the likely the biggest liquidity event you’ll ever have in your life.

An offer of cash up front is the most secure consideration a business owner can receive. While publicly traded companies often create intricate deal structures that are heavy on stock considerations, for the lower- to middle-market, the majority of any deal will typically be front-loaded with cash.

Keeping the Seller Onboard with Equity

Depending on the seller’s objectives, they may be content to accept part of the purchase price in the form of equity. If a seller plans to stay onboard in the new company, this gives them a financial interest in the business. If the buyer is a private equity firm that sells the company again in the future, this could provide the seller with a “second bite at the apple.” In many cases, the second or third time selling an equity stake could provide a greater value than the first sale transaction. This is all dependent on who the buyer is and what direction they’d like to take the company.

On the buyer’s behalf, a seller that’s willing to take equity as part of a transaction demonstrates that they believe in the business and are willing to reinvest.

Seller Notes Provide Flexibility

A deal structure that involves a seller note will contain a debt component. Along with receiving cash or other considerations being offered, the seller could agree to assume a portion of the purchase price as a note on the business to increase the valuation. The terms of a seller note will vary from one transaction to another. One common factor, however, is that the offer of a seller note often gives a buyer more flexibility in their price. If the two parties are having trouble agreeing on a number, a seller note can be an excellent strategy to make the buyer comfortable with paying a higher price.

Obtaining Additional Compensation With an Earnout

For a seller who would like to stay involved, an earnout may be negotiated into the purchase agreement. An earnout is the ultimate way to ensure that a seller keeps their eye on the ball in regards to the performance of the business. Earnouts are high-level considerations and will contain specific EBITDA targets that will be applicable over the period of time the seller is onboard. If those targets are met, the seller will receive compensation for meeting them.

Bringing It All Together

How do all of these components come together for the perfect deal structure? There isn’t one right answer to this question, as every deal will depend on the owner/seller’s goals and objectives. For an owner who simply wants to sell and retire or move on, it may be more attractive to receive a lower value that involves mostly cash up front. Meanwhile, an owner would like to sell but stay involved in some form may be able to negotiate a higher price by agreeing to hold equity in the business, accepting an earnout, or holding a seller note.

If you’re thinking about selling, the most important step you can take is working to understand what a potential buyer would want and creating a strategy to get your business there (through building a stronger team, cleaning up your financials, addressing issues like client concentration, etc.). The team at MelCap can help with this kind of planning — whether it’s taking place months or even years before you plan to sell. Next, it’s essential to speak to a wealth manager in order to understand what your lifestyle is and what you need to support it. Can you get to that dollar amount by selling your business? With these goals and numbers in mind, you’ll be on the path to crafting the perfect deal structure to ensure long-term wealth and success.

By Al Melchiorre

Al founded MelCap Partners in 2000, and is responsible for managing all aspects of client engagements from proposal through closing, developing business, reviewing offering memorandums and financial models, negotiating purchase agreements, and interacting with buyers and investors.

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Structuring A Business Acquisition Deal

LQD Staff October 13, 2020

Whether you want to enter a new market and hit the ground running or plan to buy out a competitor, business acquisitions can provide the solutions you need. Unless you or your business already possess cash in hand for the purchase, you may need a business acquisition loan to seal the deal .

Whether you choose this route or not, it is essential to remember that there is no one right way to go about business acquisition financing. Instead, it would be best if you considered how each available option might complement your business needs.

5 Business Acquisition Finance Options

Choosing the best structure for an acquisition deal goes far beyond just what the business or its owners can afford. Each option available comes with its own pros and cons. In turn, these factors can affect the ease of negotiations, the viability of the acquisition, and the deal’s success.

1. Stock Purchase

Stock purchases are one standard method of structuring an acquisition. When business owners choose to acquire a company this way, the stock price can affect how feasible the deal turns out to be. The willingness of stockholders to sell may also pose a problem. Not all companies have stock for sale. When applicable, once successfully acquired via this method, the company remains intact but under new ownership. The new owners assume all risks.

2. Asset Purchase

When business owners only want to purchase a specific product line or department, asset purchase is more appropriate rather than acquiring an entire business. This acquisition structure makes it possible to pin-point the particular assets and liabilities purchased. Despite the added complexity, buyers seek this option because it allows the ultimate flexibility for sweetening the deal in their favor. However, some sellers are not in favor of this option due to potential tax consequences and other financial impacts.

3. Seller Financing

Not every business has cash in hand to purchase a business. Getting an acquisition loan is not always easy either. This is especially the case if lenders do not believe the company for sale is worth the price. In these instances, seller financing may become a viable option. Also known as a vendor take-back loan, it allows the seller to maintain ownership until the buyer pays. Options may include earn-outs, seller notes, or delayed payments. This can sometimes prove less expensive than going through a traditional bank, but that depends on the seller and the market.

4. Leveraged Buyout

One of the most common methods of financing an acquisition is to use a unique blend of debt and equity. When choosing this method, business owners may need to prepare to see their existing business assets become collateral for the purchase. This may require first clearing any prior claims on these assets. Companies that choose this option generally have great cash flow and a solid foundation in assets.

When a business merger takes place, two companies become one new organization. There are several different ways to create the final, conjoined company. The existing relationship between the two companies can make different types of mergers :

• Vertical merger, when one company creates products or services for the other
• Horizontal merger, when two companies compete in the same industries and markets
• Congeneric mergers, when two companies produce overlapping products and services
• Market extension, when two companies sell competing products in different niches
• Conglomerate mergers, when businesses belong to different industries

4 Factors To Consider When Determining the Right Structure for a Deal

Several different factors affect how well each acquisition deal structure works in specific situations. You may find that you need to review your approach every time you come across another business that could benefit your expansion goals via acquisition.

1. Flexibility

How much flexibility do you need, or are you willing to forego in the deal structure? If you need a great deal of flexibility, then asset purchase may work best for you. If the seller is cooperative and offers fair terms, seller financing may work well for you too. Building strong relationships with lenders, over time, may also help you secure flexible terms, should you decide to use debt to finance all or part of the deal.

2. Business Finances

Another critical factor to consider is how much cash your business can afford to spend on a merger or acquisition. It is essential to look beyond just how much cash you have available. You may also need to consider whether having cash-in-hand may prove a better investment than paying zero interest on an acquisition. If flexibility is important to you and the business requires large cash volumes, it may prove better to choose debt or equity financing.

3. Financial Complexities

No matter how cooperative a seller is and how easy a deal seems, complexities may arise. For instance, the contract may require stockholder approval to go through. You also need to review all financial statements and do due diligence to ensure the business is as it appears. This may all affect taxes and the transferability of liability and assets. Asset purchases are often the most complex.

4. Legal Complexities

Wherever financial complexities exist, legal complexities quickly follow. Because of this, you will need to work with an attorney who is experienced in this area and can help resolve any issues related to intellectual property, compliance with applicable laws, non-compete contracts, and the terms of all related agreements.

The Ideal Financing Choice

Even though business owners have a wealth of options to choose from, the final decision comes down to the most optimal choice for you. For most businesses business acquisition loans play a key role in the structured deal. LQD Business Finance is here for business owners who are interested in financing their acquisitions.

Apply for a business acquisition loan with LQD Business Finance today to experience our fast services first hand.

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Amazon says in a federal lawsuit that the NLRB's structure is unconstitutional

Haleluya Hadero

Associated Press

Amazon is challenging the structure of the National Labor Relations Board in a lawsuit that also accuses the agency of improperly influencing the outcome of a union election at a company warehouse more than two years ago.

The complaint, filed Thursday at a federal court in San Antonio, mirrors legal arguments the tech giant made in front of the agency earlier this year after NLRB prosecutors accused the company of maintaining policies that made it challenging for workers to organize and retaliating against some who did so.

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In the new legal filing, attorneys for Amazon pointed back to a lawsuit the agency filed against the company in March 2022, roughly a week before voting for a union election was set to begin at a company warehouse in the New York borough of Staten Island.

Amazon views the agency’s lawsuit, which sought to force the company to give a union organizer his job back, as improperly influencing the outcome of the election. The company has also cited the action as one of its objections to the historic election, where workers voted in favor of union representation for the first time in the U.S.

Last month, the NLRB’s board denied Amazon’s appeal to review its objections, closing off any options for the company to get the election results overturned within the agency.

In its new complaint, Amazon said the four NLRB board members who authorized the injunction were later judges reviewing the objections that came before them. It argued that structure was unconstitutional because board members are shielded from removal by the president, violates Amazon’s due process rights as well as right to a jury trial.

Other companies, such as Elon Musk’s SpaceX and Trader Joe’s, have also challenged the structure of the agency in pending lawsuits or administrative cases. Kayla Blado, spokesperson for the NLRB General Counsel noted that while big companies have sought to challenge the NLRB, the Supreme Court in 1937 upheld the agency’s constitutionality.

“While the current challenges require the NLRB to expend scarce resources defending against them, we’ve seen that the results of these kinds of challenges is ultimately a delay in justice, but that ultimately justice does prevail,” Blado said.

Earlier this year, NLRB General Counsel Jennifer Abruzzo, who was appointed by President Joe Biden, said at an event that the challenges were intended to prevent the agency from enforcing labor laws as companies “divert attention away from the fact that they're actually law-breakers."

Amazon is asking the court to issue an order that stops the agency from pursuing “unconstitutional” administrative proceedings against the company as the case plays out.

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