Deal Structure Matters—Here’s What You Need to Know
In a nutshell: Most M&A transactions are structured as asset sales, stock (equity) sales, or earn-outs (often layered onto asset or stock deals). The structure can change valuation, taxes, risk allocation, speed to close, and post-close integration—and ultimately make or break a deal.
| Topic | Asset Sale | Stock/Equity Sale | Earn-Out (Contingent Consideration) |
| What’s sold | Specific assets & selected liabilities | Equity interests (buyer steps into the company as-is) | Future payments tied to performance (revenue/EBITDA/other KPIs) |
| Control of liabilities | Buyer usually picks which liabilities to assume; legacy liabilities often stay with seller | Buyer inherits all assets & liabilities unless excluded/indemnified | Not a standalone form; attaches to asset or stock deals to bridge valuation |
| Tax (typical, high-level) | Often favorable to buyer (step-up in basis); can be less favorable to seller (double tax for C corps) | Often favorable to seller (capital gains, single level for many sellers); buyer loses step-up | Taxation depends on underlying structure and terms; timing of recognition varies |
| Contracts & consents | Need to assign individual contracts, permits, and licenses (3rdparty consents may be heavy) | Entity remains; many contracts continue without assignment (fewer consents) | No direct effect on consents; adds complexity for tracking and accounting |
| Speed/Complexity | Can be slower due to schedules of assets, consents, allocations | Often faster—single equity transfer | Slows negotiations (metrics, definitions, audit rights) & postclose admin |
| Employee transition | Need new offers & benefit setups | Employment often continues with same entity | May include retention/bonus mechanics to align incentives |
| Purchase price mechanics | Working capital & debt-like items adjusted; allocate price among asset classes | Working capital & debt-like items; no asset class allocation | Performance formula, measurement periods, caps/floors, trueups, clawbacks |
Note: Tax and legal outcomes vary by jurisdiction and entity type. Always coordinate with tax and legal advisors early.
When Each Structure Shines
Asset Sale — Best when buyers want selectivity and a tax step-up
- Buyers prefer asset deals to: pick assets, avoid unknown liabilities, and obtain basis stepup (future tax deductions).
- Sellers may accept asset deals when: undesirable liabilities remain behind, the buyer will pay more for the tax benefits, or the seller is a passthrough entity (mitigating double taxation).
- Watchouts: thirdparty consents, permit re-issuance, retitling, sales/use taxes, benefits migration.
Stock/Equity Sale — Best for simplicity and continuity
- Buyers use stock deals to preserve contracts, licenses, and relationships with less assignment friction and to close faster.
- Sellers often favor stock deals for capital gains treatment and a cleaner exit.
- Watchouts: diligence on legacy liabilities, reps & warranties, quality of earnings, environmental and employment matters.
Earn-Out — Best to bridge valuation gaps and align incentives
- Useful when there’s disagreement about forward performance or when growth hinges on postclose integration or pipeline conversion.
- Design carefully: clear KPIs (GAAP EBITDA, net revenue, gross margin, bookings), measurement windows, caps/floors, acceleration on change of control, dispute resolution, and buyer operating covenants.
- Watchouts: manipulation risk (accounting policies, cost allocations), integration effects, and potential disputes.
Key Negotiation Levers
1. Tax economics
- Asset vs. stock tradeoffs (basis stepup vs. seller tax leakage).
- Section 338(h)(10)/336(e) elections as hybrid options in certain cases.
- Purchase price allocation among asset classes (for asset deals).
2. Risk allocation
- Reps & warranties scope, survival, and caps.
- Indemnities (baskets, caps, special indemnities), RWI insurance.
- Escrows/holds vs. earnout reserves.
3. Closing mechanics
- Working capital targets and debt-like items (deferred revenue, accrued comp, leases).
- Treatment of cash, NOLs, and tax refunds.
- Required thirdparty consents and regulatory approvals.
4. People & operations
- Key employee retention, incentive plans, noncompete/nonsolicit terms.
- TSAs (Transition Services Agreements) for smooth handoff.
Tax Snapshot (Very High-Level)
- Asset sale
- Buyer: typically receives stepup; future amortization/depreciation benefits.
- Seller: Ccorps may face double taxation (corporate level + shareholder level); passthroughs differ.
- Stock sale
- Buyer: generally no stepup (unless 338 election where available); inherits historic tax attributes and exposures.
- Seller: often capital gains treatment; may be more tax efficient.
- Earnout
- May be treated as purchase price or compensation depending on terms; affects timing and character.
Coordinate early with tax counsel—small changes in structure can have large aftertax impacts.
Legal & Operational Implications
- Contracts & licenses: Identify antiassignment clauses and changeofcontrol triggers.
- Permits & approvals: Map renewal or re-issuance timelines in asset deals.
- IP and data: Chain of title, opensource usage, data privacy consents.
- Real estate: Deeds, lease assignments, estoppels, SNDAs.
- Regulatory: Antitrust/HSR thresholds, industryspecific approvals.
Earn-Out Design Best Practices
- Define metrics precisely (e.g., GAAP EBITDA before nonrecurring items, revenue net of returns).
- Measurement windows (e.g., 12–36 months) with example calculations.
- Operating covenants to protect the earnout (commercially reasonable efforts, consistent accounting policies).
- Governance: reporting cadence, access rights, auditor review, dispute resolution.
- Protections: caps, floors, collars, acceleration on change of control/termination without cause.
Buyer & Seller Checklists
Buyer
- Confirm structure fit with investment thesis and tax model
- Map consents/assignments and regulatory approvals
- Validate working capital norms; identify debtlike items
- Quantify tax stepup and NPV of deductions (asset deals)
- Scope RWI insurance and special indemnities
- Align earnout metrics with controllable drivers
Seller
- Model aftertax proceeds under asset vs. stock vs. hybrid
- Inventory contracts with antiassignment/changeofcontrol clauses
- Prepare disclosure schedules early
- Plan employee communications, offers, and retention
- Clarify treatment of cash, intercompany balances, tax refunds
- Understand earnout risks and dispute mechanics
FAQS
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Is an earnout a separate deal type?
Not exactly. It’s a payment mechanism added to an asset or stock deal to bridge valuation and align incentives.
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Which is “better,” asset or stock?
It depends on taxes, liabilities, speed, and consents. Buyers often prefer asset; sellers often prefer stock—final choice is situational.
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Can we mix features?
Yes. Hybrids exist (elections, carveouts, partial asset purchases, minority/majority recapitalizations) to balance objectives.
Merit Investment Bank as a leading boutique investment bank is focused on entrepreneurial middle-market companies. Merit Investment Bank Executes sell-side M&A, buy-side M&A, and capital advisory services, debt and equity capital raises, corporate finance, and valuation services.
Securities offered through Finalis Securities LLC Member FINRA/SIPC. Merit Investment Bank and Finalis Securities LLC are separate, unaffiliated entities.
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