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.

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