DEAL STRUCTURING

The deal structure outlines a set of terms that will help guide a smooth transfer of business ownership,
usually include the buyer’s down payment, financing terms, non-compete agreements, and more.

In any business acquisition, a deal structure must be formed to specify the financial terms,
conditions, and process for successfully completing the transaction. The deal structure outlines a
set of terms that will help guide a smooth transfer of business ownership, and will usually
reference whether the transaction is leveraged, unleveraged, a joint venture, or will include
convertible/participating debt, or a traditional debt transaction.

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

If you are preparing to buy or sell a small to medium-sized business, you may want to investigate
the methods for valuing the business or use our business valuation tool.

METHODS

Choosing the best structure for a merger or acquisition is critical to the deal’s success for both
parties. These transactions are, after all, usually quite complex, and one type of structure may
favor one party more than the other. For these reasons, both parties (and their attorneys, of
course) must consider the respective legal, tax, and business issues and craft a mutually
beneficial transaction structure.

There are generally three options for structuring a merger or acquisition deal:

1. Stock purchase. The buyer purchases the target company’s stock from its stockholders.
The target company remains intact, but with new ownership. The buyer must negotiate
representations and warranties concerning the business’s assets and liabilities, to ensure a
complete and accurate understanding of the target company.
2. Asset sale/purchase. The buyer purchases only assets and assumes liabilities that are
specifically indicated in the purchase agreement. (Buyers often favor this structure
because they can choose only the assets they wish to acquire and the liabilities they wish
to assume. Sellers may not prefer this sale method because it can have adverse tax
consequences due to the allocation of the purchase price to the various assets.) This
structure is often used when the buyer wishes to acquire a single division or business unit
within a company. It can be time-intensive and complex because of the extra effort
involved in identifying and transferring only the specified assets.
3. Merger. Two companies combine to form one legal entity, and the target company’s
stockholders receive cash, buyer company stock, or a combination. A key advantage of a
merger is that it generally requires consent of only a majority of the target company’s
stockholders – it could be a good choice when the target company has multiple
stockholders.