Creative Deal Structure Brainstorm

searcher profile

January 22, 2025

by a searcher from University of Minnesota - Twin Cities Campus in Marysville, WA, USA

Hi everyone! I'm an independent sponsor, and the investor that I'm partnering with for a deal that I have under LOI is looking to change the deal structure that the seller and I agreed on from a small percentage of equity rollover and the rest cash at close to a percentage of equity rollover and the cash paid out over three years. It wouldn't be an earn-out, per se; the business would just have to maintain the same revenue level in order for the seller to receive that cash.

From the investor's perspective, the business is too dependent on the seller to give them a big wad of cash up front, which I completely understand. From the seller's perspective, this is a massive change and a huge decrease in cash at close, and he's not thrilled - which I also understand.

I'm hoping to leverage the collective creativity of Searchfunder to come up with some alternative structures that would protect the investor's downside if the seller were to abandon ship once he gets his cash and that keep the deal terms as close to the original as possible. Obviously, we're going to have to meet somewhere in the middle, but I'm open to any and all ideas of what you've seen work during this type of dilemma!

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commentor profile
Reply by a professional
from University of Michigan in Detroit, MI, USA
Hi Anon, your investor's concerns are valid (you likely share some of those concerns). The exact deal structure will depend on the circumstances. But you have a number of leavers to pull. First, recognize that your investor essentially wants the seller to loan the business a portion of the purchase price at zero percent. Understandably, the seller's not too happy about that. One easy compromise would be to ask the seller to sign a promissory note at 7%, which would at least compensate the seller for the time value of money (with forgiveness if the revenue drops). That aside, there is some mix of rollover equity, cash on close, and seller note that may get you to where you want to go. The seller wants as much cash on close as possible, but you can sweeten a less cash on close deal by offering perks (or penalties depending on your leverage) tied to the seller's involvement. For example, you can have a call right (and agreed purchase price) on the seller's rollover equity. You could also propose a formal earnout (although your post suggests this isn't on the table). Hopefully that gets you thinking. If you would like to discuss things in more detail, let me know. You can reach me at redacted
commentor profile
Reply by a professional
from Bentley College in Miami, FL, USA
One option to consider is a tiered payout structure that ties a portion of the deferred cash to specific KPIs, such as revenue retention or operational handoff milestones. This can give the seller more confidence that they’ll receive the full value while protecting the investor's downside.

Another possibility is implementing a seller consultancy agreement where part of the deferred cash is tied to the seller’s active involvement in the business for a defined period, ensuring smoother continuity. Alternatively, a performance holdback—a set amount reserved in escrow contingent on the business maintaining agreed-upon metrics—could bridge the gap.

If structuring gets tricky, leveraging third-party expertise to align everyone’s incentives while safeguarding all sides can make a big difference. Resources like DueDilio can connect you with specialists in deal structuring to refine the approach.

https://www.duedilio.com
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