Deal Structuring Playbook

A complete cheat sheet. For sellers and buyers who want to master the payout game. 🎯 Why Structure Matters * Headline valuation is the bait. * Structure decides the check you actually take home. * The same $15M deal can mean $11M in cash or $3M and a gamble. Core principle: Valuation is theory. Structure is reality. --- 💰 Cash at Close Definition: Money wired the day of closing. Usually capped at 60–70% of enterprise value due to financing limits. Seller advantages: Immediate liquidity and clean break. Tax timing certainty. Seller drawbacks: * May reduce total deal size. * No future upside or earnout participation. * Less headline bragging rights. Buyer advantages: * Clean exit and simpler accounting. * Lower dispute risk. Buyer drawbacks: * Higher upfront financing burden. * Less flexibility once deal closes. Example: Company sells for $20M. Buyer pays $12M at closing (60%), balance via notes or earnouts. --- 🎯 Earnouts Definition: Contingent payments tied to post-close performance. Purpose: Bridge valuation gaps when buyers doubt seller projections. Seller advantages: * Upside if business outperforms. * Keeps seller engaged post-close. * Makes headline valuation look higher. Seller drawbacks: * Can be manipulated by buyer decisions. * Delays full payout and adds stress. Buyer advantages: * Pay only if goals are met. * Protects against overpaying. * Flexible deal design. Buyer drawbacks: * Potential friction after close. * Complicated reporting and disputes. Common types: *Revenue-based: $5M if revenue grows 20% in 24 months. *EBITDA-based: Tiered payout, none below $10M, partial at $11M, full at $12M. *Milestone-based: $3M after product launch or approval. Design tips: Use simple, auditable metrics. Lock accounting policies early. Add caps/floors and arbitration clauses. --- 📝 Seller Notes Definition: Buyer issues an IOU, seller-financed debt, usually subordinated to senior loans. Seller advantages: Earns interest and speeds up closing. Increases headline price. Seller drawbacks: * High risk of buyer default. * Subordinated to bank debt. * Costly to enforce. Buyer advantages: * Reduces upfront cash need. * Adds flexibility in financing. Buyer drawbacks: * Adds debt-service pressure. * May require lender consent. Example: $6M note at 9% interest over 5 years, subordinated to bank debt. --- 📈 Rollover Equity Definition: Seller reinvests a portion of proceeds into buyer’s company to capture future upside. Seller advantages: * Potential 3–5x return on second exit. * Aligned with new owners. Seller drawbacks: * Illiquid for years. * Risk if buyer underperforms. * Exit timing beyond seller’s control. Buyer advantages: * Keeps seller motivated. * Reduces upfront cash requirement. Buyer drawbacks: * Must share governance and cap table. * Harder to model long-term returns. Example: $8M cash + $4M rollover equity → buyer exits 4x = $16M return. Key terms to negotiate: * Same equity class or preferred? * Board rights and exit horizon. * Tag-along/drag-along protections. --- ⚙️ Integration Risk & Protections Even perfect structures can fall apart if integration fails. For sellers: * Retention bonuses for key staff. * Narrow non-compete terms. * Indemnity caps and short survival periods. For buyers: * Non-interference clauses in earnouts. * Reporting rights and clear dispute paths. --- 📊 Deal Structure Archetypes 1️⃣ Cash-Heavy with Small Earnout * 70% cash, 10% note, 20% revenue earnout. * Best for stable businesses with lender backing. * Seller: high certainty, low upside. * Buyer: strong control, big upfront spend. 2️⃣ Earnout-Heavy * 40% cash, 15% note, 45% EBITDA earnout. * Best for high-growth projections or volatile industries. * Seller: big upside, long tail risk. * Buyer: pay for performance, higher governance friction. 3️⃣ Rollover Growth Play * 50% cash, 30% rollover, 20% ARR earnout. * Best for PE-backed roll-ups. * Seller: aligned for future exit. * Buyer: retains founder motivation, but must share equity. 4️⃣ Note-Funded Bridge * 55% cash, 35% note, 10% profit earnout. * Best for cash-constrained buyers. * Seller: earns interest but faces default risk. * Buyer: preserves cash, adds leverage pressure. 5️⃣ Milestone-Driven Earnout * 45% cash, 15% note, 40% milestone earnout. * Best for product/regulatory plays (biotech, SaaS). * Seller: clear triggers but timing risk. * Buyer: pays only on proven events. --- 🚨 Common Traps Sellers: * Vague GAAP definitions (buyer-friendly). * Earnouts tied to uncontrollable metrics. * No escrow or LOC protection. Buyers: * Overly complex payout formulas. * Governance rights limiting integration. * Paying cash too early. --- 🧠 Key Lessons * Sellers: trade headline valuation for certainty and protection. * Buyers: blend earnouts, notes, and rollover to de-risk. * Both sides: lock accounting policies and reporting rights early. * The best LOIs are short, milestone-based, and fast to close. --- 🏆 Final Takeaway Valuation is the stage. Structure is the script. The difference between walking away rich or waiting years is how you negotiate the levers.