Primary Components of Deal Structures

Before diving into the individual components of the transaction structure, here are some common guidelines regarding the primary components of the purchase price:

  • Cash: Cash accounts for the majority of consideration in most transactions. The amount of cash down ranges from 60% to 100% for most mid-sized to large transactions.
  • Earnouts: After cash, earnouts are the most frequently used component of middle-market M&A transactions. Earnouts typically comprise between 10% and 20% of the purchase price.
  • Stock: Stock in the existing buyer’s entity is commonly offered as a form of consideration in larger transactions in which the buyer is a publicly traded firm. Sellers generally prefer that the stock has sufficient trading volume and is therefore liquid. Equity rollovers are also used in transactions where you retain equity in your business, which is technically a new entity. In other words, your equity is being rolled over with the target. For example, a buyer may purchase 70% of your stock or equity at closing, while you retain 30% of the stock or equity. The 30% piece of equity that you retain is said to “roll over” to the new entity the buyer forms.
  • Third-Party Financing: Financial buyers often use debt, or leverage, to maximize their returns, while strategic buyers use leverage less frequently, especially if the target is significantly smaller than the buyer. If third-party financing is involved, it’s delivered in the form of cash to you at closing. If a seller note is also involved, it will be subordinated to any senior lenders’ positions. Earnouts, and other terms of the transaction, may also be subject to the approval of the lender. 
  • Seller Financing: Seller financing usually ranges from 10% to 30% of the total purchase price. Seller financing may also be used in lieu of a holdback.
  • Holdback (Escrow): A holdback is commonly used to fund indemnification claims for a seller’s breach of reps and warranties, which are contained in the purchase agreement. Holdbacks typically range from 10% to 25% of the purchase price. They are often held by a third-party escrow agent in line with the survival period for the reps and warranties, which normally ranges from 12 to 24 months.