Build the Best M&A Deal: Understanding Acquisition Structures as a Business Owner
Key Takeaways:
Deal structure is just as crucial as headline valuation: A M&A transaction's structure can significantly affect a business owner’s net proceeds, tax exposure, legal responsibilities, and future involvement in the business.
Rollover equity can offer a second bite at the apple: Retaining a minority stake in your company post-sale allows you to share in future upside, especially in private equity deals, while also aligning your financial interests with your new partners.
An experienced M&A advisor is essential to maximize your transaction proceeds: A knowledgeable mergers and acquisitions advisor can help you evaluate deal structure options, navigate due diligence, and negotiate terms that align with your financial goals and legacy priorities.
Understanding M&A Deal Structure as a Business Owner
If you're a business owner or founder considering an exit, one of the most important, but often misunderstood, elements of selling your business is how the deal terms are structured. The structure of a transaction can have lasting financial, tax and legal implications, and influence your ongoing role in the business post-acquisition. The type of deal structure also dictates the level of due diligence in the transaction and the necessary documentation. Should you ask for rollover equity? Do you want to retain ownership of any of your company assets? How the deal is structured will answer these questions, so understanding the mechanics of M&A deal structures is key to building the best deal possible.
What Is an M&A Deal Structure?
In simple terms, an M&A deal structure defines how a buyer will acquire a business. It lays out whether they're purchasing company assets, stock, or if they are merging with the business directly. It also covers the payment terms–cash, equity, earn-outs, or a combination–and if the party selling the business retains any ongoing ownership, through rollover equity or other means.
Good deal structuring in mergers and acquisitions balances risk and reward, manages tax exposure, and ensures a smooth transition for both buyer and seller. For sellers, knowing the difference between an asset sale and a stock sale can mean the difference between a favorable exit and unnecessary surprise costs that eat into your final profit.
The Basics of Deal Structuring
Let’s break down the three most common structures you may encounter as a seller: asset sale, stock sale and merger.
Asset Sale
In an asset sale, the buyer purchases specific assets and liabilities of the business, not the full legal entity itself. Examples of assets include specific products, a subsidiary (e.g., Unilever proposing to spin-off or divest Ben & Jerry’s Ice Cream) or intellectual property. Buyers don’t typically assume any legacy liabilities, such as outstanding lawsuits or debts, making this structure less risky for them.
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From a seller’s perspective, an asset sale can present strategic benefits and noteworthy considerations. The structure of transferring selected assets can be advantageous for buyers but may create added complexity and tax consequences for sellers. Sellers might face higher tax burdens if gains on depreciable or tangible assets are taxed as ordinary income rather than capital gains. Additionally, the process of transferring individual assets, especially those requiring third-party consents or assignments, can introduce delays or complications.
Benefits and Considerations of an Asset Sale for the Seller:
Benefits:
May be the only path to a deal when the buyer is risk-averse
Potential for higher multiple on the asset for sale by excluding lower multiple businesses and / or retaining certain liabilities
Potential for a higher value to reflect the buyers future tax-benefits from the asset purchase structure
Considerations:
Possibly higher taxes, especially on depreciated assets, if treated as ordinary income
Lengthier process due to the need for asset-by-asset transfer
Disruption to operations from contract assignment issues and potential employee uncertainty
Stock Sale
In a stock sale, also known as a share sale, the buyer purchases company shares directly, assuming ownership of both assets and liabilities in a full ownership transfer. This can be the preferred transaction structure for a seller, especially in privately held companies, and is often the desirable structure for exiting founders.
In this approach, the seller transfers ownership of the company by selling its shares, resulting in a clean break: the buyer steps into the seller’s shoes, taking over all assets, liabilities, contracts, and obligations of the company.
From the seller’s viewpoint, this structure offers greater simplicity, fewer post-closing responsibilities, and often more favorable tax treatment if the proceeds are subject to capital gains tax rather than ordinary income. However, it also means the buyer may request indemnities or escrows to protect against unforeseen liabilities. While sellers benefit from a more streamlined process, the final valuation and deal terms must reflect the buyer’s risk assessment.
Benefits and Considerations of a Stock Sale for the Seller
Benefits:
Simpler transaction structure with fewer asset-level consents required
Likely more favorable tax treatment if the sale price less the cost basis is considered a capital gain rather than ordinary income
Full exit from the business, including all liabilities
Considerations:
Buyers may push for indemnifications or holdbacks due to liability exposure
It may be harder to find a buyer willing to assume all the risks of the company
Certain regulatory or shareholder approvals may still be required, depending on the company structure, adding more decision makers and oversight, which can extend the time it takes to complete a sale transaction
Merger
In a merger, two companies of relatively equal size and complementary capabilities legally combine into a new or existing entity. This is often used in strategic acquisitions or larger corporate deals. Unlike asset or stock sales, where one company is the buyer and the other is the seller, mergers are usually positioned as partnerships of equals. Mergers aim to unlock synergies through scale, efficiency, and market expansion. For both parties, mergers can present an opportunity to grow beyond their company’s existing footprint, reduce operational redundancies, and diversify their product offerings.
However, the success of a merger depends heavily on proper alignment between the two entities. You must have the same vision, culture, and execution (pro tip: that’s why having clarity on your motivations for selling is a critical early step in the M&A process). Poor integration planning, brand confusion, or internal resistance can quickly erode the realized value of the deal. A well-structured merger requires not only financial and operational due diligence, but also a strong cultural integration strategy to ensure long-term value creation for both parties.
Deal Structure Benefits and Considerations for Sellers: At a Glance
Common M&A Strategies
| Structure Type | Benefits for Seller | Considerations for Seller |
|---|---|---|
| Asset Sale | Potential for higher valuation | Taxation considerations; more complex transfer |
| Stock Sale | Simpler tax treatment; complete transfer of ownership | Buyer may demand a discount due to assuming all current and future liabilities |
| Merger | Strategic alignment with another company can accelerate growth; deal terms can be a mix of cash/equity. | Integration risks, regulatory approval may be required |
Rollover Equity: What Sellers Need to Know
If you're retaining an equity position post-sale, you're likely being offered rollover equity, which is a common term in private equity-backed M&A transactions. But what is rollover equity, and how does it affect your bottom line?
From a seller’s perspective, rollover equity refers to reinvesting a portion of the sale proceeds, into the buyer’s new ownership structure, typically in partnership with a private equity firm. Instead of fully exiting, the seller retains a minority stake in the business post-transaction. This allows the seller to participate in the company’s future growth and value creation while sharing risk with the new ownership. For sellers who believe in the long-term potential of the business and want to stay involved, rollover equity can be a strategic way to benefit from a second, potentially more lucrative exit. However, sellers should be aware of their rights as a smaller / minority shareholder, potential changes in strategic direction, pro forma leverage, and potential future dilution.
Final Thoughts: Building the Right Deal
The best deal for sellers takes into consideration more than the headline sale amount. Aligning the deal structure with your financial goals, tax strategy, and legacy plans should be a top priority. Carefully consider the following:
Have you identified which specific assets and liabilities will be included in the transaction, and are there any you intend to exclude or retain post-sale (e.g., real estate, intellectual property, etc.)?
Have you conducted a company valuation to determine your business’s fair market value and understand the key drivers influencing its worth?
Is your business fully prepared for buyer due diligence, with all financial records, operational systems, and legal considerations accurately and properly documented?
Are all outstanding financial obligations settled or clearly accounted for? Examples may include bank debt, tax liabilities, and/or vendor payables
Have you assessed the tax implications of the transaction structure and considered strategies to optimize your post-sale tax position?
Before you get too far down the sale path, you owe it to yourself and your company to work with an experienced M&A advisor who understands how to tailor the structure of the transaction to protect your interests and maximize your outcome.
Keene Advisors Insight Series: Mergers & Acquisitions
Keene Advisors is a full-service financial advisory and investment banking firm with over $40 billion in successful mergers and acquisitions, capital raising, and restructuring advisory transactions. We are dedicated to transparent communication and seamless guidance throughout every stage of the M&A process, always aiming to align short-term needs with long-term goals.
Contact us today to learn more about our M&A Advisory Services.
Disclaimer: This commentary is intended for general informational purposes only. Keene Advisors does not render or offer to render personalized financial, investment, tax, legal or accounting advice through this report. The information provided herein is not directed at any investor or category of investors and is provided solely as general information. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action. Keene Advisors does not provide securities related services or recommendations to retail investors. Nothing in this report should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.