A buyer offers a strong headline price for your company or advisory practice. You sign a letter of intent, start planning your next chapter, and then discover that only part of the price will arrive at closing. The rest depends on working capital, an escrow release, a seller note, or future performance.
That doesn't necessarily mean the deal is bad. It means the headline number is only one part of what you're negotiating. M&A deal structuring determines how much value you receive, when you receive it, and what risks you carry after signing.
Why M&A Deal Structuring Decides the Real Price
The buyer and seller agree on a price, and both sides congratulate themselves. Then the lawyers and accountants work through the details. Closing working capital falls below the negotiated target, so the purchase price gets adjusted. Part of the proceeds stays in escrow to cover claims. Another portion is due only if the business reaches agreed milestones.
The seller may still describe the transaction by its headline price. But the practical question is more specific: What will the seller receive at closing, what can change that amount, and what must happen before the rest is paid? The answer depends on the agreement's mechanics, not just the number on its first page.
M&A deal structuring covers choices about what changes hands, who bears tax, how the buyer funds the purchase, and who controls the business after closing. Those choices affect different parts of the transaction. A stock purchase or asset purchase determines the legal form. Debt, seller financing, and rollover equity shape the sources of consideration. Escrow and purchase-price adjustments address post-closing claims. An earnout makes future payment depend on results after the buyer takes control.
Practical rule: Treat every dollar that isn't paid in cash at closing as a separate promise with its own conditions, timing, and risks.
Two deals with the same stated price can therefore deliver very different value. A larger contingent payment may look attractive but be hard to collect. A smaller cash amount may be more valuable if the seller has no further obligations and little post-closing exposure. The terms matter because they decide how value moves when the deal closes, when the accounts are settled, and when unexpected events arise.
How Deal Structure Allocates Value and Risk
A useful way to think about a purchase price is as the sticker on a car. The sticker matters, but so do the brakes, insurance, and what happens if delivery is delayed. In a transaction, termination fees, financing conditions, regulatory timing, and post-closing adjustments help determine who bears the cost when events don't go as planned.
A termination fee can require one party to pay the other if the deal fails under specified circumstances. It can protect a buyer that has spent time and money pursuing a transaction, or compensate a seller if a buyer walks away after agreed conditions are met. But the fee also affects the parties' bargaining positions and may discourage competing offers if it's too high.
Research examining U.S. mergers found that net termination fees were positively correlated with acquisition premiums, and that fee levels varied with bargaining power, outside options, cash consideration, merger-related costs, and expected operating synergies. The takeaway isn't that one fee formula fits every deal. It's that a fee can reflect the value and risks each side is negotiating over, while still needing to respect fiduciary duties and leave room for competing bids. Research on bargaining, outside options, and termination provisions
Timing can affect the economics
Regulatory review also affects deal value. For U.S. transactions subject to the Hart-Scott-Rodino Act, the 2026 size-of-transaction threshold is $133.9 million, effective February 17, 2026. Between $133.9 million and $535.5 million, the size-of-person test generally applies: one party must generally have at least $267.8 million in annual net sales or total assets, and the other at least $26.8 million. At $535.5 million or more, the size-of-person test generally doesn't apply, though exemptions may still matter. The FTC's 2026 HSR thresholds
That review may affect when the buyer can take control and when the seller receives proceeds. The parties should identify regulatory conditions and consider their effect on financing, operations, and closing certainty early, rather than treating clearance as a box to check near the end.
Before signing, a buyer also needs a clear view of the target's financial condition, including debt, liabilities, and working capital. A focused financial diligence process to spot risks in acquisition financials can help both sides understand what the agreed price assumes. That information helps turn a headline number into a realistic allocation of value and risk.
Choosing Among Asset Stock Merger and LLC Deals
Once the parties understand what needs to be allocated, they can choose the legal form of the transaction. The choice affects what the buyer acquires, which liabilities may remain with the business, how tax is handled, and whether contracts or other relationships need consent.
| Structure | What changes hands | Tax result at a high level | Main trade-off |
|---|---|---|---|
| Stock purchase | The buyer acquires the target's shares. | Sellers generally recognize capital gain, while the target corporation ordinarily doesn't recognize gain. | The buyer acquires the company, including its existing liabilities, subject to the agreement and applicable law. |
| Asset purchase | The buyer acquires specified assets and may assume agreed liabilities. | The target recognizes gain based on the purchase price, including assumed liabilities, compared with its tax basis. The buyer generally receives a fair-market-value basis in the assets. | The buyer can select assets and liabilities, but transferring contracts and other relationships may require consent. |
| Merger | Entities combine through a statutory transaction. | Tax treatment depends on the transaction's details and applicable rules. | A merger can combine entities in one statutory step, but approvals and implementation still require careful planning. |
| LLC interest purchase | The buyer acquires membership interests in the LLC. | Tax treatment depends on the LLC's classification and the transaction's details. | It can resemble a stock deal, but the operating agreement may set transfer restrictions or consent requirements. |
The tax difference between a stock deal and an asset deal can shape the negotiation. In a stock purchase, the buyer acquires the target's shares, and the sellers generally recognize capital gain while the target corporation ordinarily does not recognize gain. In an asset purchase, the target recognizes gain on the difference between the purchase price, including assumed liabilities, and its tax basis in the assets. The buyer generally receives a basis equal to the assets' fair market value. The Congressional Research Service's overview of business acquisition tax treatment
A qualifying stock acquisition may also use Section 338(g) to be treated as a deemed asset purchase. That can cause the target to recognize gain while giving the buyer a new fair-market-value basis in the assets. The potential tax consequences need to be modeled for both sides before the parties settle on a form.
Consent issues can influence the decision too. An asset purchase may require the parties to transfer contracts, licenses, or other relationships individually. A stock or LLC interest purchase may leave the entity in place, but its agreements can still require notice or consent when ownership changes. For an LLC-owned business, reviewing property title and LLC records can help identify ownership and transfer issues that should be addressed before the documents are final.
Kons Law's Commercial Transactions team, working from its Hartford business-law practice, structures and negotiates these choices for Connecticut companies and investors nationwide. The practical question is which form best addresses the actual problem: liability exposure, tax treatment, or the difficulty of transferring the business's contracts and relationships.
Financing Layers Beyond the Cash at Closing
The cash offer is only one part of the price. A buyer might fund closing with cash and senior debt, then ask the seller to accept a note or reinvest part of the proceeds as rollover equity. Each layer carries a different right to payment and a different chance of recovery if the business struggles.
Senior debt is usually paid before seller notes and equity. Its loan agreement may also limit distributions or block repayment of a seller note while covenants are in effect. The seller should review how much cash the business can use for repayment, and whether the senior lender's terms put the seller behind it.
A seller note leaves some of the price unpaid at closing in exchange for the buyer's promise to pay later. That promise matters only alongside its maturity, interest, default remedies, priority, and permitted payments. Before accepting one, sellers can review how a promissory note works. The note's terms determine whether it is a practical source of recovery or a claim that may be difficult to collect.
Rollover equity works differently. The seller keeps an ownership stake in the buyer or combined business, hoping to share in future value. That stake can be diluted by later financing or rank behind preferred claims. It depends on the company's performance and capital structure, not a fixed repayment schedule.
Test the payment stack under pressure
Consider a buyer that needs the acquired company's cash flow to service senior debt. If performance falls, the lender may restrict payments to the seller, even when the seller note is otherwise due. A later acquisition can add debt and further change the cash available. The seller's note, debt, and rollover equity therefore stack recovery risk, rather than just closing a funding gap.
Ask the downside question: If performance weakens, refinancing fails, the buyer sells the business, or a regulatory issue intervenes, what can you recover from each layer?
Write down the cash due at closing, the seller note's priority and repayment conditions, any personal guarantee, and the rights attached to rollover equity. Then test each layer against default, refinancing, a sale, or disruption. Separate what is paid now from what depends on the buyer's future decisions. That distinction is the deal's price.
Protections That Hold the Price After Signing
After the parties agree on the form and funding, the purchase agreement has to preserve the economics through closing and address claims that surface afterward. Representations and warranties are statements about the business, such as its financial condition or contracts. Indemnities establish remedies if those statements prove inaccurate. For a plain-language explanation of what a representation and warranty covers, focus on what the seller promises and what the buyer can do if that promise is breached.
An escrow can hold part of the proceeds to secure post-closing claims, including a purchase-price adjustment. The agreement should say how a claim is raised, what supporting evidence is required, when the other side may respond, and how the escrow agent releases funds. One filed escrow agreement, for example, allows the buyer to submit an adjustment notice supported by an agreement or neutral-accountant determination and directs payment within three business days after the notice reaches the escrow agent. A filed merger escrow agreement illustrating a claims-payment process
Define the working-capital math
A purchase-price adjustment commonly compares closing working capital with an agreed target amount. If closing working capital is below the target, consideration may decrease dollar for dollar; if it's above, the seller may receive an increase. The dispute usually isn't about the subtraction. It's about which accounting rules and items go into each number.
A 2024 study of more than 1,000 private-target transactions valued at approximately $244 billion found that over 90% included a purchase-price adjustment. The median finalized buyer-favorable claim was 0.21% of transaction value, and the median seller-favorable surplus was 0.18%. Sellers challenged buyer calculations nearly 30% of the time. The 2024 M&A Working Capital PPA Study
The agreement should set out the accounting principles, how GAAP and historical practices rank if they conflict, how seasonality is treated, and which items are excluded because they're already counted as debt or cash. A sample calculation attached to the agreement gives the parties a shared reference point. It can also help prevent double counting, such as treating an accrued transaction expense as both a working-capital liability and a debt-like deduction.
Set the escrow amount with realistic exposure in mind, not as a substitute for drafting. Specify the notice process, supporting evidence, timing, and the expert's authority if the parties can't agree. A termination fee serves a separate purpose: it may provide a remedy when a deal fails to close, rather than resolving a post-closing adjustment.
Earnouts as a Question of Post-Closing Control
An earnout is often described as a way to bridge a gap between the buyer's and seller's views of value. That's true, but it leaves out the practical issue that decides whether the seller collects: who controls the business decisions that determine the metric?
For a financial practice, the agreement might measure revenue, EBITDA, assets under management, client retention, or regulatory compliance. Each metric answers a different question. Revenue can be affected by pricing and client allocation. EBITDA depends on expense and accounting policies. Assets under management can move with markets and client decisions. Retention depends on how the buyer handles relationships and service. Compliance measures need clearly defined events and responsibilities.
68% of private acquisitions with earnouts used multiple performance metrics, while no 2024 transactions in the SRS Acquiom study had earnout periods longer than four years. SRS Acquiom's M&A deal data A shorter measurement period may limit how long the seller remains exposed to uncertainty, but multiple metrics can create disputes about definitions, causation, and which measure controls if results differ.
The parties should agree on reporting rights and access to the records needed to verify performance. They should also define how ordinary-course decisions differ from actions that intentionally suppress results, and what happens if the buyer integrates the practice, changes compensation, or reallocates clients. Anti-manipulation covenants can address those risks, but the language needs to match the buyer's actual operating plans. The agreement should also set a dispute process and explain what remedies apply if the buyer fails to provide reports or follow the agreed rules.
A seller who accepts a higher headline price may receive less value if the buyer controls pricing, hiring, accounting, customer assignments, and integration without meaningful constraints. The earnout is not just a number tied to future performance. It's a post-closing control and measurement system. Understanding what an earnout agreement does is only the starting point; the central negotiation is whether its rules make payment measurable and collectible.
Negotiation Moves and When to Call Counsel
A useful negotiation order starts with the decisions that can change the entire transaction. Before trading over the last turn of price, settle the intended legal form and understand its tax effect. Then map each layer of consideration under a weak performance or failed refinancing scenario, not just the expected outcome.
For the working-capital adjustment, insist on a sample calculation and clear rules for accounting policies, seasonality, and debt-like items. For an earnout, connect the metric to the buyer's post-closing responsibilities, reporting obligations, and remedies. A letter of intent can help capture the key commercial points before the purchase agreement turns them into detailed legal obligations; consider what a letter of intent should address.
Some terms are worth trading. A seller might accept a larger escrow or clearer indemnity language in exchange for a cleaner closing process. A buyer might offer more cash at closing in return for a narrower earnout, or accept a defined reporting obligation rather than broad restrictions on operations. Each choice should reflect the actual business risk, not a reflex to win every drafting point.
Kons Law's Commercial Transactions counsel works with companies, investors, and advisory-practice owners on deal structure and negotiation. If disagreements over contracts, partnerships, or transaction terms arise, the firm's Commercial Litigation practice handles disputes through negotiation, arbitration, or trial. If you want to discuss your business law matter, contact Kons Law at (860) 920-5181.
Kons Law advises companies, investors, and financial professionals on M&A structure, purchase agreements, and the risks that affect real deal value. To discuss how those terms apply to your transaction, contact Kons Law.
