deal-structuring

name

deal-structuring

description

M&A deal structuring and term sheet design. USE THIS SKILL when the user asks about deal structure, term sheet, purchase agreement terms, asset deal vs. stock deal, earnout, escrow, reps and warranties, indemnification, locked box, completion accounts, consideration mix, seller note, MAC clause, material adverse change, non-compete, conditions precedent, purchase price mechanism, closing conditions, merger agreement, or SPA terms. Also trigger when asked to draft or review M&A transaction terms.

M&A Deal Structuring & Term Sheet Design

Required Inputs

• Transaction Overview: Buyer, target, deal rationale, and indicative valuation range.
• Buyer Type: Strategic acquirer or financial sponsor (PE fund).
• Target Entity Type: C-corp, S-corp, LLC, partnership, or international entity.
• Consideration Budget: Available cash, appetite for stock issuance, and debt capacity.
• Key Sensitivities: Seller priorities (cash at close, tax efficiency, retention of upside) and buyer priorities (risk allocation, price protection, integration flexibility).

Execution Steps

1. Deal Structure Selection

Choose the legal structure for the transaction. Each has materially different tax, liability, and operational consequences.

Structure Comparison Table

Dimension	Asset Purchase	Stock Purchase	Statutory Merger
What transfers	Selected assets and liabilities	Entire legal entity (shares)	Target merges into buyer or sub
Successor liability	Generally no (except specific carve-outs)	Yes — all liabilities transfer	Yes — surviving entity assumes all
Tax to seller (C-corp)	Double tax (corporate + shareholder)	Single tax at shareholder level	Single tax (if structured properly)
Tax to seller (S-corp/LLC)	Single tax at owner level	Single tax at owner level	Single tax at owner level
Buyer tax benefit	Step-up in asset basis (higher future D&A)	No step-up (unless 338(h)(10) election)	No step-up (unless 338(h)(10))
Contract assignment	Requires consent per contract	Automatic (unless change-of-control clause)	Automatic by operation of law
Employee transfer	New employment offers required	Employees remain with entity	Employees remain with surviving entity
Third-party consents	Extensive (each asset/contract)	Limited (change-of-control only)	Limited
Minority shareholders	N/A	Must acquire 100% or deal with holdouts	Squeeze-out via appraisal rights
Regulatory complexity	Lower	Moderate	Higher (board + shareholder approvals)
Best for	Buying specific divisions; avoiding liabilities	Clean companies; speed to close	Public targets; tax-efficient combinations

Decision Framework

Score each factor 1-5 based on deal circumstances:

Factor	Favors Asset Deal	Favors Stock Deal	Favors Merger	Score
Buyer wants tax step-up	5	1	1
Seller wants single tax layer	1	5	5
Significant contingent liabilities	5	1	1
Many non-assignable contracts	1	5	5
Target has valuable NOLs	1	4	4
Minority shareholder squeeze-out needed	1	1	5
Partial acquisition (division/unit)	5	1	1
Speed to close priority	2	4	3
Total

Recommend the structure with the highest total score. Document trade-offs for the runner-up.

2. Consideration Design

Consideration Types

Type	Description	Seller Impact	Buyer Impact
Cash	Immediate payment at close	Certainty; immediate tax event	Cash outflow; possibly debt-funded
Stock	Buyer equity issued to seller	Tax deferral possible (tax-free reorg); retains upside	No cash outflow; dilution to existing shareholders
Earnout	Contingent payments tied to future performance	Bridges valuation gap; deferred and uncertain	Reduces upfront risk; creates alignment incentives
Seller note	Deferred cash payment (promissory note)	Installment sale tax treatment; credit risk on buyer	Reduces upfront cash; cheaper than bank debt
Rollover equity	Seller reinvests portion into buyer/NewCo	Tax deferral on rolled amount; ongoing participation	Reduces cash need; aligns seller post-close

Consideration Mix Design

State the proposed mix as a table:

Component	Amount ($M)	% of Total	Key Terms
Cash at close			Funded by [source]
Stock consideration			Exchange ratio: [X] buyer shares per target share; collar/fixed
Earnout			Metric: [revenue/EBITDA]; Period: [X] years; Cap: $[X]M
Seller note			Term: [X] years; Interest: [X]%; Subordination: [senior/sub]
Rollover equity			[X]% of seller proceeds rolled into NewCo
Escrow/holdback			[X]% held for [X] months for indemnification
Total consideration		100%

3. Purchase Price Mechanism

Choose between the two standard approaches:

Dimension	Locked Box	Completion Accounts
Reference date	Pre-signing balance sheet date	Closing date balance sheet
Price certainty	Fixed at signing (seller-friendly)	Adjusted post-closing (buyer-friendly)
Leakage protection	Seller covenants against value extraction post-locked-box date	N/A — price adjusts to actual
Working capital	Included in locked-box price	True-up to agreed target NWC
Cash / debt	Fixed at locked-box date	Adjusted to actual at close
Dispute risk	Low (price is fixed)	Higher (completion accounts disputed)
Best for	Competitive auctions; clean businesses	Volatile working capital; buyer-friendly deals

If using completion accounts, define:

Adjustment	Target / Peg	Mechanism
Net working capital	$___M (based on trailing [X]-month average)	Dollar-for-dollar adjustment above/below target
Net debt	$0 (cash-free / debt-free basis)	Deducted from headline price
Cash	$0 (cash-free / debt-free basis)	Added to headline price
Transaction expenses	$0	Deducted from headline price
CapEx true-up	$___M minimum spend	Shortfall deducted from price

4. Key Deal Terms

4a. Representations and Warranties

Category	Seller Reps (typical)	Buyer Reps (typical)
Fundamental	Authority, organization, capitalization, title to shares	Authority, organization
Financial	Accuracy of financial statements, no undisclosed liabilities	Solvency, available funds
Operational	Material contracts, compliance with laws, litigation, IP, employees, tax, environmental, insurance	—
Bring-down	All reps true at signing and closing	All reps true at signing and closing

Survival periods: Fundamental reps (indefinite or 5-7 years); General reps (12-24 months); Tax reps (statute of limitations + 60 days); Environmental (3-6 years).

4b. Indemnification

Parameter	Market Range	Recommendation
Cap (general)	10-20% of enterprise value	[X]% based on risk profile
Cap (fundamental/fraud)	100% of purchase price	Full recourse
Basket (deductible)	0.5-1.5% of EV	[X]% — tipping vs. true deductible
Mini-basket (de minimis)	$[X]K per claim threshold	Exclude trivial claims
Escrow amount	5-15% of purchase price	$[X]M held for [X] months
Escrow release	12-24 months post-close	[X] months, partial release at [X] months
R&W insurance	Increasingly common; 2-4% premium	Buy-side policy recommended if > $[X]M EV

4c. Material Adverse Change (MAC) Clause

Define what constitutes a MAC allowing the buyer to terminate:

Included in MAC Definition	Carved Out (NOT a MAC)
Material decline in target's business, operations, financial condition	General economic or industry-wide changes
Loss of key customers representing > [X]% revenue	Changes in law or accounting standards
Regulatory action materially impairing operations	Effects of the announced transaction itself
Material breach of reps or covenants	Pandemics, natural disasters (negotiate)
	Changes in financial markets generally

Materiality qualifier: MAC must be material to the target's business "taken as a whole" and must be "durable" (not temporary).

4d. Additional Key Terms

Term	Description	Market Standard
Non-compete	Seller restricted from competing post-close	2-4 years; defined geography and scope
Non-solicit	Seller cannot recruit target employees	2-3 years; covers employees and customers
Conditions precedent	Required before closing	Regulatory approvals, third-party consents, financing condition (PE only), no MAC
Interim operating covenants	Seller runs business in ordinary course between sign and close	Defined positive and negative covenants; materiality thresholds
Termination rights	Circumstances allowing either party to walk	Longstop date, regulatory failure, uncured breach, board fiduciary out
Break fee / reverse break fee	Penalty for termination	2-4% of EV (target break fee); 3-6% (reverse break fee for financing failure)
Go-shop / no-shop	Post-signing solicitation rights	No-shop standard; go-shop in PE deals (20-40 days)

5. Earnout Design (if applicable)

Earnouts require careful design to avoid disputes:

Design Element	Recommendation
Metric	Revenue (harder to manipulate) preferred over EBITDA (subject to cost allocation)
Measurement period	1-3 years; annual measurements with interim payments
Targets	Tiered: threshold (floor), target (midpoint), stretch (cap)
Accounting treatment	Specify GAAP/IFRS basis; define permitted and excluded adjustments
Operational covenants	Buyer commits to operate business in manner consistent with earnout achievement
Dispute resolution	Independent accountant for calculation disputes; arbitration for covenant disputes
Acceleration	Full earnout payable if buyer materially changes business or sells target
Cap	Maximum total earnout payment = $[X]M

6. Tax Implications Summary

Structure	Seller Tax Treatment	Buyer Tax Treatment	Key Consideration
Cash asset purchase	Ordinary income on recaptured depreciation; capital gain on goodwill	Step-up in basis; amortize goodwill over 15 years (Section 197)	Best buyer tax outcome; worst seller tax outcome (C-corp double tax)
Cash stock purchase	Capital gains on share sale	No step-up; carryover basis	Clean for seller; suboptimal for buyer
Stock purchase + 338(h)(10)	Treated as asset sale for tax	Step-up in basis (same as asset deal)	Requires both parties' agreement; only for S-corps and subs
Tax-free reorganization (stock-for-stock)	Tax deferred on stock received	Carryover basis in target assets	Requires continuity of interest (>40% stock); no step-up
Installment sale (seller note)	Gain recognized as payments received	Interest deductible	Seller defers tax; must meet installment sale rules

Recommend structure based on combined tax efficiency. Model the after-tax proceeds to the seller under each alternative.

Output Template

## Deal Structure: [Buyer] Acquisition of [Target]

**Date**: [Date] | **Indicative EV**: $[X]M | **Structure**: [Asset/Stock/Merger]

### Transaction Summary
| Item | Detail |
|---|---|
| Buyer | [Name and type] |
| Target | [Name, entity type, jurisdiction] |
| Enterprise value | $[X]M |
| Equity value | $[X]M |
| Structure | [Asset purchase / Stock purchase / Merger] |
| Consideration | [Cash/Stock/Mixed — summary] |

### Structure Rationale
[Why this structure was selected over alternatives, with reference to scoring]

### Consideration Mix
| Component | Amount ($M) | % of Total | Key Terms |
|---|---|---|---|
| ... | | | |

### Purchase Price Mechanism
[Locked box or completion accounts with adjustment mechanics]

### Key Terms Summary

#### Representations and Warranties
[Summary of scope and survival periods]

#### Indemnification
[Cap, basket, escrow, R&W insurance recommendation]

#### MAC Clause
[Definition and carve-outs]

#### Restrictive Covenants
[Non-compete, non-solicit scope and duration]

#### Conditions Precedent
[Required approvals and conditions for closing]

#### Termination Rights
[Break fees and termination triggers]

### Earnout Structure (if applicable)
[Metric, targets, measurement period, protections]

### Tax Analysis
| Structure Option | Seller After-Tax Proceeds | Buyer NPV of Tax Benefit | Combined Efficiency |
|---|---|---|---|
| ... | | | |

### Key Risks and Mitigants
| Risk | Probability | Impact | Mitigant |
|---|---|---|---|
| ... | | | |

### Indicative Timeline
| Milestone | Target Date |
|---|---|
| LOI / Term sheet | Week [X] |
| Due diligence completion | Week [X] |
| Definitive agreement signed | Week [X] |
| Regulatory filings | Week [X] |
| Closing | Week [X] |

Quality Checks

• Deal structure (asset/stock/merger) explicitly selected with documented rationale using the scoring framework.
• Tax implications modeled for both buyer and seller under the chosen structure and at least one alternative.
• Consideration mix fully specified with dollar amounts, percentages, and key terms for every component.
• Purchase price mechanism (locked box or completion accounts) defined with specific adjustment items and targets.
• Reps and warranties categorized (fundamental, financial, operational) with survival periods stated.
• Indemnification terms specified: cap, basket, de minimis, escrow amount, and escrow duration.
• MAC clause defined with both inclusions and carve-outs explicitly listed.
• Earnout (if included) has a defined metric, measurement period, tiered targets, operational covenants, dispute resolution, and cap.
• Non-compete and non-solicit have specific duration and scope (not left as "to be agreed").
• Conditions precedent enumerated, including regulatory approvals, consents, and financing conditions.
• Cross-reference: valuation skill used or referenced for the enterprise-to-equity value bridge and valuation basis.
• Cross-reference: tax-structure-advisory skill referenced for detailed tax structuring analysis where applicable.