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Part of How deal structures shift risk in a business sale
Where do deal structures mistakes actually start, long before signing?
Nine deal structures mistakes grouped by stage, from comparing offers by headline to leaving the price allocation until the end, with the correction for each.
Structure mistakes are quiet: nothing goes wrong at the time, and everyone signs. Months later, the cost appears in a payment that does not arrive, a liability that becomes yours, or a tax bill nobody modeled.
The nine below are grouped by the stage at which each is made, with the mechanism that turns it into money and the correction.
What to take away
- Structure decides who carries which risk. Every mistake below is a risk landing somewhere nobody intended.
- The expensive ones are made early, in conversation, and cannot be repaired by careful drafting afterwards.
- Which structure suits you, and what each costs in tax and liability, is decided by your lawyer and accountant on your facts.
While the price is being agreed
Comparing offers by the headline. Two offers with the same number can differ by everything: what arrives at closing, what is conditional, what is secured, and what you remain exposed to. Reduce each to those four figures before you prefer one. Until you have, you are not comparing offers.
Comparing offers beyond the headline
Offer A
- At closing
- cash
- Conditional
- yes
- Secured
- no
- Exposure
- high
Offer B
- At closing
- cash
- Conditional
- no
- Secured
- yes
- Exposure
- low
Agreeing a structure before it is modeled. An asset purchase and a share purchase have different tax consequences for each side, and they run in opposite directions. Agreeing the shape in a meeting and asking the accountant afterwards is how sellers discover that the structure they conceded was worth more than the price increment they won. Model both first; the deal structures page explains why the two sides pull opposite ways.
Treating consents as an afterthought. Whether a lease, license or key contract can move decides which structures are available at all. A structure agreed before those answers are known is a structure that may have to be renegotiated from a weaker position.
While the terms are being drafted
Taking a seller note without security or ranking. Deferring part of the price makes you a creditor. What secures it, where it ranks against the buyer's bank, who guarantees it personally, what counts as default and what happens then: all of it belongs in the instrument. A note agreed in principle and documented later is documented on the buyer's lender's terms.
Seller note: what must be in the instrument
- What secures the note
- Where it ranks against buyer's bank
- Who guarantees it personally
- What counts as default
- What happens on default
Leaving the earn-out metric to be worked out later. The metric must be arithmetic, the accounting policies fixed as they are today, and costs allocated from the buyer's wider operations excluded. Ambiguity in a contingent payment resolves in favor of whoever holds the money, which is never the seller. The same arithmetic discipline applies to every other term, as these deal structures examples show across five offers.
Accepting uncapped warranties, or not knowing the cap. A seller giving warranties needs to know the maximum exposure, how long each warranty survives, and what disclosure protects them. An indemnity is different again: it shifts a specific identified risk in full, and a seller who accepts one without a cap has accepted an open-ended obligation for a closed-ended price.
Missing that the escrow is the buyer's only recourse, or that it is not. These are opposite positions and both are common. If the escrow is the sole remedy, the seller's exposure is bounded by it. If it is merely the first place the buyer looks, exposure continues beyond it. Know which one you signed.
As the deal closes
Ignoring the working capital mechanism. The price is agreed, and then a formula decides how much of it arrives. Sellers who keep managing cash for the closing date rather than for the agreed target pay for it in the settlement, and the closing and handover page sets out how the calculation works.
Price allocation: negotiate with the price
- Agree total price
- Split across assets
- Allocate to goodwill
- Allocate to consulting payments
- Allocate to restrictive covenants
- Report on Form 8594
Letting the price allocation be filled in at the end. How the total is split across assets, goodwill, consulting payments and restrictive covenants has tax consequences for both sides, and the two sides' interests differ. In the United States buyer and seller each report the allocation and it is expected to agree; the IRS describes the statement on its page for Form 8594. Negotiate it with the price, not after it.
What the nine have in common
Every one is a decision made in a hurry by people concentrated on the number. The structure is where that number turns into money that arrives or does not, and it deserves more argument than the headline.
For a seller, the preparation year is where you decide which risks you are willing to carry. For a buyer, diligence is what tells you which risks the structure must cover.
