12 Feb Deal Structures 101
If you’ve made it to Letter of Intent (LOI), it’s tempting to fixate on just enterprise value. But as Mike Harvath explains our Sell-Side Masterclass Series, deal structure is the terms of how you get paid, and it can matter just as much as the number at the top. In other words, price is what the buyer says the company is worth; structure is what determines what you actually take home and when.
This post breaks down the most common components of deal structure tech services founders see in M&A and what to watch for in each.
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What “deal structure” really means
Deal structure is simply the mix and timing of consideration in a transaction. A deal might be 100% cash at close, or it might include a blend of cash at close plus deferred or contingent components like an earnout, seller note, or rollover equity. The big takeaway from our podcast episode on this is that structure also helps share risk between buyer and seller, and in some cases can help a seller achieve a higher overall enterprise value.
1. Cash at close
Definition: The amount of the purchase price paid to the seller when the transaction closes.
Why it matters: Cash at close is the cleanest form of consideration and typically carries the least complexity. It’s also the easiest benchmark for evaluating how much risk you’re taking on with the rest of the structure.
Founder lens: When you compare offers, don’t just compare enterprise value. Compare cash at close plus how “collectible” the remaining components are.
2. Earnouts
Definition: Additional purchase price paid after closing if the business achieves agreed performance targets.
Why buyers use them (as discussed in the episode):
- To share risk when future performance is uncertain
- To align incentives post-close
- To bridge a valuation gap (seller expects more; buyer wants proof)
What makes an earnout more seller-friendly (Seller-Master Class themes):
- Index high on the P&L when possible (revenue is often preferred; sometimes gross margin) rather than profit/EBITDA, because post-close expense decisions may be outside the seller’s control.
- Use a “lane” / prorated design instead of a hard cliff where missing a target means you get nothing.
- Keep duration reasonable (the episode discusses 1–3 years as common, with longer periods adding uncertainty).
Typical size (as referenced in the conversation): Often a minority of total consideration (the episode discusses ranges like roughly 10–30% depending on the full mix).
Example: “If revenue stays within an agreed range around the plan, the seller earns a proportional payout rather than all-or-nothing.”
*We know earnouts can sometimes seem scary, but if you structure them properly with the right team around you, it’s a win-win. Find an industry specific M&A advisor like Revenue Rocket.
3. Seller notes
Definition: A seller note is essentially seller financing. Instead of receiving all proceeds at close, the seller receives part of the price over time via a promissory note that typically pays interest or comes with an earnout.
Why it shows up: Seller notes often appear when a buyer is optimizing how a deal is financed. In the podcast episode, the point is made that seller notes are typically subordinated to senior debt, meaning the bank gets paid first. Earnouts are really an interesting component of structure because they focus much more on you performing at a certain level. If you do that, you can overperform or you might take a haircut to your purchase price if you underperform.
Key concepts to understand:
- You’re taking on credit risk (you’re effectively acting like the bank for that portion of the price)
- Interest rates vary, and the episode references ranges that can move from mid-single digits up toward ~10% depending on risk/market context
Example: “$15M total consideration with $12M at close and a $3M seller note paid over 24–36 months with interest.”
4. Rollover equity
Definition: The seller reinvests a portion of proceeds into the business after the sale, retaining equity in the go-forward entity.
Why it’s common in PE-backed deals: Our Sell-Side Master Class frames rollover equity as the “second bite of the apple”—the idea that you take some chips off the table at close, but keep exposure to future upside if the business grows and later sells or recapitalizes.
Founder lens: Rollover equity can be a powerful wealth builder, but it also introduces real variables: governance rights, timing of a future liquidity event, and the strategic plan you’re tying your equity to.
Example: “Roll 20% of proceeds into equity and participate again at the next exit.”
Working capital adjustments (the lever many sellers miss)
Definition: A mechanism that adjusts the purchase price based on whether the company delivers a normal/expected level of working capital at closing.
Why it matters: Working capital is a “quiet” term that can materially change what you take home. The episode highlights that many owners are overcapitalized, and that the sale process may be the moment when excess working capital can be harvested—if negotiated properly.
What founders should watch:
- How “working capital” is defined in the deal
- How the “target” (or peg) is determined
- How disputes get resolved if you and the buyer calculate it differently
Example: “If you deliver less working capital than target, purchase price adjusts downward; if you deliver more, you may get credited.”
Check out our podcast episode all about Working Capital here >>
Where Revenue Rocket fits
If you’re approaching LOI stage (or want to be), the mechanics above get easier when you’re prepared and supported. Revenue Rocket’s Sell-Side M&A / Seller Readiness programs are positioned specifically to help IT services firms prepare for a successful process and negotiate from a position of strength. Let’s talk: info@revenuerocket.com