Deal Structure Guide for Business Owners: How Sellers Maximize Profit in M&A

When you decide to sell a business, your focus instantly lands on one number: the valuation. But experienced business owners and M&A advisors know the "headline price" is only half the story. The real number—the amount you actually deposit in your bank account—is determined by the deal structure.

This guide is for sellers who want to move beyond a simple valuation and understand how to strategically structure a business sale. We will explore how the structure of the deal, from tax liabilities to post-sale obligations, dictates your final payout. Understanding these common deal structures is the key to maximizing your profit during a merger or acquisition. Sellers need this knowledge before the negotiation begins.

Beyond the Sticker Price: Why Deal Structure Dictates Your Net Profit

A $10 million offer is not always $10 million. The way that purchase price is paid, the tax treatment it receives, and the liabilities you retain can dramatically shrink your net proceeds. The chosen structure outlines the legal and financial mechanics of the transaction, impacting everything from capital gains tax to future risk.

Working capital peg (cash‑free, debt‑free): Most offers are presented on a cash‑free, debt‑free basis with a normalized net working capital (NWC) peg. At closing, your cash is excluded and your debt is paid off, then the closing price is adjusted up or down versus the agreed NWC peg. Unclear pegs or weak baselines can reduce cash at close. Build a 12–24 month NWC baseline (seasonality included) before you market the business, and make sure the LOI defines method, components, and dispute process.

The Critical Role of Tax Implications

Taxes are the single biggest factor in deal structuring. An asset sale, for example, often results in a portion of the proceeds being taxed at higher ordinary income rates for the seller, while the buyer gets a tax-advantageous "step-up" in the basis of the assets. Conversely, a stock sale typically allows the seller to treat the entire payout as a long-term capital gain, resulting in a much lower tax bill. As of mid-2025, the gap between long-term capital gains rates and top ordinary income rates can be substantial, making this the most important negotiation point for sellers.

Tax guardrails (quick scan): For asset deals, purchase price allocation follows IRC §1060; the portion allocated to goodwill is generally capital gain to the seller (ordinary for some C‑corp contexts) and amortizable to the buyer. State tax treatment can vary by jurisdiction. Always model after‑tax, after‑escrow, after‑peg proceeds when comparing offers. For a concise overview of §1060 allocation concepts, see this Practical Law primer (subscription may be required): IRC §1060 asset acquisition allocation overview.

Allocating and Mitigating Post-Sale Liability

The deal structure also defines what you are responsible for after you close the deal. In a stock sale, the buyer inherits the entire legal entity, including all its past, present, and unknown liabilities. In an asset sale, the buyer only purchases the specific assets they want, leaving the seller’s original entity (and its liabilities) behind. This makes an asset purchase far less risky for the buyer and, by extension, potentially riskier for the seller unless proper indemnifications are negotiated.

The Two Foundational Structures: Asset Sale vs. Stock Sale

Nearly every M&A transaction boils down to one of two common structures: an asset sale or a stock sale. The buyer and seller almost always have opposing preferences. Understanding the pros and cons of each is the first step in crafting a deal that works for you.

The Asset Sale: A Buyer's Preference

In an asset sale, the buyer purchases specific assets and liabilities from your company—like equipment, inventory, and customer lists—but not the company (legal entity) itself. Buyers love this structure because they can "cherry-pick" assets, leave unknown liabilities with the seller, and get a "step-up" in the tax basis of the assets they purchase. This step-up allows them to re-depreciate the assets, creating significant future tax shields for their new business.

The Stock Sale: A Seller's Preference

In a stock sale (or stock purchase), the buyer purchases the owner's shares of stock, acquiring the entire legal entity, including all its assets and liabilities. Sellers strongly prefer this structure for two primary reasons: tax and liability. The proceeds are typically treated as long-term capital gains (assuming the holding period is met), and all contingent liabilities (like old lawsuits or warranty claims) transfer to the buyer with the ownership of the business.

Navigating S-Corp Exceptions

For certain businesses, particularly S-Corporations, a special tax election called an IRC 338(h)(10) can offer a compromise. This election legally structures the transaction as a stock sale (good for the seller's liability) but allows it to be treated as an asset sale for tax purposes (good for the buyer's tax basis). This can be a powerful tool, but it requires careful analysis by an experienced M&A attorney and tax advisor to ensure the seller is compensated for any potential tax disadvantages.

Strategic Considerations: Structuring Tools to Bridge the Valuation Gap

What happens when you and the buyer are far apart on the valuation? The right deal structure can bridge that gap without either side feeling like they've 'lost' the negotiation. These tools are used to re-allocate risk and align incentives for the post-sale success of the business.

Using Seller Financing Strategically

Seller financing is when you, the seller, act as the bank for a portion of the purchase price, which the buyer pays back to you over time with interest. While this introduces risk (the buyer could default), it offers powerful advantages: it can increase the total sale price, generate ongoing interest income for you, and make the deal possible for a buyer who lacks full bank funding. A strategic seller will secure this note with the assets of the business, making it a less risky way to achieve a higher valuation.

Seller note hygiene: Document collateral and file a UCC‑1; define personal guaranties (if any); state interest, amortization, maturity, and covenants; attach default remedies; and align with senior lender via subordination/intercreditor terms. Clarify prepayment, cure periods, and whether the note accelerates on buyer sale or covenant breach.

Structuring Earn-Outs to Protect the Seller

An earn-out is a contingent payment (or payments) made to the seller post-sale if the business achieves specific, pre-defined performance milestones (like revenue or EBITDA targets). Buyers use earn-outs to reduce their upfront risk, but sellers should be cautious. A well-structured earn-out clearly defines the metrics, prevents the buyer from artificially suppressing performance, and may even include acceleration clauses if the business is sold again.

Earn‑out mechanics that matter: Define calculation methodology (GAAP vs. adjusted EBITDA and allowed add‑backs), governance covenants (no starve‑the‑business moves, reasonable funding, sales channel continuity), integration rules (no dumping costs into the target, no unfavorable transfer pricing), audit/inspection rights, caps/floors and clawbacks, plus acceleration on buyer resale, change of control, or material covenant breach. Tie timing and dispute resolution to the purchase agreement calendar.

The Role of Escrows and Holdbacks

Buyers will often demand that a portion of the purchase price (typically 8–15%) be held in an escrow account for 12–24 months. This money serves as a security deposit to cover any breaches of representations or warranties discovered during due diligence (e.g., an undisclosed liability). As a seller, your goal in the negotiation is to limit the amount, shorten the duration, and clearly define the exact conditions under which the buyer can make a claim against those funds.

Where R&W insurance (RWI) fits: In larger deals, RWI can reduce the escrow size/duration and shift a portion of indemnity risk to an insurer (subject to exclusions and a retention). Pricing and availability vary; your M&A attorney and broker can advise whether RWI makes economic sense for your transaction.

For additional negotiation and legal insights, explore our professional M&A advisor resources.

A Case Note: How Structure Changed the Net Payout

Real-world examples clearly illustrate the power of good deal structuring. Consider a manufacturing business we'll call 'TechFab Inc.' The business owner received two competing offers, and the 'winning' offer wasn't the one with the highest price.

Offer A: The "High Price" Asset Sale

Offer A was for $12 million, structured as an asset sale. This was the buyer's preference. However, after tax analysis, nearly $4 million of the purchase price would be allocated to assets taxed as ordinary income (like inventory and accounts receivable), and the seller would retain the liability for an old environmental review. The seller's net, post-tax payout was projected to be approximately $7.8 million.

Offer B: The "Strategic" Stock Sale

Offer B was for $10.5 million—a full $1.5 million lower—but was structured as a stock sale. The buyer agreed to this structure in exchange for a lower price. The entire $10.5 million was treated as a capital gain, and all liabilities (known and unknown) transferred to the buyer. The seller's net, post-tax payout was approximately $8.4 million, and they had a clean break from the business. The 'lower' offer put an extra $600,000 in the seller's pocket with zero post-sale risk.

Building Your Deal Team for M&A Success

Thinking about selling your business without an experienced M&A advisor is like going to court without a lawyer. The buyer, especially a private equity firm or strategic competitor, will have a team of experts. You must have your own deal team to level the playing field and protect your interests.

The Role of Your M&A Advisor

Your M&A advisor (or business broker) is the quarterback of the sale. They manage the entire M&A process, from valuation and marketing to finding qualified buyers and leading the negotiation on deal terms. A good advisor creates a competitive environment among multiple buyers, which gives you the leverage needed to demand a favorable deal structure, not just a high price. Their primary role is as your chief strategist in crafting a deal that maximizes your net profit.

Why You Need an Experienced M&A Attorney and Tax Professional

Do not use your general business lawyer for an M&A transaction. You need an experienced M&A attorney who specializes in transaction structure, due diligence, and purchase agreements. They draft the legal language that protects you from post-sale liability and ensures the deal terms are ironclad. Similarly, a CPA or tax professional with M&A experience will model the tax implications of every offer, allowing you to compare deals based on your actual net payout.

Conclusion: Structure is the Key to Your Legacy

When selling your business, the valuation gets the headlines, but the deal structure defines your success. Every element—from the asset vs. stock choice to the terms of an earn-out—is a negotiating point that directly impacts your final payout and future risk. The right deal structure aligns with your strategic goals, whether that's maximizing cash at close, ensuring a clean exit, or securing a legacy for your employees.

Take Control of Your Exit

Don't wait for a buyer to dictate the terms to you. By understanding these strategic considerations before you go to market, you and your deal team can proactively frame the structure you want. This approach puts you in control of the negotiation from day one. If you're thinking about selling, start the conversation with an expert who understands how to build a deal for the seller.

Schedule Your Deal-Structuring Consultation

The difference between a good exit and a great one is in the details of the M&A deal structure. Our team at Sunbelt Atlanta has guided hundreds of business owners through this process, focusing on maximizing net proceeds, not just the sale price. Schedule a confidential, no-obligation deal-structuring consultation today to find out how we can structure your sale for maximum profit.