Deal structure determines how much of your sale price you actually keep. Cash at closing, earnouts, rollovers, and working capital pegs can swing your real proceeds by millions.
The Number on the Term Sheet Is Not the Number You Take Home
Founders spend years building their businesses and months preparing for a sale. Then they get an offer, see the headline number, and make a decision based on it. That is a mistake that costs people real money.
Two offers at $20 million are not the same deal. One might deliver $17 million in cash at closing. The other might deliver $12 million at close, $4 million tied to an earnout you may or may not hit, and a $4 million rollover into the acquiring entity. Same headline. Completely different outcomes.
Deal structure is where buyers manage their risk by transferring it to you. Understanding each component, how it works and how it moves, is the difference between a good exit and a disappointing one.
Why Purchase Price Alone Misleads Sellers
The purchase price is a marketing number. It is the number buyers use to get you interested and keep you at the table. What matters is the net present value of what you actually receive, adjusted for risk, timing, and probability of collection.
Deferred consideration erodes value in two ways. First, a dollar received in three years is worth less than a dollar today, especially after you factor in inflation and opportunity cost. Second, deferred payments almost always come with conditions, and those conditions create real execution risk post-close.
This is not hypothetical. Earnouts are notoriously difficult to collect. A 2023 SRS Acquiom study found that only about 36% of earnout targets were fully achieved in tech transactions. Sellers who accepted earnouts as a significant portion of consideration frequently ended up with proceeds well below the stated deal price.
The Key Deal Structure Components That Shape Your Take-Home Proceeds
Cash at Closing
This is the only component of a deal structure that is certain. It is the amount wired to you on closing day, before any adjustments. Everything else carries some degree of execution risk, counterparty risk, or conditionality.
In a well-run competitive process, strategic buyers will often push cash at closing higher to differentiate their offer. Private equity buyers, who are more structurally disciplined, may keep cash at close somewhat lower while offering other economics like rollover participation or management incentive plans. Neither approach is inherently better; it depends entirely on your priorities.
Earnouts
An earnout is a contingent payment tied to the business hitting specific milestones after the deal closes, typically revenue, EBITDA, or ARR growth targets measured over one to three years. Buyers use earnouts when they see uncertainty they cannot get comfortable with at a fixed price.
The problem is that once you close, you rarely control the business the way you did before. Integration decisions, budget allocation, headcount changes, and sales strategy all shift. Hitting an earnout in an environment where a new owner is calling the shots is genuinely hard.
If an earnout is on the table, scrutinize the mechanics carefully. Key questions to ask:
- Is the metric revenue, gross profit, or EBITDA? EBITDA earnouts are almost always harder to hit post-close because the buyer controls expenses.
- Is the earnout structured as a binary target or a sliding scale? Binary targets are brutal; missing by 5% can cost you the full payment.
- What operational autonomy do you retain during the earnout period?
- What happens to the earnout if the buyer sells the business before it is paid out?
- Is there an acceleration clause if the buyer terminates you without cause?
Earnouts on profitable software businesses typically range from 10% to 25% of deal value in straightforward transactions. When they exceed 30-35% of total consideration, that is a signal the buyer has real concerns about sustainability, and you should pressure-test whether the headline price is achievable at all.
Rollover Equity
A rollover is when you reinvest a portion of your proceeds back into the acquiring entity, typically alongside a private equity sponsor. You are taking chips off the table but leaving some in the game.
Rollovers are standard in PE-backed deals. Sponsors typically ask for 10% to 30% of deal value as a rollover, and in competitive situations they may negotiate hard on this. The theory is that your continued skin in the game aligns incentives and positions you for a second bite at the apple when the buyer eventually exits.
That second bite can be meaningful. A founder who rolls $3 million into a deal at a $20 million enterprise value, then sells with the PE sponsor five years later at a $60 million enterprise value, could receive $9 million on that rollover if the equity tripled. But this is scenario analysis, not a guarantee. Rollover equity is illiquid, subordinate in some deal structures, and dependent on the sponsor executing their own thesis.
Working Capital Pegs
This is the deal structure component that surprises founders the most at the closing table. Nearly every acquisition includes a working capital adjustment that can reduce your cash proceeds by hundreds of thousands or even millions of dollars.
The buyer sets a "peg," a target level of working capital they expect the business to have at close. If the actual working capital at close falls below the peg, the shortfall is deducted from your proceeds. If it exceeds the peg, you receive the difference.
Why does this matter? Because the definition of working capital, which accounts are included, whether deferred revenue is counted as a liability, how prepaid expenses are treated, is entirely negotiable during the LOI phase. Founders who do not push back on peg methodology during LOI negotiation often find themselves with a seven-figure adjustment at close that nobody adequately explained to them.
Debt and Liability Deductions
Most deals are structured on a cash-free, debt-free basis. The buyer acquires the business and assumes its operating liabilities, but outstanding debt, seller notes, or unfunded obligations get deducted from your proceeds at close.
This includes obvious items like term loans and lines of credit. It also includes things founders sometimes overlook: deferred revenue recognized as a liability, accrued but unpaid employee bonuses, customer deposits, and certain lease obligations. Getting a clean read on your adjusted net proceeds requires a forensic-level review of the balance sheet before you ever sign an LOI.
Escrow and Indemnification Holdbacks
Buyers almost always hold back a portion of proceeds, typically 8% to 15% of deal value, in escrow for a period of 12 to 24 months post-close. This escrow funds potential indemnification claims the buyer might bring against you for breaches of representations and warranties made in the purchase agreement.
Representations and warranties (R&W) insurance has become common in deals above $30 million and is increasingly available at lower deal sizes. When R&W insurance is in place, escrow can often be reduced to 1% to 2% of deal value. This is worth fighting for; a 10% escrow on a $20 million deal is $2 million sitting in someone else's control for two years.
How Buyers Use Deal Structure to Manage Their Risk
When you understand why buyers structure deals the way they do, you can negotiate more effectively.
Strategic buyers, companies acquiring you to add capabilities or market share, tend to have stronger opinions about the business they are buying and often push harder on representation and warranty language. They may offer cleaner structures with more cash at close, but they can also walk away faster if due diligence surfaces something unexpected.
Private equity buyers are repeat transactors who use structure systematically. They model deals with specific leverage ratios, return hurdles, and management retention assumptions. When something in your business creates uncertainty, their first instinct is not to walk away; it is to restructure the deal to price that uncertainty into the mechanics.
Customer concentration is a perfect example. If one customer represents 30% of your revenue, a buyer may put $2-3 million of the purchase price behind a customer retention earnout, payable only if that customer renews post-close. That is not unreasonable from a risk management standpoint. But if you understand this dynamic going in, you can negotiate the earnout metrics, timeframe, and autonomy provisions instead of accepting the buyer's first draft.
Why a Lower Headline Offer Can Be the Better Deal
This is the counterintuitive reality of M&A that most founders do not internalize until they are too deep into a process.
Consider two offers for a software company doing $5 million in EBITDA:
- Offer A: $40 million headline price. $28 million at close, $8 million earnout over two years (tied to EBITDA targets), $4 million rollover.
- Offer B: $35 million headline price. $32 million at close, $3 million rollover, no earnout.
Offer A's headline is 14% higher. But Offer B delivers $32 million in certain cash versus $28 million, with only a $3 million rollover versus $4 million and a risky $8 million earnout. If the earnout is at real risk of being missed under new ownership, Offer B is clearly superior on an expected-value basis.
This comparison also ignores tax timing, which matters. Proceeds received at close in a stock sale may have different capital gains treatment than earnout payments, which are sometimes taxed as ordinary income depending on how the IRS characterizes them. The tax structure of the deal can shift effective proceeds by millions on its own.
How to Position Your Business for a Better Deal Structure
Deal structure is not fixed at the time the LOI arrives. It is shaped by the buyer's perception of risk, and your job before and during the process is to reduce that perceived risk.
Financial Visibility Reduces Contingencies
Buyers use earnouts and holdbacks when they cannot get comfortable with the numbers. Clean, audited or reviewed financials, a clear EBITDA bridge, and documented recurring revenue all reduce the information asymmetry that leads to contingent consideration. Investing in quality of earnings preparation before running a process is consistently one of the highest-ROI things a founder can do.
Management Depth Lowers Perceived Execution Risk
If you are the primary salesperson, key client relationship holder, and operational decision-maker all in one, buyers have legitimate concerns about what happens after you leave. They price this risk structurally with longer earnout periods or management retention requirements. Building a capable team beneath you, even 12 to 18 months before a process, directly improves your deal structure outcomes.
Competitive Process Creates Structural Tension
A well-run process with multiple qualified buyers is the single most effective tool for improving deal structure. When buyers know they are competing, they put their best structure forward. Cash at close goes up. Earnout percentages go down. Escrow periods shorten. This is why working with an advisor who maintains an active buyer network matters in practice, not just in theory. FIH, for example, runs processes across a network of more than 15,000 active strategic and financial buyers, specifically to create this kind of tension.
Revenue Diversification Reduces Buyer Concern
Customer concentration above 20-25% for any single client is a structural red flag in almost every buyer's model. Addressing concentration before a sale, through customer development, pricing model changes, or organic expansion, directly removes one of the most common triggers for earnout provisions.
Tax Structure and Net Proceeds: The Layer Most Founders Miss
Even after you have negotiated a favorable deal structure, the tax treatment of each component determines your real take-home number. This is not tax advice, but it is something every founder needs to understand before signing anything.
In an asset sale, the purchase price is allocated among different asset classes, and each class has different tax rates. Goodwill and intangibles generally receive long-term capital gains treatment. Certain assets like equipment, accounts receivable, and non-competes may be taxed at ordinary income rates. The allocation itself is negotiable, and buyers and sellers often have opposing preferences.
In a stock sale, the seller typically receives capital gains treatment on the entire proceeds above basis, which is usually more favorable. But buyers often prefer asset sales for the step-up in basis. This tension is real and resolving it is part of every negotiation.
Installment sale treatment, where proceeds are spread over multiple tax years, can defer capital gains tax but also creates collection risk. Qualified Small Business Stock (QSBS) exclusions under Section 1202 can shelter up to $10 million in gains for eligible C-corp shareholders. These are not afterthoughts; they are deal-altering considerations.
Frequently Asked Questions
What percentage of a deal should I expect as cash at closing?
In most software and technology transactions, well-prepared sellers receive 70% to 90% of the total deal value in cash at close. The remainder may be split among earnouts, rollover equity, and escrow holdbacks. In highly competitive processes with strong financial profiles, cash at close can reach 90-95% of headline price. In transactions involving significant business risk or seller dependency, cash at close can drop to 60% or below.
How do earnouts actually work and are they worth accepting?
An earnout is a contingent payment made after close, triggered by hitting agreed revenue, EBITDA, or ARR targets over a defined period, usually 12 to 36 months. They can be worth accepting if the metrics are clean, the measurement period is short, and you retain sufficient operational control to influence the outcome. The core risk is that integration decisions made by the new owner can undermine your ability to hit the targets regardless of your performance.
What is a working capital peg and how can it reduce my proceeds?
A working capital peg is a target balance sheet level agreed to in the purchase agreement. If your actual working capital at closing falls below this target, the shortfall is deducted from your cash proceeds. The peg is set during LOI negotiations, and how it is defined, specifically which accounts are included and how deferred revenue is treated, has enormous impact. Sellers who do not scrutinize the peg methodology early frequently discover six- or seven-figure deductions at closing that were not anticipated.
Should I accept a rollover equity request from a PE buyer?
Rollover equity can generate significant returns if the acquiring sponsor executes well and exits at a higher multiple, but it is illiquid, subordinate in some structures, and dependent on factors outside your control. If rolling equity means you retain meaningful upside in a business you believe in with a capable sponsor, it can be an excellent outcome. If you are rolling equity primarily because the buyer pressured you into it, get very clear on the governance rights, liquidation preferences, and exit timeline before agreeing.
How does deal structure differ between strategic buyers and private equity buyers?
Strategic buyers typically offer cleaner structures with less rollover equity required and fewer earnout provisions, because they are integrating the business and do not need management equity alignment the same way. PE buyers are deal professionals who systematically use structure to manage return hurdles and align incentives; rollover equity and management incentive plans are standard in their transactions. Strategics can move faster but may have less flexibility on price if synergies do not support the valuation.
Can I negotiate deal structure terms after receiving an LOI?
Yes, but your leverage decreases significantly once you sign an LOI and enter exclusivity. The LOI is the moment to push back on earnout percentages, escrow amounts, peg methodology, and rollover size. Once you are in exclusivity and the buyer has 45 to 60 days to conduct diligence, the power dynamic shifts. Buyers who find something in diligence will use it to renegotiate; sellers who gave up structural concessions at LOI have fewer cards to play at that stage.
What Matters at the End of a Process Is What You Actually Keep
The headline purchase price is where deals are won in press releases. Your real financial outcome is determined by the structure behind the number. Cash at close, earnout achievability, rollover terms, working capital mechanics, escrow duration, and tax treatment all compound on each other. A founder who understands these components negotiates from a position of genuine knowledge, not just enthusiasm about the number on page one of the term sheet.
If you are thinking about a sale or recapitalization in the next one to three years, having a clear-eyed view of what your business is worth and how deals in your segment are typically structured is the starting point. FIH works with technology and software founders on a confidential basis to run competitive processes and help evaluate deal structures against realistic market comparables. If you want an honest conversation about what your business might look like in a transaction, reach out for a confidential discussion. There is no pressure and no commitment required to have that conversation.