# How do you structure a business sale?
A business sale is structured by dividing the price into cash at closing, deferred, contingent and retained pieces. The mix decides what the seller receives.
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You structure a business sale by deciding how the agreed price is divided into cash paid at closing, money held back, money paid later, money that depends on future results and value the seller keeps invested in the company. The price is one number; the structure decides how much of that number the seller actually receives, when, and with what risk.
Two offers at the same headline price can be worth very different amounts. An offer that pays most of the price in cash on the closing date leaves the seller with little to collect and little to worry about. An offer at the same price that defers a third of it into a note, an earn-out or shares in the buyer's holding company asks the seller to wait, to carry risk and sometimes to keep working. Neither is wrong: buyers defer for real reasons, and the seller's job is to convert each offer into the same three measures (cash at closing, expected proceeds and present value), then negotiate the pieces that move them most.
This article is written from the seller's side and is general information, not legal, tax or investment advice. Tax points are given in general terms; the few rules quoted are United States federal rules, named as such, and other countries treat the same components differently. All amounts are in US dollars, and the worked example is illustrative.
$1,454,115gap in present value between the strongest and weakest of four structures at one headline price
65% to 90%share of the headline price paid in cash at closing across the same four structures
$15,112,700headline an earn-out offer needs to match a mostly-cash offer of $12,000,000
Illustrative worked example detailed below: a $12,000,000 price, stated probabilities for each deferred payment, a 12% discount rate.
## What does structuring a business sale mean?
Structuring a business sale means agreeing three things beyond the price: the form of each part of the consideration, the date each part is paid, and the conditions under which each part can shrink or disappear. The legal form of the deal, a sale of assets or a sale of shares, sits alongside those three and changes the tax and the liabilities that travel with the business.
A useful way to hold the idea is that the buyer and the seller disagree about the future, and structure is how the disagreement gets priced. The seller believes next year's earnings will be higher than the buyer does: an earn-out pays the difference only if the seller is right. The buyer is unsure the balance sheet is clean: an escrow keeps part of the price within reach until the warranty period has run. The buyer's lender will not finance the whole price: a seller note fills the gap, and the seller becomes a creditor of the business that was just sold. The buyer wants the founder's knowledge for two more years: a consulting or employment agreement pays for it separately from the price.
## What are the components of a sale structure?
A sale structure is assembled from eight components: cash at closing, a holdback or escrow, a seller note, an earn-out, rollover equity, a consulting or employment agreement, a non-compete payment and a working-capital target. Almost every private company sale uses the first and the last, and most use two or three of the others.
| Component | What it is | What the seller gives up |
| --- | --- | --- |
| Cash at closing | The part of the price wired on the closing date | Nothing, once received |
| Holdback or escrow | Part of the price retained by the buyer or placed with an escrow agent for a set period | Time, and the amount of any valid claim |
| Seller note | A loan from the seller to the buyer for part of the price, repaid with interest | Time, and exposure to the buyer's credit |
| Earn-out | Further price paid only if agreed targets are met after closing | Certainty: the amount depends on results the seller may no longer control |
| Rollover equity | Part of the price taken as shares in the buyer's acquisition vehicle | Liquidity until the next sale, and a fixed value |
| Consulting or employment agreement | Pay for the seller's work after closing | The time worked; the pay is earned, not price |
| Non-compete payment | An amount allocated to the seller's promise not to compete | Freedom to operate in the field for the agreed period |
| Working-capital target | The level of working capital the business must hold at closing, with a dollar-for-dollar price adjustment | Cash, if the business is delivered below the target |
Three of these have their own detailed treatment elsewhere, so they get the short version here. An earn-out is defined by its metric, its measurement period, its cap and the covenants that govern how the buyer runs the business while it is being measured; its payment mechanics are a subject of their own. Seller financing is a credit decision: the rate matters less than the security, the ranking behind the bank and what happens on default. The choice between an asset sale and a share sale decides which liabilities stay with the seller and how the price is taxed on each side; it is usually settled before the components above are negotiated, because it changes the value of every one of them.
## What does each component shift between buyer and seller?
Each component shifts one or more of three things from the buyer to the seller: the risk that the money is never paid, the wait before it is paid, and the tax character of the payment. Reading a structure means asking those three questions of every line.
Risk. Cash at closing carries none. An escrow carries the risk of warranty or indemnity claims, which the seller influences through the quality of disclosure. A seller note carries the buyer's credit risk, which is the risk of the business itself under new ownership and with new debt ahead of the seller in the queue. An earn-out carries performance risk plus measurement risk: the target may be met in substance and missed on the agreed definition. Rollover equity carries full ownership risk, with the difference that the seller is now a minority holder under someone else's shareholder agreement.
Timing. An escrow is commonly released in one or two instalments after a period set in the agreement. A note runs for its term. An earn-out pays after each measurement period, once the accounts for the period are agreed. Rollover equity pays when the buyer sells again, on a date nobody can fix in advance.
Tax, in general terms. Deferral can move the tax as well as the cash. In the United States, the Internal Revenue Service describes an installment sale as a sale of property where at least one payment is received after the tax year of the sale; under the installment method the seller includes in income each year only the part of the gain received that year. The same guidance sets limits a seller should know before counting on deferral: interest on the deferred amount is generally reported as ordinary income, the method cannot be used for gain on inventory, and gain that is ordinary income under the depreciation recapture rules is reported in the year of sale whenever the cash arrives.
Character matters as much as timing. Pay under a consulting or employment agreement is pay for work, so it is generally taxed as income rather than as sale proceeds, and it stops if the work stops. A non-compete payment is its own category: in the United States, the federal tax code treats a covenant not to compete entered into in connection with the acquisition of a business as an intangible that the buyer amortises over 15 years, and how the seller is taxed on the same amount is a question for the seller's adviser before the allocation is agreed. In a United States asset sale, the Internal Revenue Service's instructions for the asset acquisition statement say that generally both the purchaser and the seller must file it, allocating the price across seven classes of assets, and that a later increase or decrease in the consideration, such as an earn-out payment, must be allocated as well. The allocation is therefore a negotiated term, not paperwork for after closing.
Rollover equity is often designed so that tax on the rolled portion is deferred until the shares are eventually sold. Whether that works depends on the legal form of the roll and on the country, and it has to be designed before signing, not after.
## What does one $12 million price look like under four structures?
One $12,000,000 headline price produces between $7,800,000 and $10,800,000 of cash at closing in this illustrative example, and a present value between $10,257,049 and $11,711,164, depending only on the structure. The four structures below are the ones a seller most often has to choose between.
The assumptions are illustrative and stated once. The price is $12,000,000 before debt repayment, transaction fees and tax, which are the same under each structure and are left out. Every deferred payment is discounted at 12% a year. Each escrow is released 18 months after closing, and the seller expects to receive 90% of it after claims.
- Structure A, mostly cash: $10,800,000 at closing and a $1,200,000 escrow, 10% of the price.
- Structure B, seller note: $8,400,000 at closing, a $600,000 escrow and a $3,000,000 note repaid in five equal annual principal payments of $600,000 with 7% interest on the opening balance each year. The seller expects to collect 90% of each payment.
- Structure C, earn-out: $8,400,000 at closing, a $600,000 escrow and an earn-out of up to $3,000,000, paid as $1,500,000 after year one and $1,500,000 after year two. The seller puts the chance of earning the first payment at 60% and the second at 50%.
- Structure D, rollover: $7,800,000 at closing, a $600,000 escrow and $3,600,000 of the price taken as shares in the buyer's acquisition vehicle. The seller assumes a second sale after five years, with a 25% chance the shares return half their value, a 50% chance they return 1.5 times and a 25% chance they return 2.5 times: an expected 1.5 times, or $5,400,000.
| Structure | Cash at closing | Expected proceeds | Present value at 12% |
| --- | --- | --- | --- |
| A, mostly cash | $10,800,000 | $11,880,000 | $11,711,164 |
| B, seller note | $8,400,000 | $12,207,000 | $11,241,657 |
| C, earn-out | $8,400,000 | $10,590,000 | $10,257,049 |
| D, rollover | $7,800,000 | $13,740,000 | $11,319,687 |
Expected proceeds weight each payment by its probability; present value also discounts it for the wait. The note in structure B shows why both steps are needed. Its payments total $3,630,000 with interest, so the contract adds up to $12,630,000, more than the headline. At 90% collection the note is expected to bring $3,267,000, and discounted at 12% that is worth $2,386,075 today, because a 7% coupon does not compensate a seller whose required return is 12%.
Structure D has the highest expected proceeds and the lowest cash at closing. Its ranking rests on one assumption, the expected 1.5 times return, attached to a payment five years away: the $5,400,000 expected from the rollover is worth $3,064,105 today. Structure C is the weakest on every measure because half of its deferred price is more likely than not to go unpaid on the seller's own estimates. For the earn-out offer to match structure A in present value at the same probabilities and the same two payment dates, the maximum earn-out would have to rise by $3,112,700, to $6,112,700, taking the headline to $15,112,700. That is the size of the trade when a buyer says the offer is "the same price, with part of it on an earn-out".
## How much does the discount rate change the ranking?
The discount rate changes the ranking as soon as a structure pays late: at 8% the rollover structure in the example is worth the most of the four, and at 16% it falls to third. Structures that pay early barely move.
The chart recomputes the present value of the same four structures, with the same probabilities, at 8% and at 16%.
Present value of a $12,000,000 price at two discount ratesUS dollars, same payment schedules and probabilities as the table, discounted at 8% and at 16% a year
Discounted at 16%Discounted at 8%
Illustrative worked example. Cash at closing is not discounted; debt repayment, fees and tax are excluded from every bar.
Doubling the rate takes $97,807 off the mostly-cash structure and $1,153,042 off the rollover structure. The practical reading is that the discount rate is a statement about the seller, not about the deal. A seller who needs the money, has no other assets and cannot wait should use a high rate and will rank cash first almost regardless of the upside offered. A seller with other wealth, confidence in the buyer and no use for the cash can reasonably use a lower rate and take the rollover seriously.
## How do you read an offer?
You read an offer by rebuilding it as a schedule of dated payments, attaching a probability to each one, and reducing the schedule to cash at closing, expected proceeds and present value. An offer that cannot be rebuilt that way is missing terms, and the missing terms are the first questions to send back.
Reading an offer in six passesApplied to structure C of the worked example
Separate price from payStrip out anything that pays for future work: salary, consulting fees, bonuses. They are earned by working and belong in a separate comparison. Structure C contains none, so the full $12,000,000 is price.
List every payment with its dateClosing: $8,400,000. Year one: up to $1,500,000. Month 18: up to $600,000 from escrow. Year two: up to $1,500,000.
Write the condition next to each paymentThe escrow is reduced by valid claims. Each earn-out payment depends on a target, a definition of the metric and the buyer's conduct during the period. A payment with no written condition is not yet an agreed term.
Attach a probability and take the expected valueAt 90% for the escrow, 60% for the first earn-out payment and 50% for the second, the deferred pieces are expected to bring $540,000, $900,000 and $750,000, for expected proceeds of $10,590,000.
Discount for the waitAt 12% a year the three deferred pieces are worth $455,582, $803,571 and $597,895 today, giving a present value of $10,257,049.
Test the assumption that carries the resultChange the one input you are least sure of. If the second earn-out payment is certain to be missed, expected proceeds fall by $750,000 to $9,840,000. Decide whether the offer still stands at that figure.
Two reading habits protect a seller more than any model. The first is to read the definitions before the numbers: "net working capital", "indebtedness", "EBITDA" and "claims" are defined terms, and each definition can move more money than a point of negotiation on the price. The second is to ask who controls each condition. The seller controls the accuracy of the disclosures behind the escrow. The buyer controls the budget, the pricing and the staffing that drive an earn-out, and the timing of the next sale that pays out a rollover. A condition controlled by the other side deserves a lower probability, or a covenant that limits the control.
## Which letter of intent terms are hard to move later?
The letter of intent terms that are hard to move later are the price and its split into components, the deal form, the working-capital mechanism, the size and length of the escrow, the outline of any earn-out and the length of exclusivity. A letter of intent is usually non-binding on the commercial terms, yet whatever it says becomes the starting point that both sides' advisers treat as agreed.
The reason is leverage, and it runs one way. Before signing the letter, the seller can still talk to other buyers, and a buyer who wants the business must compete on structure as well as price. After signing, the seller is normally bound to exclusivity for a period while the buyer carries out due diligence, and every week of that period makes it more costly for the seller to walk away. A term left open at that stage ("escrow to be agreed", "customary working-capital adjustment", "earn-out on terms to be discussed") is negotiated later, by a seller with fewer options.
The working-capital target deserves particular care at this stage. The mechanics of the adjustment and its settlement after closing are a subject in themselves; what matters for structure is that the target is a price term. If the letter fixes a price "on a cash-free, debt-free basis with a normal level of working capital" and leaves "normal" undefined, the seller has agreed a price with an unknown deduction. A target set $150,000 above what the business actually holds at closing costs the seller $150,000, under any of the four structures in the example.
## In what order should a seller negotiate the terms?
A seller should negotiate from the terms that fix value towards the terms that protect it: deal form first, then price together with its structure, then the price adjustments, then the protections on each deferred piece, and the post-closing roles last. Negotiating in that order keeps each concession visible in dollars.
Deal form comes first because it changes what the price means. A price for the assets of the company and a price for its shares are not interchangeable: the tax on each side and the liabilities left with the seller differ, so an offer of the same number in the other form is a different offer.
Price and structure are negotiated together, never one after the other. A seller who agrees the headline first has little left to trade when the buyer then proposes moving a quarter of it into an earn-out. Put the three measures side by side for each proposal and answer in the same terms: an earn-out can be accepted at a higher maximum, a note at a higher rate or with security, a rollover with rights attached.
Adjustments come next: the working-capital target, the definition of debt and debt-like items, and what counts as cash. These decide how the agreed enterprise value becomes the amount wired, a calculation covered step by step elsewhere on its own. Then come the protections on each deferred piece, which is where expected value is won or lost without touching the headline:
- for an escrow or holdback: who holds it, the release date, whether release is automatic, and the cap and threshold for claims;
- for a seller note: security, ranking against the bank, covenants, acceleration on default or on a resale of the business, and any guarantee;
- for an earn-out: the metric, the accounting policies used to measure it, the seller's access to the figures, covenants on how the business is run, and acceleration if the business is sold or the seller is dismissed;
- for rollover equity: the class of shares, the right to sell alongside the majority, information rights, and what happens to the shares if the seller's employment ends.
Roles after closing come last: the employment or consulting agreement, the non-compete and its scope. A buyer may prefer to shift value from price to a consulting fee; before accepting, the seller should run the after-tax comparison with an adviser, since pay for work and proceeds from a sale are usually taxed differently. Whether and how far a non-compete can be enforced depends on the jurisdiction.
## Who is paid from the proceeds at closing?
At closing, the cash portion of the price is paid according to a funds flow agreed in advance: the company's lenders are repaid first, then transaction costs such as advisers' and lawyers' fees, then any amount going into escrow, and the balance goes to the shareholders in the order their share classes and agreements set out. The seller's own receipt is therefore the cash at closing shown in the structure, less debt and costs, which is why every figure in the worked example is stated before those items.
The distribution of proceeds among lenders, advisers and several shareholders, and the release of a holdback after closing, each have their own mechanics and are not repeated here. For structure, the point to carry is that the costs and the debt are paid out of the first payment. A structure with low cash at closing can leave a seller with very little on the day once the bank and the advisers have been paid in full, even though the headline price was met.
## What belongs on a term-sheet checklist for the seller?
A seller's term-sheet checklist covers every term that changes the amount, the date or the certainty of a payment, and it is complete when the offer can be rebuilt as a dated schedule without asking the buyer a question. The list below follows the order of negotiation.
- Deal form: assets or shares, and which liabilities stay with the seller.
- Headline price and the basis it is stated on: cash-free and debt-free, or equity value.
- Cash at closing, as an amount, and the buyer's source of funds.
- Working capital: the target amount or the method for setting it, the definition, and who prepares the closing accounts.
- Definitions of debt, debt-like items and cash.
- Escrow or holdback: amount, holder, release date or dates, claim threshold and cap.
- Seller note: principal, rate, repayment schedule, security, ranking, default and acceleration terms.
- Earn-out: maximum amount, metric, measurement periods, payment dates, operating covenants, acceleration events, access to figures.
- Rollover equity: amount, valuation used, class of shares, exit and information rights, treatment if employment ends.
- Employment or consulting: role, term, pay, and what ends it.
- Non-compete: scope, territory, duration, and any amount allocated to it.
- Price allocation between asset classes, where the deal form requires one.
- Warranty and indemnity framework: survival period and overall cap.
- Exclusivity: length, and what ends it early.
- Conditions to closing: financing, third-party consents, regulatory approvals.
- Timetable to signing and closing, and who pays which costs if the deal does not complete.