Part Six: Deal Structures and Payments
In part six of our seven-part series Selling Your Business: A Guide to Success, we explore the essential components of deal structures and payments. To jump to another section:
- Part One: Assessing Readiness and Appraisal
- Part Two: Being Due Diligence Ready
- Part Three: Preparation for a Transferable Business
- Part Four: Buyer Research and Profiling
- Part Five: A Professional Negotiation
- Part Six: Deal Structures and Payments
- Part Seven: Post-Deal Transition
The structure of a business sale should reflect the commercial, legal, and financial priorities of both buyer and seller. Payment terms, risk allocation, and funding mechanisms must be agreed in detail. Most buyers will not pay the entire price in one upfront sum; instead, a mixture of lump sums, staged or deferred payments, and contingent elements is commonly used to accommodate cash flow and mitigate perceived risk.
Initial Elements of Deal Structure
Before we delve into the types of financing to be used and the way that payments can be structured, some initial key elements of a deal structure should already be in place.
The most important question is whether the transaction will be an asset or share sale. A share sale transfers ownership of the business as a whole, whereas an asset sale involves selling individual components, such as property, intellectual property, or equipment. Each has different tax implications and legal requirements, so careful consideration is required.
Another is the type of merger or acquisition. Structures such as Management Buy-Outs (MBOs), Management Buy-Ins (MBIs), and their hybrids (BIMBOs and VIAMBOs) are common when internal teams or external managers acquire control.
Types of Financing
Not all buyers are able, or willing, to fund the purchase entirely from their own capital. Various financing options may form part of the deal structure, including:
- Vendor Finance: This is a financing arrangement in which the seller acts as the lender, allowing the buyer to complete the purchase through scheduled instalments. The seller provides a loan or extends credit to the buyer, which is repaid over time with interest. This enables the seller to recover the initial amount lent along with any agreed financial return. For more information, read here.
- Bridge Financing: This is often used when the buyer’s financing is not yet in place or when they need additional funds to complete the purchase. Bridge financing typically involves short-term loans that allow the buyer to proceed with the deal and secure longer-term financing at a later stage. For example, if a buyer needs additional time to arrange their funding but doesn’t want to lose the opportunity to purchase the business, a seller might agree to bridge financing as a temporary measure. This can ensure that the sale moves forward, while both parties have confidence that the deal will close on agreed terms. Bridge financing can offer several advantages, such as minimising delays, flexibility and reducing risk.
- Private Equity or Bank Loans: Often secured against the target business.
- Stapled Finance: Pre-arranged financing packages offered alongside the sale to streamline buyer funding.
Deal Payment Structure Examples
In practice, deal payments are often a blend of fixed and contingent mechanisms. Common structures and elements include:
- All Cash Purchase: In this arrangement, the buyer pays the full purchase price in cash at completion. While an all-cash purchase is one of the simplest payment structures in UK M&A, it is not necessarily the most practical or financially viable. It can be appealing to sellers seeking a clean break and immediate access to funds, however, from the buyer’s perspective, it requires substantial upfront capital or financing and therefore limits the pool of available potential buyers for a business.
- Fixed Deferred Payments: This is the most common type of deferred payment structure. The buyer pays in scheduled tranches or instalments (e.g. monthly, quarterly or annually) over an agreed period and may include interest. Fixed deferred payments are used when the buyer requires time to generate funds post-acquisition. Almost always, there is a very significant first sum – an “upfront payment” or “initial consideration” – paid at the handover. Each deal calls for a bespoke arrangement. With counterparties utilising fixed deferred payments; typically the seller will be seeking as high an upfront payment sum as possible, while the buyer will aim to minimise their initial outlay. Fixed deferred payments are particularly common where goodwill has a major role in the consideration of the business’ value.
- Earn-Outs: Deferred payments based on achieving revenue, EBITDA, or other performance milestones. Common when there’s a gap in valuation or growth prospects are strong. Earn-outs are commonly used to bridge the gap between the buyer’s expectations and the seller’s valuation. They provide a means for the seller to achieve additional payment based on future performance. The terms of the earn-out should be carefully negotiated to ensure that both parties are satisfied with the expectations, timelines, and calculations involved.
- Contingent Consideration: Broader than earn-outs, this structure makes payments dependent on events such as licence approvals or key contracts being renewed.
- Milestone Payments: Tied to specific non-financial outcomes such as lease transfers or customer retention targets.
- Retentions (Holdbacks): An agreed sum is withheld post-completion to cover warranty claims or indemnities, typically released after 12–24 months.
- Escrow Release Payments: Funds are held by a neutral third-party agent and released upon trigger events or timeframes.
- Reverse Earn-Outs: Payment reduces if agreed performance targets are not met, offering downside protection for the buyer.
- Revenue-Based Payments: Ongoing payments made as a percentage of future turnover, up to an agreed cap or deadline.
- Royalty-Style Payments: Used where IP, branding, or licensing is central to the deal. The seller receives a percentage of future product or licensing revenues.
Next Step: Post-Deal Transition
The final stages of a business sale are often the most sensitive, but with a carefully structured deal in place, the transition can be handled with clarity and assurance.
Elements such as bridge financing and performance-linked payments can play a crucial role in aligning expectations and ensuring a smooth handover. These tools not only support cash flow but also help manage risk and incentivise continuity.
At every stage, partnering with experienced professionals like Altius Corporate Finance is essential. From structuring the deal to overseeing the transition, their guidance can significantly improve the outcome for all parties. For tailored advice or support with your own business sale, get in touch with Altius Corporate Finance
In our final article, Part Seven: Post-Deal Transition, we look at what happens post-deal completion and the transition of ownership from seller to buyer.
