Three main types of an M&A deal structure and their pros and cons

The structure of a mergers and acquisitions (M&A) transaction often determines its success. How deal parties outline transaction terms, conditions, and responsibilities shapes how the deal is conducted and its outcomes. 

Amidst 42% of CEOs being optimistic about the state of the global economy and potential M&A activity rebound in 2025, let’s get back to basics and learn how M&A deals are generally structured. 

This article describes three main types of deal structures, their components, and potential challenges. It also explains the role of virtual data rooms (VDRs) in deal structuring.

Highlights:

• A deal structure is a way a transaction is organized. It includes outlining the deal’s terms, payment methods, financing options, and risk distribution.
• A deal can be structured through an asset purchase, stock purchase, or a merger.
• Asset purchase is about purchasing the target’s assets. Stock purchases include acquiring the target’s stock. A merger is about companies combining their operations into a single new entity.

What is a deal structure?

Deal structure refers to the way a transaction, such as a merger, acquisition, or investment, is organized. It outlines key terms, including payment methods (cash, stock, or a mix), financing options, risk distribution, and legal agreements.

In M&A deals, the structure determines financial outcomes, tax implications, and risk allocation between parties. A well-structured deal maximizes value, ensures smooth integration, and protects both buyers and sellers from unexpected liabilities.

Key components of a deal structure

A deal structure typically covers the following components:

• Purchase price
  This is the total amount the buyer agrees to pay for the target company. It can be a fixed sum or adjusted based on financial performance, working capital, or other factors. A well-negotiated price ensures both parties get fair value while minimizing post-deal disputes.
• Payment terms
  It defines how and when the seller will receive payment:  in cash, stock, or a mix of both. Cash payments typically provide immediate value, while stock deals allow sellers to benefit from an increase in the company’s stock price. Payment structures impact risk distribution and financial flexibility for both parties.
• Financing arrangements
  It describes how the buyer will fund the deal, such as through bank loans, private equity, or company reserves. Debt financing provides quick access to funds but increases financial risk, while equity financing avoids debt but may dilute ownership. The choice of financing affects cash flow, creditworthiness, and long-term profitability.
• Earnouts
  It’s part of the purchase price paid only if the acquired business meets certain financial or operational targets. This approach reduces upfront risk for the buyer and keeps the seller engaged in the business after the deal. However, if performance goals are unclear or difficult to achieve, disputes may arise.
• Contingencies
  These are conditions that must be met before the deal is finalized, such as regulatory approvals, financial audits, or due diligence reviews. Contingencies help protect both parties from unexpected risks or changes in business conditions. If key conditions aren’t met, the deal can be delayed or canceled.
• Liabilities and indemnifications
  These define which party is responsible for existing debts, legal claims, or contractual obligations after the deal. Buyers often negotiate indemnification clauses to protect against hidden liabilities.

Types of M&A deal structures

Merger and acquisition deals are generally structured as a stock purchase, asset purchase, or a merger. Let’s take a look at the advantages and disadvantages of each approach.

Asset purchase

In an asset purchase, the buyer acquires the target company’s assets, such as equipment, intellectual property, customer lists, and real estate. This structure allows buyers to avoid taking on unwanted liabilities, which makes it a lower-risk option. 

Asset purchases are common in situations where buyers want to expand operations without inheriting financial risks or existing contracts. However, transferring assets can be complex and may require renegotiating contracts and securing regulatory approvals.

Pros

• Less probability of unwanted liabilities and legal risks
• Greater flexibility in choosing which assets to acquire
• Possibility for a seller to retain certain assets that a buyer doesn’t want to acquire

Cons

• The buyer might not acquire non-transferable assets, such as goodwill
• The deal might bring high-impact tax costs for both the buyer and the seller
• The deal might be more complex, including renegotiation of contracts, permits, and licenses

Stock purchase

In a stock purchase, a buyer acquires the target company’s stock, effectively taking full ownership of the business, including its assets, liabilities, and contracts. The company continues to operate as before, with minimal disruption to existing agreements, employees, and customer relationships. 

This structure is common when the buyer wants to acquire an entire company without transferring individual assets. However, the buyer assumes all liabilities, including potential legal and financial risks, which may not be disclosed at the time of purchase.

Pros

• Minimized taxes, especially for the seller
• Less complicated negotiations and, therefore, less time-consuming transaction execution
• Minimal disruptions in the target’s operations, which maintains a business continuity
• No need for renegotiation of existing contracts, terms, and licenses

Cons

• The buyer may inherit legal and financial liabilities that are not 100% clear at the time of purchase
• It requires more thorough due diligence to minimize risks
• The seller may face tax liabilities
• Minority target company’s stockholders might become a problem for the buyer

Merger

A merger occurs when two companies combine into a single legal entity to achieve synergies, expand market reach, or increase operational efficiency. 

Mergers can be structured as a merger of equals, where both companies contribute assets and leadership, or as an acquisition-style merger, where one company takes control over another. 

This structure allows businesses to consolidate resources and eliminate redundancies, leading to cost savings and a stronger competitive position. However, mergers often face challenges such as cultural clashes, regulatory scrutiny, and integration difficulties.

Pros

• Creates synergies by combining resources, expertise, and markets
• Can result in cost savings through operational efficiencies
• May improve competitive positioning and long-term growth potential

Cons

• Integration challenges, including cultural clashes and leadership conflicts
• Regulatory approval, especially in large mergers
• High costs associated with legal, operational, and financial restructuring
  

Note: The above-mentioned types are the most common deal structures. However, deals can also be structured as a leveraged buyout, where the buyer uses a great amount of debt to finance the purchase,  or a joint venture when two businesses combine their operations as partnerships or limited liability companies.

Factors affecting deal structure

So, which deal structure is best? It all depends on a particular case and is always influenced by the following factors: 

• Financial considerations
  The buyer’s ability to pay and the seller’s financial needs influence the proposed deal type. Stock purchases require less upfront cash but may dilute ownership. Asset purchases need more immediate funding but let buyers avoid unwanted liabilities, while mergers often combine stock and cash to balance financial risks.
• Tax implications
  Different deal structures bring different tax consequences for both parties. Sellers may face capital gains taxes on stock sales, while asset sales could result in higher tax liabilities. Buyers often prefer asset purchases for tax benefits, such as depreciation deductions, while sellers may push for a stock sale to minimize immediate tax burdens. Mergers are typically structured to minimize taxes.
• Legal and regulatory concerns
  Government approvals and legal risks affect how deals are structured. Stock purchases transfer all assets and liabilities, potentially triggering antitrust reviews. Asset purchases require renegotiating contracts and licenses, while mergers often face the highest regulatory scrutiny, especially in industries with major market influence, such as finance.
• Buyer and seller’s objectives
  Primarily, it all depends on the parties’ goals. Stock purchases help sellers exit smoothly but require buyers to accept liabilities. Asset purchases let buyers choose specific assets while limiting risks. Mergers work best when both companies see long-term benefits from combining operations.

Common pitfalls in deal structuring

Now, let’s take a look at the main roadblocks that appear in the deal-structuring process:

• Overpaying for the deal
  Buyers sometimes overestimate a company’s value. This can result in lower returns or difficulties in recouping the investment. To avoid this, conduct thorough due diligence and use realistic valuation models.
• Ignoring hidden liabilities
  In stock purchases, buyers inherit all liabilities, including legal disputes or debt. Unexpected liabilities lead to costly legal battles or financial losses. In this case, thorough M&A due diligence, especially a legal one, is also a solution.
• Poorly defined payment terms
  Vague or unstructured payment agreements create disputes and cash flow issues. Sellers may expect immediate payments, while buyers prefer installment plans. Clearly define payment schedules, contingencies, and financing terms in the purchase agreement.
• Neglecting tax consequences
  A deal structure that overlooks tax implications leads to excessive tax burdens for either party. Buyers might miss out on deductions, while sellers may face unexpected capital gains taxes. To avoid that and build an optimized structure that minimizes tax liabilities, consult third-party tax experts.
• Regulatory and compliance oversight
  Failure to address industry regulations or antitrust laws can delay or cancel a deal. This is especially critical in highly regulated sectors like healthcare or finance. Engage legal experts early to navigate regulatory requirements smoothly.
• Mismatched goals
  If the deal structure does not align with both parties’ objectives, negotiations may fall apart. Sellers may prioritize a quick business exit strategy, while buyers focus on long-term growth. In this case, focus on clear communication and stay open for flexible structuring. This helps create a win-win outcome.

Using virtual data rooms in deal structuring

A virtual data room significantly improves the deal-structuring process by providing a single space for storing all the documents and the ability to monitor the activity on the dashboard and for securing sensitive and confidential data.

Source: Ideals Help Center

Here is what ideals VDR brings into the deal structuring process:

• Streamlined document management
  All the acquisition deal structuring documentation, including a term sheet, letter of intent, and purchase agreement, can be stored in the VDR’s cloud space and shared with required parties.
• Enhanced security
  ideals VDR offers a variety of security features, such as redaction, watermarking, and eight levels of granular access controls, which ensure that confidential and sensitive data is stored securely and only accessible by authorized personnel.
• Efficient collaboration
  Thanks to the Q&A section, all the parties involved in the deal-structuring process can promptly address and solve issues.
• Real-time activity tracking
  With detailed audit trails, admins can see who viewed what, when, and for how long. This improves transparency and accountability throughout the deal process and helps resolve disputes by providing a clear record of interactions with important files.
• Multi-project management
  Making a couple of deals or engaging with several potential buyers simultaneously? You can do it all in a single virtual data room without mixing the participants and documents, thanks to the multiproject management capabilities. Each project will have a separate space with specified users, access permissions, and documents.

Summing up

A well-structured deal is halfway to M&A success. Whether opting for a stock purchase, asset purchase, or merger, the structure defines key factors like financial terms, tax outcomes, and risk distribution. 

To ensure smooth deal structuring, parties should clearly understand their objectives and be aware of potential pitfalls. Using virtual data rooms can make the process straightforward and more secure.

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