The 5 Pillars of Deal Structure:
1. Cash at close. Inversely correlated with valuation (the less cash the seller requires upfront, the higher total value you are willing to pay, and vice versa). No skin in the game from seller.
2. Seller note. Guaranteed future payment, senior to all equity. Usually 0-20% of total consideration. A seller willing to do 40-100% seller financing (very rare) could command a higher valuation (“I can pay you a billion dollars; one dollar per day for a billion days”). Moderate skin from seller.
3. Earn-out. Contingent on future performance. Best way to bridge the gap if negotiations are stalling. Meaningful skin from seller. Pro tip: base it on revenue (= less manipulative/controversial than gross margin or especially EBITDA).
4. Rollover equity. Usually 0-20%, but occasionally up towards 49%. Strong alignment with seller (the more rolled equity, the better).
5. Compensation for continued employment. This is most applicable for smaller deals (e.g., add-on acquisitions) - somebody who just cashed out $$$$ doesn't care as much. Emotionally important as many people like to have a fixed monthly income.
