Exploring five M&A deal structures

There are many ways to sell your business.

It's a myth that the only way to 'exit' your business is a full, 100% sale. You hand over the keys and walk away with a big cheque. 

There are actually a range of options – all of which give you a payout today in return for some or all of your equity in the business.

We will explore the options for how to structure a deal, debate the pros and cons, and help you decide which to favour in your circumstances.

The Options

First, let's introduce the options. We have five in total.

Think of them as running along a spectrum, in order of increasing completeness of the exit.

1️⃣ Don't sell, handover control and take dividends
2️⃣ Sell a minority share
3️⃣ Sell a majority share
4️⃣ Sell 100%, but with contingent component
5️⃣ Sell 100%

Why are you selling?

In order to weigh up these options, you need to clearly understand your reasons for considering some form of sale.

Many founders lack clarity on this, and then struggle to objectively compare deals with different structures.

So, what you want to achieve? There are three main variables:

👉 Confidence. How confident are you in the business continuing to grow? Do you want to keep some upside if the business does well, or do you want to cash in all your chips now? How much risk are you willing to take on after the deal?

👉 Liquidity. How much cash do you want or need right now? Do you have a specific funding requirement, or just want to maximise your exit?

👉 Involvement. How involved in the company do you want to be after you sell? Would you like to stay involved, or do you want to walk away? How much influence do you want to have on the future of the company?

Case Study: MediScan

Let's use the case study of fictional company MediScan to bring these options to life.

1️⃣ Don't sell, handover control and take dividends

This is not technically an exit... but we have included it here for completeness.

Structure
You retain all of your ownership of the business but step away from daily operations. You appoint a CEO to hold the reins, and you might keep a role as Chairman, Board member or consultant.

You don't sell any shares, so there is no cash payment. But if the company has a large cash balance and good cashflow, you may be able to still get a significant payout over the next few years. You can take this month through dividends or share repurchases, on a schedule that suits you and your tax situation.

Pros & Cons
You keep ownership and control.

Because you still own all of your shares, you may still get your big exit in the future... you are not taking that option of the table.

There is no transaction risk like with an M&A deal, and there are no deal costs.

However, you are very much exposed to the future performance of the business. Especially with a new leader, there's risk that your shares decline in value.

This structure is very dependent on hiring the right team to replace you. If you get that right, the business can continue to thrive. But there's always risk in hiring for senior roles.

You also need to clearly articulate your role going forward – so you can add value without interfering, and also get the level of involvement that you are wanting.

The payout that you take upfront may be enough to satisfy your initial liquidity needs, but it won't be nearly as much as if you sold your shares. So those numbers need to work out for you.

MediScan
Because Jim is concerned about the growth prospects of the business, this is the least exciting structure for him. He's also worried about being dragged back into the day-to-day, especially if the new management struggles.

But the company has a significant cash balance and his profit share is around £9m per year (73% of £12m)... so it certainly wouldn't be a disaster.

2️⃣ Sell a minority share

Structure
You sell some (a minority) of your shares, but keep holding most of them to remain the largest shareholder. You would typically continue in your role as leader of the company.

The buyer in a minority deal is usually a financial buyer (like a Private Equity house) rather than a strategy buyer. They may invest some growth capital into the business as well as buying some shares from you.

Pros & Cons
This is best suited to owners who want to 'go long' on the business, but want to take some cash off the table now. As you retain most of your shares, you still have most of your upside if the business does well and the value of that equity keeps growing.

Best of both worlds!

But obviously, the amount of cash you get on closing the deal is less than if you had sold more or all of your shares. And you might not want that exposure to future performance – most of your personal net worth will still be in the business.

The main risk here comes from the choice of partner. You need to be fully aligned with them on the growth plans and exit expectations – financial buyers tend to have very clear plans when they invest.

Watch out for protections the buyer will seek in the contract to protect their interests. That might include preferences on a future sale (which guarantees a minimum return), board control and input into certain decisions (including strategy and future exit). You might think you keep control of the business by being the largest shareholder, but these provisions can seriously erode that control.

Lastly, the highest valuations tend to come when a strategic buyer can see a "strategic premium". That comes from integrating your business into theirs to get some synergies or accelerate growth. There's also a “control premium,” where a buyer pays more if they can fully control the company. Both are difficult with a minority deal, so the valuation may be lower.

MediScan
For Jim, this might look better than option 1 as he gets a more substantial payout on the deal.

But he wants to walk away, and this deal would keep him tied into the business – the buyer will want him to retain the CEO role.

And he's (rightly) worried about working alongside a new owner and the impact that might have on the direction of his company.

3️⃣ Sell a majority share

Structure
You are selling more than 50% of your business, so control transfers to the buyer.

This is the next step along the spectrum from a minority sale: you get more cash upfront, and reduce the amount of equity retained.

As you've transferred a majority stake, it's possible that you can walk away from an exec role – but you will might want to keep some influence over strategy and key decisions.

Pros & Cons
You've increased your payment on closing the deal, and taken more risk off the table. That will appeal to many owners.

The main challenges centre around loss of control. You are giving that control to the new majority owner, and you need to be confident that they will run the business successfully to safeguard the value of your remaining shares. You will be partners, and picking the right partner is key.

Can you walk away? That's possible, but your remaining shares might account for a large amount of your net worth, so you might want to stick around to ensure the business is being well run.

You need to agree what rights you want to retain, and fight for these. It's the same issues we discussed in the section on a minority sale, except this time you are now the minority who needs to fight for ways to protect your investment. If you are keeping an exec role post sale, that will help too.

One other challenge gets missed. If you retain a small shareholding, that is not easy to sell. There is not always an obvious buyer who would want to take a minority, so may end up not being able to sell it at all. You can solve this with a Put Option – this gives you right to sell your shares to the buyer at an agreed price within a specific period. That price can be fixed upfront, or be calculated on a formula (such as an agreed multiple of latest earnings). The buyer might want a reciprocal Call Option, which gives them the right to buy in the same way.

MediScan
This is a step forward for Jim. He takes more chips off the table, and as long as he chooses the partner carefully he should get more later too.

One issue – buyers often want to keep management teams intact, especially if they don't have management expertise on hand to take over. So Jim might get tied into staying at MediScan... but would that be worth it for the large lump sum?

4️⃣ Sell 100%, but with contingent component

Structure
We are now into the 'full exits', where you sell 100% of your shares and so are no longer a shareholder.

Option 5 below is the complete or total version of this. This structure is a little more nuanced. Here's how it works:

You sell all of your shares on closing the deal. But, the amount you get paid for the shares is split into:

1) A fixed component, agreed and paid up-front
2) A 'contingent' component, paid later based on company performance.

That second part is also called deferred or performance-based consideration. The most well-known way of doing that is an Earnout.

The idea is to protect the buyer against weak performance after the sale and to align buyer and seller on a valuation. If the company hits the targets in the seller's forecast, the buyer will pay more... but will pay less (or nothing at all) under the contingent component if performance is poor.

There are many ways to calculate the contingent component, but it's usually based on the profitability of the company post-sale. Here are some examples:

2x EBITDA achieved in 2025

£2m if you hit £5m EBITDA in 2025, then £0.10 for every £1 of EBITDA above that

The split between the fixed and contingent components vary hugely from deal to deal – it can be anywhere from 90% fixed, and in same cases nearly all deferred.

Pros & Cons
You've sold all of your shares, and may have banked a significant payout upfront. If the contingent payment is a small % of the overall, but helps to get the buyer over the line, that can be a win/win.

The risk here comes when the contingent component is a significant part of the overall. You're not actually taking that much cash upfront, and are still heavily exposed to future performance. That might not be something you are comfortable with.

This starts to look and feel more like a partial exit: you get a little up front, but the bigger payday will come later... if (and only if) the business does well and hits the agreed targets. That might not be something you are comfortable with.

The other consequence of a heavily contingent deal is your ability to walk away. If much of your net worth is still tied up in hitting some future profit targets, you will want to stay involved during that period and ensure that performance is good. You also want to guard against the buyer managing the numbers to pay you less (which does happen!). So it will hinder your ability to walk away.

MediScan
Jim would take this deal, if he was getting 80% or more of his payment upfront. That's enough for him to secure his family (comfortably), and would allow him to work less intensively.

If the payment is much more contingent, and the analysis looks more like option 3 above.

5️⃣ Sell 100%

Structure
The 'cleanest' structure of all, and Plan A for many owners.

You sell 100% of your shares, and receive all the consideration upfront without any contingent or deferred component.

You are no longer a shareholder, and have no ongoing relationship with the buyer or the company unless you decide that you would like to stay on.

A clean break.

Pros & Cons
The benefits are obvious here, but there are some downsides too...

You are pushing all the risk onto the buyer, by not offering them any contingent component to the deal or retaining any of your shares. That tends to get reflected in the valuation, where this risk is 'priced in' by the buyer and they offer you less.

So you might get 100% upfront, but it's 100% of a smaller amount than if took an 80/20 split on upfront vs contingent.

Note that even though you get paid for all of your shares upfront, there may be a holdback or escrow in place. This helps protect the buyer in case any issues are identified in the business later which relate to your period of ownership (such as a tax liability or a litigation). This tends to be a small % of the overall amount.

MediScan
Remember, Jim's two main deal criteria were: 1) worried about future performance, 2) wants to walk away. This is the perfect deal for him.