M&A Transaction Structuring

What Is M&A Transaction Structuring and Why It Determines Your Deal's Outcome

Structuring a merger or acquisition means figuring out all the legal, financial, and tax details that shape how your deal gets done. This process covers aspects like how the buyer will pay (whether that’s cash, stock, or something else), who takes on which risks and debts, and what happens to any existing loans or obligations.

Deal structure matters in mergers and acquisitions because it shapes how much value both buyers and sellers receive. For sellers, it affects what they keep after taxes, and for buyers, it impacts future perks like depreciation and amortization, plus which risks and responsibilities they take on. That’s why having knowledgeable transaction advisors in your corner is so important. At Mowery & Schoenfeld, we pull together expertise in tax, accounting, and deal strategy to give business owners practical, customized advice. We’re here to help you get the most after-tax cash, make smart choices, and safeguard your interests every step of the way so you can close your deal with confidence.

Michael Kidd >

Partner, Transaction Advisory Services Leader

Mark Hallgren >

Transaction Advisory Services Director

Insights

Seller Structures 101: Why Deal Structure Matters More Than Price >

Asset Purchase vs. Stock Purchase: How Each Structure Affects Your Deal

Mowery & Schoenfeld’s transaction advisory team guides you through the transaction structuring process, walking you through the pros and cons of each structure and helping you see exactly how the after-tax results will play out for both buyers and sellers. With our guidance, you can negotiate smarter and move forward with confidence. Here’s what you need to know about each type of deal structure:

Asset purchase

In an asset purchase, the buyer chooses which things they want to buy and only takes on the debts or responsibilities they’ve agreed to. Since these assets get a fresh start for taxes, the buyer can take bigger tax deductions in the future, which means they’ll keep more money and pay less tax as time goes on.

This type of agreement makes sense when the buyer wants to avoid inheriting unwanted or unknown liabilities, acquire only the most certain assets, or reset the tax value used to calculate depreciation and amortization.

Stock purchase

With a stock purchase, the buyer takes over the seller’s shares, which means they get everything the business owns, including all assets and any liabilities (even ones that arise later). This setup keeps all the company’s contracts, permits, and licenses in place, but it generally does not increase the tax value of the assets unless special tax elections are made, which require advance planning. That election lets you treat the stock sale as if it were an asset sale for tax reasons only.

A stock purchase agreement makes sense when the buyer wants to take over the entire business as-is, keep contracts or licenses in place that might not be easily transferred, or avoid the hassle of retitling every individual asset.

Buyer vs. seller expectations

Most buyers prefer asset purchases for tax perks, like bigger deductions down the road. Sellers, meanwhile, usually like stock deals because they get capital gains treatment on the full sale price. This difference creates a tug-of-war that both sides must work out during deal negotiations.

One major difference between asset and stock purchases is how contracts and approvals are handled. In an asset deal, many customer contracts, leases, permits, or licenses may require third‑party consent before they can be transferred to the buyer. If these issues aren’t identified early in due diligence, they can delay or even jeopardize closing — making it essential to work with an experienced transaction advisory team. In a stock purchase, on the other hand, the buyer takes over the company’s shares and gets everything the business owns, including assets and liabilities, so contracts, permits, and licenses are still in effect.

Merger Structures and Tax-Free Reorganizations

Mergers can be structured in different ways, and those choices determine whether the transaction is fully taxable or may qualify for tax‑deferred treatment. The outcome depends on how the deal is structured and whether it meets certain IRS requirements, making early planning an important part of the process.

In general, tax‑deferred merger treatment under IRC Section 368 requires owners to retain an ongoing stake in the combined business and the acquired company’s operations must continue after the transaction.

IRC Section 368 defines several types of tax-free reorganizations. These include:

Type A: Statutory merger or consolidation

Type B: Stock‑for‑stock exchange

Type C: Stock‑for‑assets exchange

Type D: Divisive or acquisitive reorganizations

Type F: Mere change in identity or place of organization

To qualify for tax-free reorganization, you must meet specific continuity of interest and continuity of business enterprise requirements.

State law decides how the merger is carried out, while federal tax rules determine how the transaction is taxed. Coordinating early with experienced tax, accounting, and legal advisors helps reduce the risk of unexpected tax consequences and keeps the transaction aligned with your business goals.

Earnouts, Escrows, and Contingent Consideration: Bridging Your Valuation Gap

Earnouts are payment arrangements that are set up so part of the purchase price depends on how well the target company performs financially after the deal closes. They’re especially popular when buyers and sellers can’t agree on value, or when the target’s future sales rely on important relationships or contracts.

Escrow arrangements usually set aside about 10%-20% of the deal’s value to make sure the seller lives up to their promises. This way, buyers don’t have to just trust the seller to pay up later if something goes wrong. The money is held back and only released once conditions are met.

The tax side of earnout payments can get tricky. Sellers often aren’t sure if the payments will be taxed as capital gains or ordinary income, and sometimes the installment sale rules under IRC Section 453 come into play. Mowery & Schoenfeld’s transaction advisory team works with clients to model different earnout scenarios, set up the right performance metrics, and figure out the tax impact of contingent payments, bringing together both deal and tax planning expertise.

Earnout payment structures can vary from deal to deal, making it essential to work with an M&A advisor who can tell you about common earnouts for companies like yours. The time period can also vary. The right length will depend on factors like how stable the business is or how much risk the buyer can tolerate.

Often, earnouts are tied to metrics that are negotiated during the deal. Two of the common metrics are EBITDA-based earnouts and revenue-based earnouts. An EBITDA-based earnout means the seller gets extra payments if the company hits agreed-upon earnings targets (profits before interest, taxes, depreciation, and amortization). A revenue-based earnout pays based on hitting certain sales or revenue milestones.

Contingent consideration tax treatment

When a deal includes contingent payments such as earnouts or other amounts tied to future performance, the way those payments are structured can affect a buyer’s financial results after closing. Because the final purchase price isn’t fully known at the start, these arrangements can bring about uncertainty that impacts reported earnings, lender expectations, and future exit planning. Some contingent payment structures can cause earnings to fluctuate after closing as expectations change, while others lock in the impact immediately.

Because contingent payments can affect a buyer’s financial performance after the deal closes, it’s important to evaluate these terms carefully before finalizing the deal. Careful planning helps avoid surprises, cut down on post‑closing volatility, and ensure the deal aligns with the buyer’s goals.

Expert Advice in Structuring a Deal

Because we’ve guided clients through every type of transaction, our team can offer practical advice and help you weigh your options so you can choose the best structure for your needs:

Buying all of the target company’s shares (capital stock).

Buying the seller’s assets and taking on their liabilities. This might include everything from equipment and inventory to intellectual property, accounts receivable, cash, and more.

Negotiating a merger where one company sticks around and the other is dissolved. The surviving business keeps ownership and rights from both companies.

Doing a two-step merger: First comes a tender offer, then a squeeze-out without the need for shareholder approval.

Start Your M&A Transaction Structuring Conversation with M&S

Whether you’re buying, selling, or just weighing your options, it’s important to have a reliable transaction advisory team on your side. Mowery & Schoenfeld’s advisors can assist with all kinds of deals, including acquisitions, divestitures, mergers, recapitalizations, and search fund deals.

Our team helps you navigate the tax, legal, and financial details, making sure the structure fits your unique situation. We handle these complex tasks so you can maximize the value of your transaction, move forward confidently, and set your business up for long-term success.

Based in Chicago with clients nationwide, we’re known for straightforward, hands-on, and proactive M&A advice before, during, and after deal close. Reach out to see how we can help.

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