# Deal Structuring > Deal Structuring - Skill: `brainbytes-dev/deal-structuring` (Agent Skill) - Install (CLI): `npx skillmds@latest add brainbytes-dev/deal-structuring` - Raw SKILL.md: https://api.skillmd.com/api/skills/brainbytes-dev/deal-structuring/raw - Safety review: pending - Works with: Claude Code, Claude.ai, OpenAI Codex - Category: Coding & Dev Tools - Author: brainbytes-dev (https://skillmd.com/u/brainbytes-dev) - Updated: 2026-09-17 - Page: https://skillmd.com/skills/brainbytes-dev/deal-structuring --- # Deal Structuring name: deal-structuring description: M&A deal structuring — stock vs cash, earn-outs, tax considerations ## When to Activate - User needs to evaluate deal consideration types (cash, stock, mixed) - Performing accretion/dilution analysis on a proposed transaction - Structuring earn-outs, escrow, or contingent consideration - Analyzing tax implications of transaction structures - Evaluating deal protection mechanisms or merger agreement terms ## Core Concepts ### Deal Consideration Types **All-cash deal:** - Certainty of value for target shareholders - Acquirer bears all post-close risk - Requires cash on hand, debt financing, or both - Taxable event for target shareholders (capital gains) - No dilution to acquirer's existing shareholders (but increases leverage) **All-stock deal:** - Target shareholders share in combined company's upside/downside - Exchange ratio: fixed (set number of shares) or floating (fixed value) - Potential for tax-free reorganization (Section 368) - Dilutive to acquirer's existing shareholders - Subject to market risk between signing and closing **Mixed consideration (cash + stock):** - Balances interests of both parties - May offer election mechanism (shareholder choice, subject to proration) - Partial tax deferral possible depending on structure **Other consideration elements:** - CVRs (Contingent Value Rights) — tradeable instruments tied to milestones - Assumed debt — acquirer takes on target's existing obligations - Rollover equity — target management reinvests portion of proceeds (common in PE deals) ### Accretion / Dilution Analysis Determines whether a transaction is accretive (increases) or dilutive (decreases) to the acquirer's EPS. ``` Acquirer Standalone EPS: $X.XX Pro Forma Combined EPS: $Y.YY Accretion / (Dilution): $(Y.YY - X.XX) = $Z.ZZ Accretion / (Dilution) %: Z.ZZ / X.XX = ___% ``` **Pro forma EPS calculation:** ``` Acquirer Net Income + Target Net Income + After-Tax Cost Synergies - After-Tax Revenue Dis-synergies (if any) - Incremental Interest Expense (on new debt, after tax) + Interest Income Foregone (on cash used, after tax) — negative - Incremental D&A from Fair Value Step-Ups (after tax) - Goodwill Amortization (if applicable under GAAP for private acquirers) = Pro Forma Net Income ÷ Pro Forma Diluted Shares (acquirer shares + new shares issued) = Pro Forma EPS ``` **Key drivers of accretion/dilution:** - Relative P/E ratios: acquirer P/E > target P/E tends to be accretive (stock deal) - Synergy magnitude and timing - Cost of financing (interest rate on debt) vs target's earnings yield - Purchase price premium ### Tax Structures **Taxable transactions:** - Asset purchase (buyer perspective): step-up in tax basis of acquired assets, creating future tax deductions (amortizable goodwill under Section 197 — 15 years) - Stock purchase (no 338(h)(10) election): no asset step-up, carry-over tax basis - Cash tender offer: generally taxable to target shareholders **Tax-free reorganizations (Section 368):** - Type A: Statutory merger — most flexible, allows up to 60% cash - Type B: Stock-for-stock — must be 100% stock consideration - Type C: Asset acquisition — substantially all assets for stock - Requirements: continuity of interest, continuity of business enterprise, valid business purpose - Benefit: target shareholders defer capital gains tax **Section 338(h)(10) election:** - Stock purchase treated as asset purchase for tax purposes - Buyer gets asset step-up (tax shield via amortization) - Seller treated as if assets were sold (may result in double tax for C-corps) - Most beneficial for S-corps, partnerships, or subsidiaries ### Earn-Out Structures Earn-outs bridge valuation gaps by making a portion of consideration contingent on future performance. **Design parameters:** ``` Metric: Revenue, EBITDA, gross profit, or specific milestones Period: 1-3 years (longer periods create more friction) Measurement: Annual vs cumulative Cap: Maximum earn-out payable Floor: Minimum performance threshold before any payout Acceleration: Change of control triggers full payout Dispute resolution: Independent accountant for financial metrics ``` **Common structures:** - Linear: pro-rata payout between floor and cap - Tiered: step-function payouts at defined thresholds - Binary: all-or-nothing at a single milestone - Hybrid: combination of financial and non-financial milestones **Risks and mitigation:** - Buyer manipulation: seller demands operational covenants (maintain sales force, R&D spending) - Integration conflicts: earn-out period operations may conflict with integration plans - Accounting: ASC 805 requires fair value estimation of contingent consideration at close ### Escrow and Indemnification ``` Escrow Amount: Typically 5-15% of purchase price Escrow Period: 12-24 months (longer for specific indemnities like tax) Release: Scheduled release or at expiry, less claims R&W Insurance: Increasingly common alternative to large escrow Indemnification Cap: Often 10-20% of purchase price (excluding fundamental reps) Basket/Deductible: 0.5-1.0% of purchase price (tipping vs true deductible) ``` ### Deal Protection Mechanisms **Seller-favorable protections:** - Go-shop period: 30-60 days post-signing to solicit competing bids - Fiduciary out: board can terminate if superior proposal received - Reverse break-up fee: acquirer pays if it fails to close (financing failure, regulatory block) — typically 3-6% of EV **Buyer-favorable protections:** - No-shop clause: target cannot solicit or engage with other bidders - Break-up fee: target pays if it terminates to accept a superior offer — typically 2-4% of EV - Matching rights: acquirer has right to match any superior proposal - Force-the-vote: target must submit deal to shareholder vote even if board changes recommendation - Lockup option: acquirer gets option to buy shares or assets at favorable price if deal breaks ### Material Adverse Change (MAC) MAC clause allows the acquirer to terminate if the target experiences a material adverse change between signing and closing. **Typically carved out (not considered MAC):** - General economic or market conditions - Industry-wide changes - Changes in law or accounting standards - Effects of the announced transaction itself - Natural disasters, pandemics (increasingly carved out post-2020) **MAC litigation is rare but high-stakes — courts apply a high bar (durationally significant impact on long-term earnings power).** ## Methodology ### Deal Structure Decision Framework 1. **Assess acquirer's capacity** — cash on hand, debt capacity, share price/currency strength 2. **Evaluate tax implications** — taxable vs tax-free for both buyer and seller 3. **Model accretion/dilution** — under cash, stock, and mixed scenarios 4. **Consider seller preferences** — tax deferral, continued upside participation, certainty 5. **Address valuation gaps** — earn-outs, CVRs if buyer and seller disagree on value 6. **Structure protections** — escrow, indemnification, MAC clause, deal protection 7. **Negotiate governance** — board seats, management retention, integration approach ## Templates ### Accretion / Dilution Summary ``` === ACCRETION / DILUTION ANALYSIS === Transaction: [Acquirer] acquiring [Target] Consideration: [Cash / Stock / Mixed] Purchase Price: $____m (___x EV/EBITDA) --- Pro Forma EPS Impact --- | 100% Cash | 100% Stock | 50/50 Mix Acquirer Standalone EPS | $____ | $____ | $____ Target Net Income | $____m | $____m | $____m + Cost Synergies (after-tax) | $____m | $____m | $____m - Incremental Interest (a-t) | ($____m) | — | ($____m) - D&A Step-Up (after-tax) | ($____m) | ($____m) | ($____m) Pro Forma Net Income | $____m | $____m | $____m Pro Forma Shares | ____m | ____m | ____m Pro Forma EPS | $____ | $____ | $____ Accretion / (Dilution) | ____% | ____% | ____% Break-even Synergies: $____m pre-tax ``` ### Earn-Out Term Sheet ``` === EARN-OUT STRUCTURE === Metric: [EBITDA / Revenue / Milestone] Measurement Period: Year 1: [Date] to [Date] Year 2: [Date] to [Date] Threshold (Floor): $____m [Metric] Target: $____m [Metric] Maximum (Cap): $____m [Metric] Payout Schedule: - Below Floor: $0 - At Threshold: $____m - At Target: $____m - At/Above Cap: $____m (maximum) - Linear interpolation between thresholds Payment Form: [Cash / Stock / Election] Payment Timing: Within 90 days of measurement period end Dispute Resolution: [Independent accounting firm] Acceleration: [Full payout on change of control] ``` ## Quality Gate Before finalizing deal structure analysis, verify: - [ ] Accretion/dilution analysis covers all consideration scenarios (cash, stock, mixed) - [ ] Tax structure is appropriate for both buyer and seller objectives - [ ] Earn-out metrics are clearly measurable and not easily manipulated - [ ] Escrow amount and period are within market norms for deal size - [ ] Deal protection mechanisms are balanced and market-standard - [ ] MAC clause carve-outs reflect current market practice - [ ] Pro forma share count includes dilutive impact of new shares issued - [ ] Synergy assumptions are phased realistically (not 100% in year 1) - [ ] Interest rate assumptions on acquisition debt reflect current market - [ ] Regulatory approval timeline is factored into the deal timeline - [ ] Break-up fee and reverse break-up fee are within customary range (2-4%, 3-6%) - [ ] Indemnification structure balances risk allocation between buyer and seller - [ ] Accounting treatment (ASC 805/IFRS 3) for consideration is correctly modeled