Deal mechanics are the terms that decide how much of a headline price you receive, and when. The number in an offer is usually the price of the operating business alone, so debt, working capital, holdbacks and deferred or contingent pieces all sit between it and the wire that reaches your account. The multiple gets the attention, and terms like the working capital peg tend to arrive after the letter of intent is signed, when most of your leverage is gone. The letter of intent guide shows what binds and which economic terms the letter fixes.
The first group of terms turns the headline into a wire amount. Cash-free, debt-free pricing sets what comes off, the working capital peg sets the target the price adjusts to, and the funds flow shows the result line by line. Whether the deal is an asset sale or a stock sale changes the tax bill and which liabilities travel with the company.
The second group decides how much arrives later, or never. Earnouts, seller notes and rollover equity are the usual ways to bridge a valuation gap, and each leaves you carrying a different risk. Escrows and holdbacks decide how much of the price stays exposed to claims after closing, and for how long; representations and warranties insurance can shrink that exposure.
The documents around the price matter too. The purchase agreement sets out the statements and promises behind the number, and a non-compete or a post-close employment agreement keeps obligations running after the money has arrived.
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- 1Letters of Intent in M&A: What Is Binding, What to Nail Down, and How Long Until CloseWhat is binding in an M&A letter of intent, the economic terms to fix at LOI (price, working capital, rollover, escrow), and typical timelines to close.
- 2Cash-Free Debt-Free Explained: Enterprise Value, Equity Value, and the Debt-Like Items That Shrink Seller ProceedsWhat cash-free debt-free means in M&A: enterprise value vs equity value, the equity bridge, and how debt-like items like deferred revenue cut seller proceeds.
- 3The Net Working Capital Peg: Why Deals Are Cash-Free Debt-Free, How the Target Is Set, and How the True-Up WorksWhy M&A deals are cash-free debt-free, how the working capital peg is set from a trailing-twelve-month average, true-up mechanics, and seller protections.
- 4Asset Sale vs. Stock Sale: Taxes, Liabilities, and Deal StructureHow asset sales and stock sales differ on taxes, liability transfer, and contract consents, and how 338(h)(10) or 336(e) elections can bridge the two sides.
- 5Escrows and Holdbacks in M&A: Size, Duration, Release Mechanics, and How RWI Is Changing the MathHow M&A escrows and holdbacks work: the typical 10% indemnity escrow, working-capital true-ups, release mechanics, disputes, and how RWI shrinks escrows.
Every article on this topic
- Private Equity Due Diligence Checklist: What Buyers Will Ask ForThe due diligence checklist a private equity buyer runs against your company, workstream by workstream, and how to prepare before they send it.
- What Is an FDD? Franchise Disclosure Document ExplainedFDD usually means Franchise Disclosure Document, the FTC-mandated 23-item packet franchisors give buyers 14 days before signing; here's what it covers.
- Escrow vs. Reps and Warranties Insurance: Which Fits Your DealEscrow vs. RWI in M&A compared: cost, seller cash at closing, survival periods, coverage, claims process, and the deal size where RWI beats an escrow.
- Goodwill and Intangible Assets in a Business Sale, ExplainedWhat goodwill and intangible assets mean when a business sells: book vs. economic goodwill, ASC 805 purchase price allocation, IRC 1060, and Form 8594.
- Evaluating Competing Offers: Price, Terms, and CertaintyHow sellers compare competing M&A offers beyond headline price: cash at close, earnouts, rollover equity, escrows, indemnification, and certainty to close.
- Bridging the Valuation Gap Between Buyer and Seller in M&AWhy buyers and sellers disagree on price, and the structures that bridge the gap: earnouts, seller notes, rollover equity, CVRs, escrows, staged sales.
- Representations & Warranties Insurance (RWI) in M&A: Coverage, Cost, and How It Replaces the EscrowWhat RWI covers in M&A, buy-side vs sell-side policies, typical premiums and retentions, key exclusions, the underwriting timeline, and how it shrinks escrows.
- Earnouts Explained: Bridging Valuation Gaps in a Business SaleHow earnouts bridge valuation gaps in private-company sales: revenue vs EBITDA metrics, typical duration, payment caps, classic disputes, and tax basics.
- Indemnification in M&A Purchase Agreements: Survival, Baskets, Caps, and RWIHow M&A indemnification really works: reps survival periods, tipping vs deductible baskets, caps, materiality scrapes, and how escrows and RWI change the math.
- Seller Financing and Seller Notes: Size, Terms, Standby Rules, and RemediesHow seller notes work in a business sale: typical size versus price, interest rates and terms, SBA standby rules, subordination, security, and remedies.
- Rollover Equity Explained: Taxes, Valuation, Minority Protections, and the Second Bite of the AppleWhy PE buyers want sellers to roll 10-30% into the new deal, how tax-deferred rollover works, how to value it, minority protections, and the questions to ask.
- Purchase Price Allocation: Form 8594, the Seven Asset Classes, and the Buyer-Seller Tax ConflictHow IRS Form 8594's seven asset classes split a business sale price, why buyer and seller tax goals conflict, personal goodwill, and ASC 805 book PPA basics.
- Buyer Due Diligence: What Acquirers Examine and How Sellers PrepareWhat buyers examine in M&A due diligence: QoE, tax, legal, commercial, IT, HR, and environmental reviews, document requests, timelines, and deal-killers.
- M&A Deal Structures: Asset Purchase vs. Stock Purchase vs. MergerHow asset purchases, stock purchases, and mergers differ in US private M&A, when each structure is used, and how cash, notes, and earnouts pay the seller.
- SBA 7(a) Financing in Business Acquisitions: Limits, Equity Injection, and Seller-Note RulesSBA 7(a) acquisition loans explained: the $5M cap, 10% equity injection, seller-note standby rules, personal guarantees, eligibility, and closing timeline.
- Closing Day and the Funds Flow in a Business Sale ExplainedHow a private-company sale closes: signing vs closing, the funds flow statement, wire order for debt, escrow, fees, seller net, and the true-up.
- Confidentiality and NDAs When Selling Your BusinessHow NDAs, blind teasers, and staged information release protect a business sale: common confidentiality terms, non-solicitation, standstill, and the limits.
- Anatomy of a Purchase Agreement: SPA and APA SectionsA section-by-section guide to private-company purchase agreements: price adjustments, reps and warranties, covenants, indemnification, and termination.
- Disclosure Schedules in an M&A Purchase Agreement, ExplainedDisclosure schedules qualify the seller's representations and warranties in an M&A purchase agreement, allocating risk and shaping indemnification.
- Non-Compete Agreements in a Business Sale: A GuideHow sale-of-business non-compete and non-solicit covenants work, why buyers require them, and how state law governs their enforceability and reasonable scope.
- Transition Services Agreements (TSAs) in M&A ExplainedHow transition services agreements keep a business running after close: scope, service levels, duration, cost-plus pricing, wind-down, and common pitfalls.
- Post-Close Employment Agreements: The Owner's Role After SaleHow owners and key staff are retained after a business sale: post-close employment and consulting agreements, typical terms, and ties to earnouts.
- Deferred Revenue in M&A: The SaaS Subscription HaircutHow deferred revenue is treated in a sale: an assumed liability, its role in working capital and price, the fair value write-down, and the ASU 2021-08 change.
- Inventory Issues in M&A: Reserves, Costing, and DiligenceHow buyers scrutinize inventory in a business sale: obsolete stock reserves, FIFO and LIFO costing, physical counts, the working capital peg, and LIFO tax.
- Real Estate in a Business Sale: Own, Sell, or Lease BackHow owner-held real estate is handled when a business sells: keep and lease it, sell it with the deal, or a sale-leaseback, and how each affects valuation.
Frequently asked questions
- Why is the money I receive lower than the headline price?
- The headline number in most letters of intent is enterprise value, the price of the operating business alone. At closing the seller's debt is paid off, debt-like items such as deferred revenue or unpaid taxes can come off the price, working capital is trued up against a target, and an escrow holds back part of what remains. Advisory and legal fees are paid out of proceeds as well.
- What is the difference between an asset sale and a stock sale?
- In an asset sale the buyer purchases specific assets and assumes only the liabilities it agrees to take, while in a stock sale it buys the owners' shares and gets the whole company, liabilities included. Buyers usually prefer asset deals for the stepped-up tax basis, and sellers usually prefer stock deals for a single layer of tax and a cleaner exit. Two offers with the same headline price can differ materially in after-tax proceeds.
- What is held back from the price after closing, and for how long?
- Part of the price is commonly placed in escrow with a neutral agent, or held back by the buyer, to cover claims that the seller's statements about the business were wrong and to settle the working capital true-up. On uninsured private deals the median indemnity escrow has been about 10 percent of the price, held for 12 to 18 months, while representations and warranties insurance can shrink it to a fraction of a percent. Every figure is negotiated.
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