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Private Equity · Topic lesson

Deal Structuring

How the terms of a deal change who gets what: earnouts that bridge a valuation gap, rolling equity instead of taking cash, and preferred equity that protects a minority investor.

3 chapters About 31 minutes0 of 3 complete
Start chapter 1

Two buyers can offer the same headline price and be offering very different deals. Structure decides when the seller is paid, how much is certain, what the seller keeps in the business, and who takes the first loss if things go wrong. Interviewers use these questions to see whether you look past the headline.

  • Agreeing a price. When buyer and seller disagree about the forecast, an earnout pays for it only if it arrives.
  • Taking the proceeds. A seller can take cash, or roll part of it into the new deal, often deferring the tax.
  • Protecting a minority investment. Preferred equity gets its money back first and still shares the upside.
The rule that solves every question

Draw the payoff. For every structure, ask what each side gets in a bad, middle and good outcome. Headline price, expected price, rollover and preference questions all fall out of that picture.

Structuring a deal, step by step

From agreeing the price to protecting the money. Each step points to the chapter that practices it.

  1. 1
    Bridge the valuation gap

    Pay for history now and for the forecast if it arrives.

    Chapter 1
  2. 2
    Compare offers

    Headline price, expected price and a rival's cash.

    Chapter 1
  3. 3
    Decide what the seller keeps

    Cash now, or a rolled stake taxed at exit.

    Chapter 2
  4. 4
    Protect a minority stake

    A preference first, conversion when it pays more.

    Chapter 3
  5. 5
    Check who takes the first loss

    Participation, the conversion point and the common's shortfall.

    Chapter 3

Chapters

1

Earnouts: paying for a forecast

11 min

Pay for today's earnings now, and for the seller's forecast only if it is delivered.

  • Separate the headline price from the expected price
  • Calculate a straight-line earnout payout from actual EBITDA
  • Find the probability at which an earnout offer beats a rival cash bid
  • Find the EBITDA that earns a set share of the earnout
2

Rollover versus cash at close

10 min

A seller can take certain cash now, or reinvest part of it in the sponsor's plan, and pay the tax later.

  • Compare a seller's after-tax dollars from all cash and from a rollover
  • Value the tax deferral a rollover gives
  • Find the exit multiple a rollover needs to beat cash by a margin
  • Explain why the sponsor wants the seller to roll
3

Preferred equity: preference and participation

10 min

First claim on the downside, a share of the upside. Where converting beats the preference, and what participation costs the common.

  • Decide whether non-participating preferred converts or takes its preference
  • Calculate participating preferred's proceeds and what it costs the common
  • Find the exit value at which the investor converts
  • Explain why a minority investor asks for a preference