M&A Deal Terms Every Seller Needs to Know (But Lawyers Don’t Always Explain)

The terms negotiated after entering into an LOI (and documented in the purchase agreement) can materially impact proceeds, risk allocation, and the timeline for receiving sale proceeds. This article highlights core concepts every seller should understand.

1. Purchase Price and Deductions

The purchase price is the total value the buyer agrees to pay for the business. The headline purchase price can make for an epic press release; but, it rarely reflects the amount a seller ultimately receives.

• Purchase Price is net of adjustments. Your final payout is typically reduced by working capital adjustments, debt paydowns, and transaction expenses. These aren’t “gotchas” (they’re standard) but too many sellers are surprised when the wire is smaller than expected.

• Working capital targets. Often set based on trailing averages, these targets can become a friction point late in the deal. If actual working capital at closing falls short of the target, the shortfall reduces your proceeds dollar-for-dollar.

• Transaction fees. Legal, advisory, accounting, and success fees can be meaningful, especially in larger or more complex deals. Sellers should model their after-fee proceeds early—and keep advisors aligned on timing and expectations.

2. Earnouts

An earnout is a portion of the purchase price that is contingent on the business meeting certain performance targets post-closing. Earnouts are often positioned as a win-win: the buyer pays more if the business performs. But for sellers, they can introduce risk, complexity, and delayed upside.

Key considerations:

• Structure and metrics. Most earnouts are tied to revenue or EBITDA. Here is where definitions and mechanics matter. How EBITDA is calculated, who controls post-closing accounting and the timing (or subordination) of payments can make or break the earnout.

• Measurement and payout schedule. Clearly define how the earnout will be calculated and when payments will be made. Is it measured quarterly or annually? Who runs the calculation, and how is the data verified? Sellers should request audit rights and limit the buyer’s ability to make discretionary post-close changes that could affect performance.

• Dispute resolution. Earnouts are among the most litigated provisions in M&A. Protect yourself with objective targets, third-party review rights, and clear dispute processes.

3. Escrow & Holdbacks

An escrow is a portion of the purchase price that is withheld and held by a third party to cover any post-closing claims. Escrows protect the buyer post-closing, but they also tie up a portion of your proceeds. The key is knowing what’s market—and where you can push.

Key considerations:

• Size and duration. Escrows are generally measured as a function of the purchase price and are released after certain period of time post-closing. A phased release (e.g., 50% of the escrow after a short period post-Closing, with the balance at a later date) can improve liquidity.

• Purpose. Escrows secure the buyer’s indemnification rights for breaches of reps, warranties, and covenants. It’s important to draft limitations on what claims can be made against escrow.

• Release mechanics. Ensure clear timelines for release, with defined procedures for pending claims and thresholds for notice.

4. Reps & Warranties

Reps and warranties are factual statements the seller makes about the condition of the business, such as its financial statements, compliance with law, ownership of IP, and employment matters.  Representations and warranties allocate informational risk: you’re telling the buyer what you know (and don’t know) about the business.

Key considerations:

• Scope. This can be a lengthy part of the purchase agreement.  It’s important to review these with your management team and advisors, and include qualifications based on knowledge, materiality, and disclosures can reduce exposure.

• Insurance. Rep and warranty insurance (RWI) can shift risk away from the seller and reduce escrow requirements. It’s often required in competitive processes or private equity deals.

5. Indemnification

Indemnification provisions obligate the seller to compensate the buyer for losses arising from breaches of the agreement, such as inaccurate reps or undisclosed liabilities. These terms govern how (and how much) a buyer can recover post-closing.

Key considerations:

• Cap and basket. The cap is the ceiling on seller liability; the basket (or deductible) is the threshold before claims are payable. These are generally a function of purchase price.

• Scope of claims. Review which types of losses or breaches the buyer can recover for—and where the boundaries are. Some categories, like fraud, taxes, or breaches of fundamental reps, are often carved out from any caps or baskets (described above). It’s important to understand where liability is uncapped or open-ended.

• Survival periods. These define how long the buyer can bring claims. Depending on the size of the transaction and whether there’s rep and warranty insurance (RWI), the survival period could be longer or shorter.

Selling your business is a high-stakes moment—and the difference between a good deal and a great one often comes down to how the terms are structured. The best outcomes come from a clear understanding of your net proceeds, risks, and leverage points. If you’re preparing for a sale, focus early on structure (not just headline price!) and build a deal team that’s fluent in these details.

Reach out when you’re ready.