The Impact of Deal Structures in B2B SaaS Exits

Every founder, the first time they see a number in an LOI, has the same visceral reaction: they multiply it by their ownership percentage and start mentally shopping for houses or calculating after-tax proceeds. But here's the thing—that number isn't what you get paid.

What you get paid depends on structure.

Example: Two Offers, Two Realities

Imagine a vertical SaaS company doing about $9 million in ARR, profitable, growing ~25% year-over-year. Maybe decent, but not amazing retention metrics. A solid, but not very fast growing, mid-market B2B SaaS profile.

This company hired a banker and ran a competitive process and ended up with a bunch of LOIs, including the following top two contenders:

When you look at the LOIs, Offer B looked obviously better to the tune of $9 million more headline value! But is that accurate?

We'll explain in detail the nuances of equity rolls and earnouts later in this chapter, but at a very high level an equity roll is you being asked to invest part of your proceeds into the acquirer and an earnout is a payout that happens if you meet certain metrics.

Let's assume that in each case, that the equity roll has a 25% chance of paying out triple, a 25% chance of doubling, a 25% chance of staying flat and a 25% chance of it going to zero. (side note: probably not a fair assumption - usually different buyers are more or less likely to succeed, but let's put that aside for now).

Let's further assume that the earnout has a 30% chance of being met (it's an aggressive one after all given the 25% growth over the last year).

Given those assumptions:

All of a sudden the “lower” Offer A has a higher expected value.

But hold up! Money sooner is worth more than money later and there is more money later in Offer B. Let's assume that the seller (very conservatively) puts the proceeds immediately into bonds paying 4%. In that case, the present value of the delayed payouts look like this:

So now the lower topline offer actually has an expected present value of $1.7M more than the "higher" offer.

This just goes to show — understanding the structure is crucial, and that’s what this chapter is about: understanding the moving parts behind an offer so you can translate “enterprise value” into real money.

The Real Meaning of "Enterprise Value"

Enterprise value (EV) is a headline. It's the number in bold that everyone scans to quickly when an LOI is received. However, what you really care about is net proceeds, broken into:

• Cash at close (after paying debt and fees)
• Deferred or contingent payments (equity roll, seller note, earnout, retention)
• Timing and risk (when you get it, what conditions, what could blow it up)
• Tax treatment (capital gain vs ordinary income)

The cleanest deal—high cash, simple mechanics, favorable tax treatment—usually isn't the one with the largest EV. In practice, acquirers trade price for structure. A higher EV almost always hides more contingencies.

Dissecting the Building Blocks of a Deal

Let's break down each major component and how it changes risk, reward, and behavior.

1. Cash at Close: The Sleep-Well Money

Cash at close is simple: wire hits your account, done. It's also the only pure form of value in M&A.

In SaaS transactions in the $2-$20 million ARR band, we typically see 50-80% cash at close. Anything above that means you either ran a tight competitive process or the buyer really, really wanted your asset.

What eats into your cash at close:

• Escrow or holdback. Usually 10-15% held for 12-18 months to cover rep & warranty claims. RWI (Reps & Warranties Insurance) can shrink this to 0%.
• Debt pay-offs. Loans of all kinds: personal loans, venture debt, lines of credit, credit cards, unpaid taxes.
• Transaction fees. Banker fees, legal fees, RWI premium, tail policies.
• Working-capital adjustment. If your working capital at close is below target, you owe the shortfall.
• Differing payout terms between investors and founders. Quite often shareholders are paid in cash at close in full as the buyers want only the founders on their cap table. That can mean that the percentage of cash that you receive is lower than the % mix the LOI outlines for the business overall.

We'll explain what each of these are, along with how they're described or alluded to (or not!) in an LOI in the chapter on The Anatomy of an LOI.

2. Rollover Equity: The "Second Bite Of The Apple" (Myth and Reality)

Rolling equity means you're reinvesting part of your proceeds into the buyer's vehicle—either the acquisition newco (ie the acquisition vehicle setup to acquire your business) or in the acquiring entity. For $2-20M ARR B2B SaaS companies, a typical roll is 10-25% of total EV (which can obviously be a higher percentage for you in terms of your proceeds if other investors are getting cashed out in full).

Buyers pitch it as "alignment", and it's pretty much standard if you're being acquired directly by a PE firm or as a tuck in by a PE firm's portfolio company. The reason is simple - their LPs (that is, the PE firm's investors) love to see it because it signals your confidence in the future of the business. In some cases, the PE firm guarantees to their LPs that all acquisitions have a minimum roll.

Sometimes it's the best investment you'll make. Sometimes it's vapor.

Why it exists:

• Aligns incentives. The buyer and the seller both wants the acquiring entity to succeed and gets paid if that happens.
• Helps buyer stretch valuation without more cash.
• Defers taxes (in certain structures), allowing your proceeds to grow tax deferred.
• Lets founders share in future multiple expansion and growth that result from the acquisition.

Why and How to diligence a roll:

Equity rolls are a bit funny in the sense that they reverse the usual due diligence process. Normally, the buyer is performing their due diligence on your business. Now, you are in effect becoming a (minor) investor in their business, so you need to do your diligence!

• What entity are you rolling into? The newco or the larger acquiring company (if being acquired as a tuck in or by a strategic)?
• At what valuation? Are you buying in at the same valuation or multiple the fund paid, or a markup?
• Preference stack. Where do you sit versus the fund's preferred equity? Best case: pari passu—you ride in the same security. Common case: you're common or subordinated.
• Governance & information rights. You're probably not getting a board seat, but are you entitled to investor updates? Can you expect to see audited financials? Are you subject to drag/tag in a future acquisition (probably), etc.
• Liquidity path. When and how do you expect to get paid? What is the acquiring entity's exit horizon? Usually PE buyers look to exit in 3-5 years, but sometimes they hold longer. Do you have the right after a certain time for the buyer to buy you out? At what terms?

Tax angle: In the U.S., a properly structured 351 exchange can make a roll tax-deferred—you only pay capital gains when the rolled equity is sold later. But it's important to ensure that happens - at the very least discuss with your accountant and maybe consult a tax lawyer; done wrong, you'll owe now and later.

Pro tip buyers sometimes will agree to: ask for a tax opinion from buyer's counsel confirming the intended treatment and that they'll indemnify you if the IRS disagrees.

If you are a non-US entity or the acquirer is non-US, then you may have to first pay capital gains taxes and then have to invest. Make sure you understand what the implications are in your personal tax situation before agreeing to a roll and how that will impact your cash situation.

Rule of thumb: be happy with your cash alone. Treat the roll as a bonus investment, not a make-or-break component.

“We hired Discretion Capital to help us maximize our upside and mitigate our downside risk in an exit process. They have a great balance of expert finance, positioning, and negotiating skills that should help founders maximize their returns, as they did with us.”

Brad Redding

Founder, Elevar

3. Seller Notes: When You Become the Bank

A seller note is debt you extend to the buyer. It's pretty uncommon in deals over about $20M, but it quite frequently appears in smaller deals, or if the buyer is really pushing to maximize EVs.

When it shows up:

• Buyer's lender limits leverage.
• Buyer wants to stretch price but lacks cash.
• Credit markets are tight.

Key terms:

• Principal & rate: often 5-8%.
• Term: 24–60 months.
• Security: secured by assets, holdco, or unsecured (bad).
• Seniority: subordinated to senior debt?
• Amortization: bullet or installment.
• Default & acceleration: what triggers repayment?

I have to be honest, we quite rarely see seller notes in the $2-20M ARR market, but if you must hold a seller note, negotiate security, acceleration, and change-of-control provisions like a lender would.

4. Earnouts: Hope with a Contract

Fundamentally, earnouts exist to bridge valuation gaps between what the seller wants and what the buyer is willing to pay, given the current state of the business. In essence, they often occur when the seller says, "This business will grow 40% next year" and the buyer says, "Great, if that happens I'll gladly pay your ask."

Founders have often heard that "earnouts are worthless" or "assume you'll get nothing", and while that can be sound advice for certain types of earnouts and certain kinds of buyers, there's quite a bit more nuance to it than that. Earnouts can range from being almost laughably easy to achieve through to borderline impossible.

Common Earnout Components:

• Employment-based: Reasonably straight forward to understand - you (and/or your key employees) need to stay employed for X number of years post close and you'll get paid. There are some nuances here to be aware of though - the acquirer should not be able to fire you without cause unless that accelerates your earnout. What is "for cause" should be defined and crucially not include something like "failed to meet performance expectations" language. That leaves way too much leeway and incentivizes the buyer to fire you to save money.
• Performance-based: These are earnouts based on the business hitting some metrics (ARR, revenue, EBITDA) within some time frame. Usually (but not always) these metrics relate to performance claims that you (or your banker) have made about the future of the business.
• Strategic-based: Some other thing that is important to the acquirer that you help them achieve post close. These could be things like integrate your product into theirs, launch a specific feature, win a given kind of certification, etc.

Where they go wrong:

The key thing to understand about earnouts is that, as much as possible, you want them to be designed such that your incentives and the buyers' incentives are aligned. You don't want a scenario where the buyer benefits if they handicap your ability to hit your earnout.

Some common pitfalls include:

• Binary cliffs. Grow the business to $10M ARR in 1 year, you get paid; grow it to $9.9M in two years (or $10M in 2 years and 1 month), you get nothing. The buyer here is obviously incentivized to grow (what is now) their business, but if they can just stall out some marketing or sales expenditure by a couple of months and they get out of paying tens of millions then they may well do that.
• Multiple hurdles. A very common earnout structure is something like: Hit $10M ARR in year 1, $15M ARR in Year 2 and maintain an EBITDA margin of > 20% throughout. These kinds of multiple hurdle earnouts can often be conflicting, and more hurdles can make it extremely easy for the buyer to ensure they don't have to pay you without damaging their business - particularly if combined with the binary cliffs mentioned above.
• Buyer-controlled levers. Once you sold the business, obviously the buyer now owns and runs it. Even if you're working in a senior role within the acquiring entity, you may lack the authority to make decisions such that you can successfully hit your earnout target.
• No information rights. Particularly if you're no longer working with the company, it can be hard to get information from the buyer about the performance such that you can verify if and when the earnouts are met.

Design for survivability:

• One metric, seller-influencable: The earnout metric should be a single metric that you have as much influence over as possible. In general, prefer a metric that is hard to game and aligns incentives. For example, earnings numbers are much more subject to interpretation than a topline number like ARR.
• Sliding scale, not cliff: If at all possible, make the metric such that if you succeed somewhat, you get paid somewhat. Buyers often will not be happy about paying even a little bit for a big miss, but will be amenable to something like - nothing until X, then a more steep scale as you approach the target.
• Cumulative catch-up: If a target is multi year, say "reach $5M ARR in year 1, $7M ARR in year 2", can you miss in year 1, and then catch up to that $7M ARR target in year 2 and get paid in full?
• Information rights & neutral arbitration: How will you know if the target was reached? How will disputes be resolved?
• Acceleration on termination without cause or sale: If the acquiring company itself gets acquired before the earnout is met, you'll want the earnout to be accelerated. Similarly, if you're fired without cause in an employment based earnout situation, then you should get paid in full.

Rule of thumb: mentally value tough earnouts at zero. If they pay, it's gravy.

5. Team / Founder Retention and Carve-Outs

Sometimes the "purchase price" headline masks that most of the enterprise value is really a retention pool. That is, the LOI may in effect say something like "Total Enterprise Value of $10M, of which $3M is for equity holders and $7M is for team retention purposes". This is pretty common in so called soft landings or when equity is underwater - that is, the EV is not even high enough to repay the investors in full.

This might seem a bit peculiar - why would investors agree to get only $3M back when the team gets $7M? The answer to that is pretty straightforward - either the investors don't have the right to block a sale, or if they do they get nothing.

These kinds of carveouts are usually reserved for situations where the company isn't a big success, so really any kind of return on investment is a bonus. That being said, these kinds of deals often require pretty delicate negotiation with investors - it definitely pays to be on good terms with them if you're asking them to agree to a situation where you're getting paid millions of dollars and they lose money.

Some things to be aware of if you're facing this situation:

• Tax hit: Your (and your team's) payments are likely going to be treated as ordinary income, and so (at least in US terms) be likely to face a significantly higher tax burden than what you'd face in the case where your proceeds come from equity sales.
• Investor approval: You're likely to need consent from the investors if the deal shifts proceeds away from equity holders.
• Optics: These kinds of deals can be quite ugly if (as is likely) founders and certain employees are being favored over others (in particular former employees or those not identified as "key") who may end up with nothing. There may not be much you can do here, but you might sleep better if you decide to pull as hard as possible to give your employees as fair a shake as possible in the circumstances. They're unlikely to be surprised that things aren't going well.

6. Taxes: The Invisible Hand Behind Every Structure

When founders hear "structure," they think "earnout vs. cash." But often buyers think "tax efficiency." And if you don't understand their tax motivations (and your own tax situation) you can lose 10–30% of your proceeds without anyone "cutting" the price.

Now, taxes is a complicated issue, and my rule of thumb is - if I think I understand a tax situation and it makes complete sense, then it's probably wrong, so it pays to hire competent tax counsel.

That being said, there are a few high level considerations to be aware of.

Stock vs. Asset Deals

There are two different ways that an acquirer can acquire a company - either they can acquire the stock in the company or they can acquire specific assets of the company (leaving the company and any remaining assets (and liabilities) alone.

• Stock sale (preferred by founders): This is the vast majority of deals done in the $2-20M ARR range. From a founder perspective, this means you sell shares and it gets taxed at capital-gains rates. This is clean and tax efficient for you - at least if your company is a C-Corp instead of an LLC or similar. In a stock sale you're often eligible for QSBS (Qualified Small Business Stock) exemption which can be a significant boost. The downside to a stock sale is mostly that the buyer will require a more thorough due diligence as they're assuming all liabilities incurred by the company since inception.
• Asset sale (preferred by buyers): An asset purchase usually comes in either because the buyer requests it and the seller doesn't understand the tax implications, or in situations where the buyer wants to pick and choose specific assets. A buyer will in general prefer an asset sale, because (at least in the US) they get to re-depreciate asset if they do so. However, if you're a C-Corp and you agree to an asset sale, you are most likely going to face double taxation: Once at the corporate level as the asset sale will count as income for the corporation and then again when the proceeds gets distributed to you.

Section 338(h)(10) Elections: PE buyers occasionally request a "deemed asset sale" for tax reasons. In that case, you should be compensated for the incremental tax you'll owe.

7. Reps and Warranties (R&W) Holdbacks

Reps and warranties are basically legal statements that you make in the purchase agreement. We won't go into detail about the various types of reps and warranties that exist (did I mention you want a good M&A lawyer already?), but in terms of how these directly relate to your payout, the most important aspect is that usually a portion of the purchase price is held in escrow for a certain period of time against which the buyer can make claims if they find that you're in breach of these statements (and that they've caused actual harm).

Typically, the R&W holdbacks are 10% (sometimes 15%) of the total EV and they're held in escrow for 12-18 months. This can constitute a significant portion of the cash at close, particularly if you're being asked to roll a significant portion and you have investors or others that are being cashed out at close.

Some things to be aware of when it comes to R&W holdbacks - you should normally try and negotiate some kind of tipping basket arrangement. That is - there should be a minimum amount that a claim can be before it gets made.

In addition, it might be possible to have the buyer buy R&W Insurance so that little or no holdback is necessary. R&W insurance usually comes into play at around $25M EV, but we have seen it for smaller deals. Particularly if the structure of your deal is such that your cash at close is underwhelming, this might be a good solution.

8. Working Capital: The Last Minute Curveball

Working capital is the cash required to operate a business. What it means at a basic level is that, when you sell your business you'll normally be required to leave some cash in the bank account such that the new owner can keep operating the business without having to immediately inject more cash into it.

There's usually a working capital target that gets worked out as part of the purchase agreement, and at a certain point after close, there is a true up. If there's money in excess of the target, that goes to you, if there's less money then you need to pay up.

For a B2B SaaS business, an example of where working capital comes into play is if you're selling mostly annual plans and your customers pay up front. In that case, the acquirer is usually going to want to keep some of the money you collected for 12 months of service if they're buying the business one month after you took payment. Which makes sense, they after all need to service the client for another 11 months.

Working capital can be very contentious, mostly because it tends to come up very late in the deal process, can involve hundreds of thousands (or millions) of dollars and the expectation for what's reasonable can vary greatly between buyer and seller.

Also, some buyers are bastards and know that towards the end of the due diligence process you're likely to have deal fatigue and they figure they can squeeze a few hundreds of thousands of dollars out of you.

The key thing when it comes to working capital is twofold - don't agree to any excess net (ie buffer above the normal) working capital and make sure you have a banker able to advocate strongly for you based on historical financials to arrive at a fair working capital target.

Rule of thumb: If a buyer introduces new working-capital adjustments in the final week, they're squeezing, not protecting.

This guide is for informational purposes only and does not constitute legal, tax, or financial advice. Consult qualified advisors before making decisions regarding your transaction.