Deal Structuring: How to Structure a Deal with a Private Equity Buyer

Private equity buyers are investment firms that purchase companies and businesses with the goal of increasing their value and generating a return on investment. Structuring a deal with a private equity buyer can be complex and requires careful planning and negotiation. In this article, we will explore key considerations for structuring a deal with a private equity buyer, steps to follow, common mistakes to avoid, and the importance of effective deal structuring.

Key Considerations for Structuring a Deal with a Private Equity Buyer

When structuring a deal with a private equity buyer, several key considerations come into play. They most important concepts to address while structuring a deal are considering all your structure options, valuation and pricing, and governance and control.

Deal Structure Options with a Private Equity Buyer

The first consideration is the type of deal structure that will best suit your business and the private equity buyer. There are several options available, including leveraged buyouts, management buyouts, recapitalizations, and growth capital investments. Each option has its own advantages and disadvantages, and choosing the right one depends on various factors, including the size of the business, the industry, and the buyer’s investment strategy.

Leveraged buyouts

A leveraged buyout (LBO) is a type of transaction in which a private equity buyer acquires a target company using a combination of equity and debt. In an LBO, the buyer typically borrows a significant amount of money to finance the acquisition, using the assets and cash flows of the target company as collateral for the debt.

The main advantage of an LBO is that it allows the buyer to acquire a company with relatively little cash outlay. By using debt to finance the majority of the purchase price, the buyer can achieve a higher return on investment if the target company performs well.

However, there are also risks associated with LBOs. The high levels of debt can leave the target company vulnerable to economic downturns or other adverse events. Additionally, the interest payments on the debt can place a significant burden on the company’s cash flow, which can limit its ability to invest in growth initiatives or make necessary capital expenditures.

When structuring an LBO, it is important for both the buyer and the seller to carefully consider the risks and benefits of the transaction. The buyer should have a clear plan for how it will use the target company’s assets and cash flows to generate the cash needed to repay the debt, while the seller should negotiate favorable terms and ensure that it is receiving fair value for the company.

Overall, an LBO can be a useful tool for private equity buyers looking to acquire a target company, but it is important to approach the transaction with caution and seek expert advice to ensure a successful outcome.

Management buyouts

A management buyout (MBO) is a type of transaction in which the existing management team of a company acquires the business from its current owners, including a private equity buyer. In an MBO, the management team typically invests a significant amount of their own money into the transaction, and may also seek financing from private equity firms or other investors.

One advantage of an MBO is that it allows the existing management team to gain control of the company, which can increase their sense of ownership and motivation to drive the business forward. Additionally, because the management team is already familiar with the operations of the company, there may be less disruption during the transition period following the acquisition.

However, an MBO also has its risks. The management team may be overvaluing the company, leading to a higher purchase price and potential difficulties in securing financing. Additionally, the management team may be inexperienced in running a company as owners rather than employees, leading to challenges in decision-making and overall performance.

When structuring an MBO with a private equity buyer, it is important to carefully assess the risks and benefits of the transaction. The management team should conduct a thorough due diligence process to ensure they are making an informed decision, and should seek expert advice on valuation and financing. The private equity buyer should also carefully evaluate the management team’s experience and capabilities, and ensure that the transaction is structured in a way that is fair to all parties involved.

Overall, an MBO can be a successful strategy for existing management teams looking to acquire the company they work for, but it requires careful planning, negotiation, and execution to ensure a positive outcome for both the management team and the private equity buyer.


A recapitalization is a type of transaction that involves changing the capital structure of a company, often with the help of a private equity buyer. In a recapitalization, a company typically issues new debt and/or equity securities to replace its existing capital structure. The goal of a recapitalization is usually to increase the amount of debt or equity in the company’s capital structure, which can provide additional funds for growth, reduce the cost of capital, or provide liquidity to shareholders.

When a private equity buyer is involved in a recapitalization, they may provide financing to the company in the form of debt or equity securities, and may also work with management to restructure the company’s existing debt or equity. In some cases, a private equity buyer may also take a majority ownership stake in the company as part of the recapitalization.

One advantage of a recapitalization is that it can provide a significant amount of capital to a company without requiring it to sell a controlling interest to an outside investor. Additionally, by restructuring its capital structure, a company may be able to reduce its cost of capital and improve its financial position.

Deal Structuring Risks

However, there are also risks associated with a recapitalization. By taking on additional debt or equity, a company may increase its financial risk, and may be required to make significant interest or dividend payments that could impact its ability to invest in growth or pay dividends to shareholders.

When structuring a recapitalization with a private equity buyer, it is important to carefully consider the risks and benefits of the transaction, and to conduct a thorough due diligence process to assess the company’s financial position and prospects for growth. The private equity buyer should also work closely with management to develop a realistic plan for using the new funds, and to ensure that the company’s capital structure is appropriate for its financial needs and goals.

Overall, a recapitalization can be an effective way for a company to raise capital and improve its financial position, but it requires careful planning and execution to ensure a positive outcome for all parties involved.

Growth capital investments

Growth capital investments are a type of private equity investment that is focused on providing capital to support the growth and expansion of a company. When structuring a deal with a private equity buyer, growth capital investments may be an attractive option for companies that have a solid business plan and growth strategy, but lack the capital to fund their expansion plans.

In a growth capital investment, a private equity buyer typically takes a minority stake in the company, providing capital in exchange for an equity stake. The private equity buyer may also provide strategic guidance and support to the company, helping to develop and execute its growth strategy.

Unlike other types of private equity investments, growth capital investments are often focused on companies that have already achieved a certain level of success, and are looking to scale their operations or expand into new markets. This makes growth capital investments less risky than early-stage venture capital investments, but still offers significant potential for returns.

Deal Structuring

When structuring a growth capital investment with a private equity buyer, it is important to carefully consider the terms of the investment and ensure that they are aligned with the company’s growth strategy. This may include developing a detailed plan for how the funds will be used, setting realistic growth targets, and ensuring that the company has the resources and management team in place to execute its strategy.

Overall, growth capital investments can be an effective way for companies to access the capital they need to fuel their growth and expansion plans, while also benefiting from the strategic guidance and support of a private equity buyer. However, as with any type of investment, it is important to conduct thorough due diligence and carefully consider the risks and benefits before entering into a growth capital investment with a private equity buyer.

Valuation and Pricing Considerations

The second consideration is valuation and pricing. Valuation methods can vary depending on the type of business and the industry. For example, EBITDA (earnings before interest, taxes, depreciation, and amortization) is a common valuation method used for companies with predictable cash flows. Companies with erratic cash flows may use a discounted cash flow analysis.

Negotiating a fair price is also important. A private equity buyer will typically want to pay the lowest possible price for a business, while the seller will want the highest possible price. Negotiation requires a delicate balance to achieve a price that is acceptable to both parties.

Governance and Control

The third consideration is governance and control. Private equity buyers will typically want to have some level of control over the business in which they invest. This can include representation on the board of directors, voting rights, and management incentives. It is important for the seller to carefully consider the governance and control implications of a deal before agreeing to the terms.

Steps for Structuring a Deal with a Private Equity Buyer

The following steps can help ensure a successful deal with a private equity buyer:

  1. The initial step is to identify prospective buyers who might have an interest in your business and contact them. This can involve working with a business broker or investment bank, attending industry conferences, and reaching out to private equity firms directly.
  2. Conducting Due Diligence: This involves gathering and analyzing information about the business, including financials, operations, and legal and regulatory compliance. Due diligence is essential for identifying potential risks and opportunities associated with the business.
  3. Negotiating and Drafting Deal Terms: This involves working with the buyer to come up with a fair price and deal structure that meets the needs of both parties. It is important to engage legal and financial advisors to assist with this process.
  4. Closing the Deal: This involves signing legal documents and transferring ownership of the business to the buyer. Ensuring that they meet all the required legal and regulatory obligations before closing the deal is crucial.

Common Mistakes to Avoid When Structuring a Deal with a Private Equity Buyer

There are several common mistakes that businesses make when structuring a deal with a private equity buyer:

Lack of Preparation

One common mistake is a lack of preparation. This can include a failure to adequately assess the business’s value and potential risks and opportunities, as well as a lack of understanding of the private equity buyer’s investment strategy and goals.

Overreliance on Valuation

Another mistake is overreliance on valuation. While valuation is an important consideration, it should not be the sole focus of a deal. Other factors, such as governance and control, are equally important.

Ignoring Governance and Control

In addition to the price, there are several other terms that should be considered when structuring a deal with a private equity buyer. The negotiators should handle these terms carefully as they can substantially impact the total transaction value. Here are a few key terms to consider:

  1. Equity vs. Debt: Private equity buyers can choose equity or debt structure in private equity investment. Equity offers ownership, debt has a fixed return. Firms should select the one that suits their objectives.
  2. Earnouts: Earnouts bridge valuation gaps by making a portion of purchase price dependent on performance milestones. Useful for high-potential companies with no established record.
  3. Management Incentives: Private equity buyers often require key members of the management team to sign employment agreements and earn-outs to ensure that they stay with the company post-acquisition. These agreements can include performance-based incentives such as equity or cash bonuses, which can help align management’s interests with those of the buyer.
  4. Indemnification: Private equity buyers typically require the seller to provide indemnification for any undisclosed liabilities or breaches of representations and warranties made during the transaction. Negotiators should handle this carefully as it could pose a significant risk for the seller.
  5. Due Diligence and Closing Conditions: Private equity buyers will typically conduct extensive due diligence on the target company before closing the transaction. The seller should prepare to give access to all pertinent information and recognize any possible deal-breakers that may come up during due diligence. Furthermore, the parties must negotiate a list of closing conditions that they must fulfill before they can finalize the transaction.


In conclusion, structuring a deal with a private equity buyer involves careful consideration of several key terms beyond just the purchase price. By negotiating favorable terms in areas such as equity vs. debt, earnouts, management incentives, indemnification, and due diligence/closing conditions, companies can ensure that they maximize the overall value of the transaction.

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Author: Waldon Fenster
Waldon Fenster is an experienced chief executive officer with a demonstrated history of working with startups to create multi-million dollar companies. At his core Waldon is a startup expert and corporate acquisition consultant with an expertise in facilitating brand growth for businesses that want to present their company to the marketplace. Waldon has worked with thousands of companies and Fortune 100 brands to expand their business models and amplify their portfolios for immediate financial benefit. He has deep knowledge and experience in capital, strategy, sales, procurement, systems development, and start-up ventures. Currently Waldon focuses on top level work, where he can build small businesses and emerging startups from the ground up, to make them attractive to outside investments and acquisitions on a global scale. Waldon holds Bachelor Degrees in Business Management & Marketing from the University of Wyoming along with Associate degrees in Service Management, Decision Science and Finance.

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