Deal Structuring Finance: Earnouts, Seller Notes, Rollover Equity, and Bridge Loans

Introduction: Financing as a Strategic Lever

Deal structuring is not just about the purchase price. It is about how that price is paid, over what time frame, and under what contingencies. The mix of earnouts, seller notes, rollover equity, and bridge loans can shape risk, align incentives, and unlock transactions that might otherwise stall. For CFOs, understanding these instruments is essential to building financially sound and strategically aligned deals.

Earnouts: Bridging the Valuation Gap

Earnouts are contingent payments tied to post-close performance. They are particularly useful when there is disagreement over growth projections.

In a Series C healthtech acquisition, we structured a $20 million earnout tied to hitting $50 million in revenue within two years. This allowed us to meet the seller’s price expectations while protecting downside risk. The key is measurability: clearly defined metrics, time frames, and audit rights.

But earnouts are not passive instruments. They require careful drafting to avoid disputes. We include commercially reasonable efforts clauses and define accounting policies up front.

Seller Notes: Skin in the Game and Deferred Risk

Seller notes are promissory notes issued by the buyer to the seller. They defer part of the purchase price and often bear interest.

In one industrial roll-up, we issued a 3-year, 6 percent seller note covering 15 percent of the purchase price. It created seller alignment without immediate cash outlay. But it also created subordination risk, especially if the buyer takes on senior debt.

We typically stress-test seller note repayment under downside cases to ensure feasibility.

Rollover Equity: Continuity and Shared Upside

Rollover equity involves the seller retaining a minority stake in the new entity. It signals confidence and ensures continuity.

In a consumer brand acquisition, the founder rolled 30 percent of their equity into the new HoldCo. This allowed us to fund the deal with less cash and kept the founder motivated. We structured the rollover as tax-deferred under Section 351.

Key terms include:

• Tag-along and drag-along rights
• Anti-dilution protections
• Exit timing alignment

Bridge Loans: Short-Term Capital to Close the Gap

Bridge loans are temporary financing used to close timing gaps or fund interim obligations.

In a cross-border acquisition, we used a 6-month bridge loan to fund escrow and working capital until permanent financing closed. The bridge carried an 8 percent coupon and was repaid from the debt facility post-close.

Bridge loans require tight coordination with lenders and clarity on sources and uses.

Blended Structures: Why One Tool Rarely Fits All

Most deals use a mix of these instruments. In one SaaS acquisition, we combined:

• 60 percent cash at close
• 20 percent rollover equity
• 10 percent seller note
• 10 percent earnout

This balanced cash needs, seller incentives, and financing availability.

Conclusion: Structuring Is Strategy in Action

CFOs must treat deal structuring not as a formality but as a design problem. The right mix of instruments can create alignment, mitigate risk, and optimize capital deployment. Financing terms are not just legal mechanics. They are strategic levers that determine whether a deal delivers value or underperforms.

Insight

Over my career, I have come to view deal structuring as one of the purest expressions of financial creativity. In the boardroom, we talk about strategy, synergies, and integration. But in the negotiation room, it comes down to how the dollars move and when. That is where the real decisions are made. Earnouts, seller notes, rollover equity, and bridge loans are not just tools of financing. They are instruments of alignment, risk transfer, and trust.

Let us begin with earnouts. These are often misunderstood. They are not just ways to defer payment; they are ways to close belief gaps. In one Series C healthtech acquisition, we and the seller could not agree on what the revenue would be two years out. Their forecasts showed $60 million. Ours showed $45 million. We bridged the difference with a $20 million earnout that triggered at $50 million in revenue. It gave them upside, gave us protection, and created shared goals. But it required surgical precision. We had to define revenue in GAAP terms, control for customer refunds, and align on reporting cadence. A badly drafted earnout is a lawsuit in waiting.

Seller notes are a more straightforward but equally nuanced tool. They say, we will pay you, but not today. And they work best when the buyer’s capital is constrained or when seller alignment is critical. We once used seller notes to finance a 20 percent gap in a roll-up where traditional debt was tapped out. The seller agreed because we provided a lien, interest, and a clear amortization schedule. But I always caution that seller notes must be tested against downside cash flow. A note you cannot repay is a liability waiting to impair goodwill.

Rollover equity is perhaps my favorite structuring element. It is the clearest signal that a seller believes in the business post-transaction. When founders or management teams roll equity into NewCo, they are saying, I am not done building. We use this in almost every deal where continuity is important. In a consumer brand acquisition, the founder rolled 30 percent of their stake and stayed on as CEO. The business grew 3x over four years. Their rolled equity returned more than their cash at close. But rollover equity is complex. You must define shareholder rights, exit terms, and dilution protection. And you must align the timing of exit with your own.

Bridge loans are the least glamorous but often the most critical tool in your kit. We once had a deal where regulatory approvals delayed permanent financing. Rather than lose momentum, we closed with a 6-month bridge loan to fund escrow and pay vendors. It carried an 8 percent interest rate, was subordinated to the new credit facility, and was repaid post-close. It was not ideal. But it preserved the timeline. In M&A, speed is often the difference between a deal done and a deal abandoned.

Where these instruments shine is in combination. I am increasingly a fan of blended structures. In one SaaS deal, we used 60 percent cash at close, 20 percent rollover, 10 percent seller note, and 10 percent earnout. It balanced our liquidity, the seller’s upside, and the bank’s leverage tolerance. More importantly, it created a durable alignment that carried us through a rocky first year post-close.

What I have learned is this: structuring is not about cleverness. It is about empathy. You have to understand what each party values, where their risks lie, and what they need to feel whole. Then you use your tools—notes, equity, bridges, earnouts—to shape a structure that gets everyone there.

You also need rigor. Every structuring element must be modeled, documented, and stress-tested. Our diligence process includes a term sheet waterfall, a sources and uses schedule, and a scenario model showing payoffs under different operating outcomes. This is not just to protect us. It is to build trust. When sellers see that you have thought through their risk, they are more likely to meet you halfway.

Structuring also has downstream implications. Earnouts must be tracked. Notes must be serviced. Rollover equity must be integrated into cap tables. Bridge loans must be retired. We use a post-close checklist to ensure none of these moving parts are lost in the handoff from deal to operations.

For the CFO, structuring is one of the most strategic aspects of the deal. It determines how much capital you need, when you need it, and how returns are shared. It affects tax outcomes, governance, and even cultural integration. Done well, it turns risk into momentum. Done poorly, it creates complexity that haunts the deal.

My advice to any CFO preparing for a transaction is simple. Do not treat structuring as legal boilerplate. Treat it as design. Think in terms of incentives, behavior, and resilience. Ask what happens if things go worse than planned. Or better. Then build a structure that reflects those realities.

In the end, M&A is about value creation. But value is not created at close. It is realized over time. The structure is what carries you from here to there.

Disclaimer: This article is for informational purposes only and does not constitute financial or legal advice. Always consult qualified professionals before executing transaction structures.