Consideration structure

Consideration structure is the composition of the total price in an M&A transaction: how the agreed value is split between cash at closing, seller note, contingent tranches (earn-out), and, if applicable, equity participation. It is not only how much is paid but when and under what conditions. The buyer uses it to manage risk and limit upfront cash; the seller must evaluate total value versus certain value — how much is cash at closing and how much depends on performance or the buyer’s credit.

What are the components of consideration structure?

Total consideration breaks down into three blocks. Not every transaction has all three; in Mexican SMEs it is common that they do.

• Cash at closing

  The amount the buyer pays in cash on the closing date. It is the most liquid and certain part for the seller. Financed with the buyer’s equity, acquisition debt, or a combination.

• Seller note (vendor financing)

  A loan the seller extends to the buyer: the buyer commits to pay principal and interest over a defined period (typically 2–5 years). It reduces the need for cash at closing and external financing. The seller bears the buyer’s credit risk; hence rate, tenor, guarantees, and possible subordination are negotiated. More context in seller note in Mexico.

• Contingent tranche (earn-out, contingent consideration)

  The part of the price paid only if post-closing conditions are met: revenue or EBITDA targets, retention of key customers, operational handoff. If conditions are not met, payment is reduced or not made. It lets the buyer transfer transition and concentration risk to the seller. Details in earn-out.

The LOI sets enterprise value and the split among these components; the definitive agreement details tenors, interest, covenants, and conditions for each. Working capital and cash/debt adjustments at closing are also part of closing mechanics and are reflected in the same negotiation.

How does the buyer use consideration structure to manage risk?

The buyer wants to limit upfront cash and align payment with the value it actually receives. If EBITDA is uncertain or customer concentration is high, it shifts value toward the contingent tranche: it pays more only if the business performs. If the buyer has capital or bank financing constraints, it increases the proportion of seller note. The structure is not just financing: it is risk allocation. The seller must look at total value (cash + expected value of the note + expected value of the earn-out) and compare it to certain value (cash + present value of the note if credible), and decide whether to accept contingent risk.

What does an example of consideration structure look like in Mexico?

Illustrative example (industrial distribution, Mexico, anonymized): agreed enterprise value of MXN 24 M (4× normalized EBITDA of MXN 6 M). Breakdown by tranche:

The seller received MXN 14.4 M on the closing date; the rest depends on performance under the note and earn-out conditions. The buyer limited its upfront cash and tied part of the price to performance and stability of key accounts. To simulate seller note scenarios, see the seller note in Mexico; for the legal framework of the LOI and consideration, LOI.

What do buyers and sellers ask about consideration structure?

What is cash at closing and what proportion is typical in Mexico?

It is the part of the price the buyer pays in cash on the closing date. In Mexican SME transactions financed with equity and some debt, cash at closing typically represents 40% to 70% of enterprise value; the rest is deferred in seller note and/or contingent tranche. When the buyer uses more leverage or the seller demands more certainty, the cash proportion can go down (30–40%) or up (70%+) depending on negotiation.

How does consideration structure relate to the LOI?

The LOI (Letter of Intent) is the document where consideration structure is first set out formally: enterprise value, percentage or amount in cash at closing, principal and conditions of the seller note, and conditions of the contingent tranche (earn-out). What is signed in the LOI is not binding on price and payments, but it sets the framework for negotiation; the definitive agreement details tenors, interest, guarantees, and payment conditions for each tranche.

What risks does the seller face accepting a large seller note?

The seller note is credit the seller extends to the buyer: if the business or the buyer fails, the seller may not recover principal and interest. Risks: buyer insolvency, default, dilution of priority if the buyer takes on more debt later. The seller must evaluate rate, tenor, guarantees or collateral, and the buyer’s financial profile. The article on the seller note in Mexico and the seller note calculator help size flows and alternatives.

Do customer concentration or uncertain EBITDA affect the structure?

Yes. When there is high customer concentration or EBITDA that is hard to verify, the buyer shifts value toward the contingent tranche (earn-out) to align payment with post-closing performance. When transition risk is high (owner dependency), a larger earn-out or seller retention is also common. Conversely, stable, diversified businesses with clear finances achieve a higher proportion of cash at closing and seller note, and less contingent.