What Is a Deal Structure?

A deal structure is a term used to describe the terms of the agreement between a buyer and seller that apply in a given business deal. The term is commonly associated with investment activities and refers to the rights and responsibilities that both the investor and the issuer of those securities undertake as part of their ongoing business relationship. A deal structure is present in just about any transaction that involves the establishment of some sort of covenant between the parties involved, including venture capital schemes and company acquisitions that require all parties to perform certain tasks in order for the deal to be considered complete.

While the provisions found in any type of agreement will vary based on the assets involved and the intentions of all parties concerned, there are a few basics found in just about every deal structure. One has to do with the identification of the asset that is being traded or sold. The contract provisions will include a description that is exact and helps to identify the asset without question.

A deal structure will also address the circumstances under which the buyer is allowed to assume control of the asset. This often relates to the terms of payment that are spelled out in the contract. For example, a business owner may sell a company to a buyer, with the provision that a certain percentage of the purchase price as a down payment is tendered by a specific date, with a series of monthly or periodic balloon payments to occur according to a predetermined schedule thereafter. Assuming the down payment is tendered on time, the seller relinquishes control of the company to the buyer, who at that point becomes responsible for the operation of the business.

The deal structure will also often include specifics regarding the rights of the seller in the event that the buyer does not live up to the commitments made in the contract. This means that if the deal structure calls for the remittance of payments at specified intervals over a period of time and the buyer fails to tender those payments, the owner may have the ability to declare the agreement null and void, and take action to recover the asset. At the same time, the terms of the agreement may offer some protections to the buyer, such as a grace period to catch up past due payments before the deal is considered void.

The general idea of a deal structure can be related to the sale of all sorts of assets, beginning with shares of stock and moving all the way through to a business acquisition. In each situation, the structure will provide all parties concerned with certain rights that enable them to benefit from the transaction, and also certain responsibilities that they must manage in order to continue enjoying those benefits. Failure to do so can mean that the deal collapses, leaving one or more parties with some type of loss that may or may not be easily recovered.