Deal Structuring: The Highest Leverage Skill In Finance?

There’s no doubt that finance is an important discipline and skill to have.

Finance involves many other skills and has various applications.

But the highest attainment of finance is deal structuring and deal making.

This involves buying and selling businesses and business units.

(Ideally, in ways that maximize returns while minimizing risks).

Some of the wealthiest people in the world didn’t build their fortunes by running factories or writing code. They built them through deal-making.

They understood that a single well-structured transaction can create more value than years of incremental growth.

If you do it right, you can get way more than what you put in.

Warren Buffett didn’t become a billionaire by inventing a product. He became one by buying companies at the right price and structuring the terms in his favor.

Private equity giants like Blackstone and KKR don’t manufacture anything. They buy, improve, and sell businesses.

Even tech titans like Apple and Google use acquisitions strategically. They buy startups for their talent, technology, or market position.

Then they integrate them to strengthen their dominance.

The same is true for industries as diverse as energy, media, and retail.

ExxonMobil’s mega-mergers shaped the modern oil industry.

Disney’s acquisition of Pixar, Marvel, and Lucasfilm turned it into a creative and IP powerhouse.

Walmart has bought logistics and e-commerce firms to accelerate its digital shift.

Transactions are a high-leverage way to deploy capital and compound wealth.

Instead of starting from scratch, you buy something with existing customers, revenue, talent, and systems.

You can then use deal structure, capital and operational improvements to multiply its value.

This is why the best investors and most powerful companies treat deal structuring as a core skill, and not a side activity.

What is deal structuring?

If deal-making is the engine, deal structuring is the blueprint.

It’s what determines how much you pay, how you pay it, who controls what, how risk is shared, and how the rewards are split.

Two buyers can pay the same headline price for the same company but walk away with completely different outcomes. It all depends on how the deal is structured.

The richest individuals and most successful companies know this. They win not just by finding great opportunities, but by designing transactions so the odds are stacked in their favor.

Deal structuring is the process of defining the terms, economics, roles, risks, and rewards between parties involved in a transaction.

It's about crafting win-win arrangements that align incentives, manage risk, and maximize upside.

Deal-making is a very people-intensive process, which makes it harder to master.

You not only need to understand finance, but you need to know how to build and manage a series of delicate relationships in a fiercely competitive environment.

You do all this while trying to get a good deal for yourself.

Why does deal structuring exist?

This ‘dance’ between all parties largely exists because of information asymmetry.

The reality is: the seller knows more than the buyer

The seller typically has a deeper, longer history with the business.

They hold the customer relationships, the data, and operational know-how.

They know where the ‘skeletons’ are hidden.

The seller wants to maximize his or her payout, so they are incentivized to portray a rosier picture of the business.

In the meantime, the buyer wants to minimize how much is paid for the business (to increase returns and compensate for the unknowns).

Beyond information asymmetry, a good deal of structuring can also increase returns to the buyer. This can be done through financial leverage and tax mitigation strategies.

Good deal structuring reduces risk while increasing the deal’s returns.

The Key Components of a Deal

I like to break down the terms of a deal into three categories.

The categories are Economics, Control & Governance, and Risk Mitigation.

1)        Economics – Who gets what, when, and how

This involves deciding the value of the business, how it will be paid for, and how profits will be shared.

I.  It starts with valuation.

This is the agreed-upon worth of the business or asset.

Getting there is not an exact science.

Although math is involved, value is subjective and changes based on the buyer and seller.

Strategic buyers who can create more value will often pay more than financial buyers. Negotiation skill and the buyer–seller dynamic also matter.

II. Once valuation is set, the capital structure decides how it’s funded.

Equity, debt, and hybrids like mezzanine financing or preferred equity each carry different costs, risks, and seniority rights.

The structure dictates who puts in money, who gets paid first, and in what order.

Senior debt comes before junior debt, which comes before common equity.

Capital structure is an important consideration because financial leverage (debt) can boost equity returns.

In theory, the less the proportion of equity used in a transaction, the higher the return on equity.

But the reality is that certain deals can be overleveraged and can be detrimental to the deal.

III. There are other mechanisms that also define how profits from a deal are distributed between capital providers.

Preferred returns guarantee certain investors a minimum rate of return before others receive payouts. This nudges capital providers to commit funds and ensures aligned incentives.

Waterfalls decide who gets paid and in what order. For example: first everyone gets their original investment back, then certain investors get their promised minimum return. Only after that is the remaining profit shared among other investors at agreed-upon proportions.

Promotes or carried interest gives sponsors or management teams a larger share of profits once performance exceeds agreed targets. This rewards them for delivering outsized returns.

Together, these mechanisms align incentives, attract capital, and motivate those managing the investment to push for exceptional results.

2)        Control & Governance – Who decides, and under what rules

Control & governance defines who makes decisions, how they’re made, and how performance is monitored after a deal closes.

Control is the distribution of authority.

It defines who gets the final call on how the business is run.

Whoever has control can set the strategy, approve budgets, hire executives, and sign off on major transactions.

In majority stake acquisitions, the buyer usually holds full control. In minority deals, it’s defined through negotiated rights like veto powers or consent requirements.

Governance is the framework that ensures decisions are responsible, strategic goals are met, and performance is tracked accurately.

It mitigates the risk that management underperform or engage in misconduct.

It does this through oversight mechanisms, reporting requirements, and special approvals.

Strong governance protects the value of the business. It holds management accountable and can boost returns by keeping the business focused and addresses issues early.

There are various control and governance tools that can be used when structuring a deal:

I. Board and Management Structure is all about who sits at the table and how oversight happens.

Board seats gives formal authority to approve strategy and hold management accountable.

Board committees focus on oversight in areas like audit or compensation.

Observer rights, which allow attendance at board meetings without voting power, ensures transparency for non-controlling investors.

II. Voting Rights & Share Classes determines how power is distributed among shareholders.

This can include super-voting shares that give some a disproportionate level of control. 

You can also have weighted voting across different share classes.

Cumulative voting can help minority shareholders secure board representation.

III. Reserved Matters are high-impact decisions that require special consent. These include decisions around mergers, major asset sales, or issuing new shares.

They prevent unilateral actions that could significantly alter the company’s value or structure.

3)        Risk Mitigation – Who bears which risks, by how much, and how they’re mitigated

Risk Mitigation protects each party from the unknowns in a deal.

It combines tools from economics and control & governance but focuses on preventing losses, overpayment, or poor performance. Risk mitigation reduces uncertainty and helps ensure what you buy matches what you expected.

I. Legal Protections are the terms that define the promises made about the business and the remedies if those promises are broken. It also includes the safeguards to ensure funds are available to cover potential claims.

Representations & Warranties are promises the seller makes about the business. It covers things like the state of finances, operations, assets, debts, and legal compliance.

Indemnities means the seller must pay the buyer if those promises are broken.

Escrow Accounts hold a portion of the purchase price with a neutral third party. Funds are only released after conditions are met or a claims period ends.

Holdbacks work similarly to escrow, but the buyer simply withholds part of the price until conditions are satisfied.

Guarantees are personal or corporate promises to meet obligations. The buyer can take legal action and get compensated if the seller doesn’t deliver.

II. Operational Safeguards are measures that protect the business’s performance and value after the deal closes. These measures ensure the business operates as agreed and meets key targets.

Covenants are commitments to take or avoid certain actions. They can include keeping key employees, maintaining service levels, preserving customer contracts, or avoiding new debt.

Performance Conditions require the business to meet specific targets, such as revenue, EBITDA, or market share. Failure to meet these can reduce payments or trigger other remedies.

III. Payment Structure Protections are ways of structuring when and how the purchase price is paid. These protections aim to align the incentives of management with those of shareholders. It links payouts to the business’s actual performance after closing.

Deferred Payments reduce the risk of paying for value that never materializes by spreading payments over time.

Earnouts make part of the purchase price contingent on meeting agreed performance metrics after closing.

Why learn about deal structuring?

Understanding how to structure a deal is a rare skill with outsized rewards.

It can protect you from costly mistakes, unlock hidden value, and turn a good transaction into a great one.

And it’s not just for buyers.

Sellers who understand deal mechanics can negotiate stronger terms, reduce risk, and capture more of the upside.

Whether you’re acquiring a small business, raising capital, selling a company, or investing in one, the principles are the same.

This is a skill you can apply across industries and deal sizes.

In future posts I’ll break down other aspects of the deal process.

If this topic resonates with you, or if you’d like to discuss, compare notes, or share your perspective, feel free to reach out. I’d love to hear from you.