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What Business Owners Should Know About Private Equity Buyers

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Since Allston Advisory Group’s founding in 2010, the private equity landscape has changed considerably. Around 2010, the United States had approximately 2,300 private equity firms. By 2024, that number had increased to approximately 6,000 firms. The number of private equity backed companies has also grown substantially. PitchBook data indicates approximately 6,400 U.S. companies had private equity backing in 2010. That figure approached 12,000 by 2024. For business owners considering selling to private equity, this growth has created a larger and more diverse universe of potential buyers.

Over the intervening years, private equity also expanded further into the lower middle market. Firms developed increasingly specialized strategies based on industry, geography, company size, and transaction type. For business owners, this expansion has created a much larger and more diverse universe of potential financial buyers.

However, more private equity firms do not necessarily mean more qualified buyers for every company. Each firm has a specific investment criteria, capital requirements, and return expectations. An experienced M&A advisor must therefore identify firms whose strategies align with the company and seller’s objectives.

Platform and Add-On Acquisitions

Private equity firms generally pursue acquisitions as either platform investments or add-on acquisitions. Understanding the distinction may help sellers evaluate the buyer’s strategy and potential transaction structure. A platform acquisition establishes or expands the private equity firm’s primary investment within a particular industry. The platform typically has sufficient scale, management, infrastructure, and market position to support future growth.

After acquiring a platform, the private equity firm may invest additional capital to expand the business. Growth may occur organically or through subsequent acquisitions. As the platform develops, management may pursue geographic expansion, new services, additional customers, or complementary capabilities. The private equity firm may also provide strategic resources and acquisition expertise.

An add-on acquisition involves purchasing a company that complements an existing platform investment. The platform company often participates directly in evaluating and completing the acquisition. Add-ons may provide new customers, geographic markets, employees, services, technology, or specialized capabilities. They may also create purchasing efficiencies or other operating benefits.

For the seller, the distinction may materially affect the transaction. A platform buyer may expect the existing management team to continue operating and growing the company. An add-on buyer may have different plans. It could integrate accounting, technology, purchasing, human resources, sales, or other functions into the existing platform.

The seller should therefore understand the buyer’s integration strategy and expected post-closing role before accepting an offer. The distinction may also affect value. A platform or add-on buyer may identify synergies unavailable to other financial buyers. Those benefits may influence how much a particular buyer is willing to pay.

Where rollover equity is involved, the buyer’s strategy becomes even more relevant. Sellers may retain an ownership interest in the platform rather than only their former company. If the platform grows and later sells successfully, the seller may participate in that additional value creation. This potential outcome is sometimes called the “second bite of the apple.” However, rollover equity also carries investment risk and reduced control. Sellers should evaluate both the initial transaction and their continuing investment before committing capital.

Transaction Structures May Vary

Selling to private equity does not necessarily require an owner to exit completely. Private equity can support several transaction structures and seller objectives. An owner may pursue an outright sale and transition toward retirement. Another may complete a recapitalization while retaining meaningful equity ownership.

Likewise, private equity can provide capital for growth, acquisitions, or ownership transitions. It can also support management teams purchasing businesses from existing owners. Rollover equity can give sellers another opportunity to participate in future growth. However, sellers exchange immediate liquidity for continued investment risk.

Evaluating More Than Purchase Price

Private equity firms may differ substantially in structure, risk, and post-closing expectations. Sellers should therefore evaluate more than headline purchase price. Beyond the economics, owners should understand the firm’s investment philosophy and expected holding period. They should also evaluate governance, management expectations, and plans for the business. The portfolio company’s role may also matter when an add-on buyer leads the transaction.

An experienced M&A advisor will identify firms whose investment criteria match the company and seller’s objectives. The advisor may also create competition among qualified financial and strategic buyers. For the right owner, selling to private equity may provide liquidity while creating opportunities for continued growth and participation. The right structure depends on what the seller wants the transaction to accomplish.

Negotiating the LOI Before Granting Exclusivity

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The Letter of Intent represents a major turning point in the sale of a business. Until this stage, multiple prospective buyers may still compete for the opportunity. Once the seller signs an LOI, the dynamics change significantly. The selected buyer typically receives exclusivity and begins confirmatory due diligence. For this reason, sellers should use their LOI negotiating leverage before committing to a single buyer.

Establish the Major Economic Terms

Although most LOI provisions remain nonbinding, the document establishes the framework for the transaction. Reopening major business terms later may erode trust and create unnecessary tension between the parties. It may also cause either party to question whether previously negotiated terms remain settled.

Therefore, the LOI should clearly address the purchase price, transaction structure, and form of consideration. It should also define other significant economic terms. These terms may include working capital, seller financing, earnouts, rollover equity, escrows, and other holdbacks. Before exclusivity begins, sellers should resolve as many significant economics issues as reasonably possible.

Address the Seller’s Post-Closing Role

Many sellers remain involved after closing through employment, consulting, or transition agreements. Others may retain an economic interest through an earnout or rollover equity. The LOI should address these arrangements when they represent a meaningful part of the transaction. At this point, the seller still has meaningful negotiating leverage. Postponing difficult issues or conversations may shift that leverage toward the buyer.

Provide Accurate Information Early

Sellers should provide accurate financial and operational information before accepting an LOI. Material inconsistencies discovered later may give the buyer grounds to renegotiate. Sellers should also disclose known weaknesses that could materially affect the transaction. Surprises during the confirmatory due diligence may damage credibility and threaten the deal.

Understand What Changes After Signing

Signing an LOI does not complete the transaction. However, it usually removes the seller from the competitive marketplace for a defined period. From that moment forward, the buyer will devote substantial resources to diligence and definitive agreements. Meanwhile, the seller’s alternatives become temporarily limited.

An experienced M&A advisor should negotiate the LOI with the definitive transaction already in mind. The advisor should identify unresolved issues before the seller grants exclusivity. Effective LOI negotiating leverage comes from addressing significant terms while buyers still compete. Sellers should use that leverage before choosing the buyer who moves forward.

Private Equity Transaction Structures: More Than an Outright Sale

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Private equity groups offer business owners far more than a traditional outright sale. Depending on the owner’s objectives, a private equity firm may offer several different transaction structures. Consequently, business owners should understand these alternatives before selecting a buyer or negotiating a letter of intent.

Unlike many other acquirers, private equity firms often tailor transactions to meet the seller’s financial, operational, and personal goals. They provide access to capital, strategic guidance, operational expertise, and professional networks that support long-term growth. Furthermore, their flexibility allows business owners to pursue transaction structures that may not be available through strategic buyers or individual investors.

One common structure supports family succession planning. A private equity firm may provide liquidity to the senior generation while allowing active family members to retain operational control. Likewise, private equity firms frequently provide growth capital to finance acquisitions, expand into new markets, develop new products, or invest in facilities without requiring owners to assume additional personal financial risk.

Private equity firms also participate in management buyouts by providing the capital necessary for key employees to acquire ownership. As a result, owners may transition the business to the next generation of leadership while preserving the company’s culture and customer relationships.

For owners seeking liquidity while maintaining future upside, a recapitalization may provide an attractive solution. In a recapitalization, the owner sells a majority or minority interest, retains meaningful equity, and participates in the company’s future growth. This “second bite of the apple” often creates substantial additional value when the private equity firm exits its investment.

Of course, some owners simply prefer an outright sale and retirement. Others may benefit from a strategic acquisition completed through one of the private equity firm’s existing portfolio companies. In either case, the transaction structure should reflect the owner’s long-term objectives rather than the buyer’s preferred approach.

Private equity firms differ significantly in their investment strategies, industries, and operating philosophies. Accordingly, business owners should clearly define their goals before entering the market. An experienced M&A advisory team will identify the most appropriate private equity partners, negotiate the optimal transaction structure, and help owners maximize value while achieving their personal, financial, and strategic objectives.

Evaluating Purchase Consideration in an M&A Transaction

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Sellers of lower middle market companies should evaluate more than the headline purchase price when comparing offers. Purchase consideration may include cash, seller financing, earnouts, rollover equity, escrows, holdbacks, and other forms of deferred payment. Consequently, two offers with identical purchase prices may provide significantly different economic outcomes for the seller.

Cash paid at closing generally provides the greatest certainty and immediate liquidity. However, buyers may use other forms of consideration to bridge valuation differences or address transaction risks. Sellers must therefore evaluate each component based on its economic value rather than its stated amount.

Two important considerations are the time value of money and the probability of collection.

The time value of money recognizes that one dollar received today exceeds the value of one dollar received later. Accordingly, sellers should discount future payments to determine their present value. Interest rates, payment periods, timing, and other financial assumptions affect that calculation.

The probability of collection introduces another important consideration. A contractual right to future payment does not necessarily provide the same certainty as cash at closing. Several factors may increase the risk associated with deferred or contingent payments:

  • Seller financing exposes the seller to the buyer’s future ability to repay the obligation.
  • Earnouts depend on achieving specifically defined financial or operational performance targets.
  • Escrows and holdbacks may remain subject to indemnification claims or other post-closing adjustments.
  • Rollover equity provides future upside potential but also exposes the seller to continued investment risk.

Earnouts deserve particular attention when evaluating purchase consideration. Poorly defined performance measurements may create disagreements between buyers and sellers after closing. Furthermore, the buyer may control operating decisions that directly influence whether the seller achieves the earnout. Therefore, sellers should compare offers using estimated cash equivalencies rather than headline purchase prices alone. A lower offer with greater cash at closing may provide more economic value than a larger contingent offer. Transaction structure, tax considerations, risk allocation, and the seller’s personal objectives may also influence the decision.

An experienced M&A advisor will help sellers evaluate competing offers and understand the economics behind each structure. Ultimately, the best offer balances purchase price, certainty of payment, transaction terms, and the seller’s objectives. Purchase consideration should always be evaluated based on what the seller reasonably expects to receive, not simply the number presented.

Transaction Structure: Looking Beyond the Purchase Price

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Purchase price represents only one component of an offer to acquire a lower middle market business. An M&A transaction structure may significantly influence risk, proceeds, taxes, financing, and the seller’s obligations after closing.

Consequently, sellers should not automatically dismiss an offer simply because another buyer proposes a higher headline price. A properly structured lower offer may provide greater certainty, better terms, or more favorable after-tax proceeds.

The two most common acquisition structures involve purchasing assets or acquiring the seller’s equity. Each structure creates different economic, legal, accounting, and tax considerations for buyers and sellers.

In an asset sale, the buyer acquires specifically identified assets and assumes certain agreed liabilities. Buyers often prefer this structure because they may select the assets and liabilities included in the transaction. Additionally, buyers may receive favorable tax treatment from the acquired assets under applicable tax rules.

Conversely, sellers may prefer an equity transaction under certain circumstances. The buyer acquires the ownership interests of the company rather than purchasing individual assets. As a result, contracts, licenses, permits, and other relationships may remain with the existing legal entity. However, change-of-control provisions and required consents may still apply.

An M&A transaction structure also extends beyond the choice between an asset and equity sale. Buyers and sellers must evaluate several other components, including:

  • Cash paid at closing
  • Seller financing
  • Earnout payments
  • Rollover equity
  • Escrow and holdbacks
  • Working capital adjustments
  • Assumed liabilities
  • Employment or consulting arrangements

Each component affects the overall economics and risk of the transaction. For example, additional cash at closing provides greater certainty than contingent consideration. Alternatively, rollover equity may provide future upside while exposing the seller to continued investment risk.

Taxes may also materially influence transaction economics. However, the tax consequences depend on the seller’s entity structure and specific transaction terms. Therefore, sellers should involve qualified tax advisors before agreeing to a structure.

The highest purchase price does not always represent the best transaction. Sellers should compare offers based on total economic value, risk, certainty, timing, and their personal objectives.

An experienced M&A advisor may help sellers evaluate competing structures and understand their economic differences. Ultimately, the right M&A transaction structure should balance value, risk, flexibility, and the objectives of both parties.

Rollover Equity: The Opportunity for a Second Bite

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Sellers should evaluate every component of consideration when comparing offers for their businesses. Cash, seller notes, earnouts, and rollover equity in M&A each carry different levels of risk and potential return.

Cash paid at closing provides immediate liquidity and generally offers the greatest certainty. Conversely, deferred or contingent consideration requires sellers to evaluate its present value and probability of collection. Rollover equity requires an additional consideration because its ultimate value depends on the buyer’s future success.

With rollover equity, the seller reinvests a portion of transaction proceeds into the buyer’s ownership structure. This arrangement commonly appears in private equity transactions. Rather than receiving the entire purchase price at closing, the seller maintains an ownership interest following the transaction.

For sellers, rollover equity may provide several potential advantages:

  • Continued participation in the company’s future growth
  • Additional value if the combined business appreciates
  • Alignment of interests between the seller and buyer
  • Potential participation in a future liquidity event
  • Possible tax deferral when properly structured and applicable

However, rollover equity also introduces meaningful risks. The seller exchanges immediate liquidity for an investment whose future value remains uncertain. Furthermore, the seller may hold a minority position with limited control over future decisions.

Therefore, sellers should understand exactly what they will own after closing. Important considerations include ownership percentage, voting rights, distributions, dilution protections, and future capital requirements. Sellers should also evaluate transfer restrictions, redemption rights, and the circumstances surrounding a future liquidity event.

The buyer’s capital structure deserves equal attention. Debt levels, preferred returns, management incentives, and other investor rights may affect the seller’s ultimate return. Additionally, sellers should understand whether their equity ranks equally with the buyer’s investment.

For some sellers, rollover equity in M&A creates an opportunity for what the industry calls a “second bite of the apple.” The seller realizes liquidity today while retaining exposure to future appreciation. If the business grows and later sells at a higher valuation, that retained equity could create additional proceeds.

However, potential upside should not obscure investment risk. Sellers should evaluate rollover equity as a new investment decision, separate from selling their existing business.

An experienced M&A advisor may help sellers evaluate rollover equity within the complete transaction structure. Ultimately, sellers should balance immediate liquidity, future upside, investment risk, and their personal objectives before accepting buyer equity.

Exit Strategy: Taking Chips Off The Table

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Selling a business is one of the most significant financial decisions a business owner will ever make. However, many owners delay planning their exit while focusing on daily operations and long-term growth. As a result, they often miss valuable opportunities to prepare their companies for a successful transition.

Business owners face constant demands on their time and attention. They manage employees, serve customers, respond to competitors, oversee operations, and pursue growth objectives. In addition, they must navigate changing market conditions and economic uncertainty. Consequently, developing an exit strategy often falls to the bottom of the priority list.

Unfortunately, inaction limits future options and increases transaction risk. Waiting until retirement, burnout, or an unexpected life event often forces a sale and rarely produces the best outcome. Instead, business owners should view exit planning as an ongoing business strategy rather than a one-time event.

A well-designed exit strategy identifies potential risks before buyers discover them. It also strengthens the company’s value drivers, improves profitability, enhances operational efficiency, and supports sustainable growth. Furthermore, early planning allows owners to address legal, financial, operational, and management issues that could reduce the company’s valuation or delay a transaction.

Preparation also creates flexibility. Owners who prepare early can choose the right time to sell rather than reacting to unforeseen circumstances. They can evaluate strategic buyers, financial buyers, management buyouts, employee stock ownership plans, or family succession with greater confidence. Accordingly, they maintain greater control over both the process and the outcome.

For most entrepreneurs, their business represents their largest financial asset. Therefore, protecting and maximizing its value should remain a continuous priority. An experienced M&A advisory team can help owners evaluate their business’s readiness, develop an exit strategy, and implement initiatives that increase enterprise value well before entering the market.

Business owners who begin preparing years before a liquidity event consistently achieve better results. They enter negotiations from a position of strength and create a more competitive sale process. After all, every buyer eventually becomes a seller. The best time to prepare for a successful exit is the first day you own the business, not the day you decide to sell.

Tax Planning for M&A: Do Taxes Even Matter?

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Tax planning and compliance issues influence nearly every merger and acquisition (“M&A”) transaction. Although taxes should not dictate a transaction, they may significantly affect its structure, economics, and ultimately, its outcome. Therefore, buyers and sellers should identify potential tax considerations early in the planning process rather than after negotiations begin.

Every M&A transaction presents unique tax challenges. The appropriate approach depends on the parties, transaction structure, ownership objectives, and applicable laws. Consequently, no single strategy applies to every transaction. Instead, buyers, sellers, and their advisors should evaluate tax considerations alongside legal, financial, and operational objectives throughout the sale process.

Transaction structure often represents the first major tax consideration. Buyers and sellers typically negotiate either an asset purchase or a stock purchase, and each structure creates different implications for both parties. In addition, certain reorganizations may qualify for favorable tax treatment if they satisfy applicable IRS requirements. Purchase price allocations also deserve careful attention because different asset classes may receive different tax treatment (i.e., capital gains versus ordinary income tax rates). Likewise, earnouts, installment payments, and other forms of contingent consideration may influence the transaction’s overall economics.

Furthermore, business owners should understand how state and local tax (“SALT”) implications may affect a transaction. These vary by jurisdiction and may include income taxes, sales and use taxes, excise taxes, gross receipts taxes, licensing fees and requirements, and successor liability for unpaid taxes. As a result, multi-state transactions frequently require additional planning and coordination among professional advisors.

Tax due diligence also plays an important role in a successful transaction. Buyers routinely evaluate historical tax filings, compliance procedures, and potential areas of exposure before closing. Accordingly, sellers that organize records and address issues early often experience a more efficient due diligence process.

Successful M&A transactions that ensure the represented party receives optimal tax treatment at closing require close coordination among M&A advisors, tax professionals, legal counsel, and management. Together, these professionals help identify potential tax exposures, evaluate transaction alternatives, and support informed decision-making throughout the sale process. Most importantly, planning should begin well before the business enters the market, allowing sufficient time to address issues before they become obstacles to closing.

Setting the Deal Framework in the Letter of Intent

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A Letter of Intent marks a significant transition in the sale of a business. It moves the parties from preliminary discussions toward a defined transaction. The LOI should establish the principal business terms before the parties commit substantial resources to completing the deal. Most provisions remain nonbinding. However, certain provisions, including confidentiality and exclusivity, may create binding obligations.

Define the Transaction Economics

The purchase price represents only one component of an offer. Sellers should understand how and when they will receive the consideration. Accordingly, LOI deal terms should address purchase price, transaction structure, and the form of consideration. The LOI may also address seller financing, earnouts, rollover equity, escrows, and other holdbacks.

Working capital deserves particular attention. The parties should establish the methodology for determining the working capital target and any resulting adjustment. At this point in the negotiations, the parties should also identify whether the transaction involves an asset or equity purchase.

Address the Seller’s Continuing Involvement

Many transactions require the seller to remain involved after closing. The LOI should address significant expectations concerning employment, consulting, transition assistance, or continuing ownership. Compensation and responsibilities may also require discussion when the seller remains employed. Similarly, the parties should identify material noncompetition or non-solicitation expectations before proceeding.

Establish the Path to Closing

The LOI should provide a framework for moving from agreement to closing. This framework may address due diligence, financing, regulatory approvals, closing conditions, and the anticipated closing date. Before the process narrows, the seller should also understand the exclusivity period. During exclusivity, the seller generally stops discussions with competing buyers. The buyer then conducts confirmatory due diligence and negotiates the definitive purchase agreement.

Resolve Major Issues Early

The LOI cannot anticipate every provision contained in the final purchase agreement. Trying to negotiate every legal detail at this stage would also defeat its purpose. However, leaving significant economic issues unresolved may create problems later.

An experienced M&A advisor should negotiate the LOI deal terms with the entire transaction in mind. The advisor can identify economic issues that deserve resolution before exclusivity begins. Legal counsel should review the LOI before execution and address its binding and nonbinding provisions. A well-structured LOI does more than summarize an offer. It establishes the economic framework and provides a clear path toward the definitive purchase agreement.

How Tax Structure Shapes the Economics of a Business Sale

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A business sale involves more than negotiating the purchase price. The transaction structure significantly affects the economics for both buyer and seller. Accordingly, tax considerations in M&A should enter the discussion early. Decisions made during negotiations may directly influence each party’s after-tax outcome.

Buyers and sellers often approach these decisions from different perspectives. What creates a tax benefit for one party may create additional costs for the other. The choice between an asset sale and an equity sale illustrates this difference.

Buyers often prefer asset purchases because they can receive a new tax basis in the acquired assets. This basis may generate future depreciation and amortization deductions. Sellers may prefer an equity sale, particularly when proceeds qualify for capital gain treatment. The seller’s entity structure may also substantially affect this analysis. C corporations, S corporations, partnerships, and LLCs can produce different tax consequences. Therefore, the parties must evaluate structure within the specific circumstances of the transaction.

Once the parties determine the transaction structure, purchase price allocation becomes another consideration. In an asset sale, the allocation assigns value among the acquired assets. These allocations may affect the seller’s character of gain and the buyer’s future deductions. As a result, allocation often becomes an economic negotiating point rather than simply a tax exercise.

The form of consideration can create additional tax consequences. Cash, seller notes, rollover equity, and buyer stock may affect the timing and character of taxable income.

Other tax considerations in M&A may also influence the transaction. These can include:

  • Tax Elections: Sections 338(h)(10) and 754 may provide different tax treatment when applicable.
  • Tax Attributes: Net operating losses and tax credits may have value, although limitations may restrict their use.
  • Built-In Gains: Certain S corporations may face additional tax exposure following a prior conversion from C corporation status.
  • Transfer Taxes: Real estate, sales, and other transfer taxes may create additional transaction costs.

These issues demonstrate why headline purchase price tells only part of the story. A higher offer may produce lower after-tax proceeds depending on its structure. For this reason, sellers should evaluate competing offers on both a gross and after-tax basis. Buyers should likewise consider tax benefits when evaluating their total acquisition cost.

The M&A advisor should coordinate this analysis with experienced tax and legal professionals. The M&A team can evaluate structure, allocations, consideration, elections, and other material provisions before they become difficult to change.

Addressing tax considerations in M&A early gives both parties greater flexibility during negotiations. More significantly, thoughtful planning helps ensure the transaction structure supports the seller’s broader financial objectives.

Allston Advisory Group is an experienced boutique M&A advisory firm providing a variety of services to lower middle market companies. See our footer for contact information.

(502) 742-2933
[email protected]
P.O. Box 21266, Louisville, KY 40221

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