Caps and Baskets: How Buyers and Sellers Negotiate Risk in a Business Sale
A beautifully drafted set of seller promises is worth very little if the cap is too low to recover under or the basket is structured so you can never reach it. This…
Selling to private equity means selling some or all of your company to an investment fund, or to a company the fund owns, that plans to grow the business and sell it again in several years. Owners most often meet these buyers when a PE-backed platform in their industry makes an offer, or when a firm proposes buying a majority stake while the owner keeps a share.
We represent sellers in sales to private investment platforms and PE-backed platforms, and we make sure the owner understands what each term means for the money actually received.
How Private Equity Deals Differ
Majority Recapitalizations
The buyer takes a majority stake, and the owner keeps a minority interest for a second sale later.
Working Capital Targets
The price adjusts at closing if the company's working capital differs from an agreed target.
R&W Insurance
A buyer's policy covering breaches of the seller's representations, which can shrink the seller's exposure.
Platforms and Add-Ons
A company the fund owns buys smaller businesses in its industry, often with rollover.
Price, Rollover and Insurance
A private equity offer is usually a headline price on a cash-free, debt-free basis with a working capital target. The amount paid at closing goes down for debt the buyer doesn't assume, and up or down if working capital differs from the target, so the target deserves as much attention as the multiple. Many offers also ask the owner to reinvest part of the price, which our rollover equity page covers.
Many of these buyers purchase representations and warranties insurance, which pays the buyer for losses from breaches of the seller's representations. With a policy in place, the seller can usually negotiate a much smaller indemnity escrow. Who pays the premium and how the retention is shared belong in the letter of intent.
Preparing for a Private Equity Buyer
A quality of earnings review looks hard at the numbers behind the price. Owners who prepare keep more of it:
Financial Statements
Reviewed or audited statements, with revenue recognized the same way each year.
Owner Adjustments
A documented list of personal and one-time expenses added back to earnings.
Ownership and Contracts
Clean ownership records, signed agreements with key customers and intellectual property assigned to the company.
Disclosure
A list of known disputes and compliance issues, ready for the schedules and the buyer's due diligence.
How a Private Equity Sale Moves
Indication of Interest
After a first look, the buyer offers a non-binding price range and structure.
Letter of Intent
Price, structure, rollover and a period of exclusivity are agreed.
Quality of Earnings
The buyer's accountants test revenue, margins, owner adjustments and working capital.
Confirmatory Diligence
Legal, tax, insurance and operational reviews, usually from a long request list.
Deal Documents
The purchase agreement, rollover documents and the owner's employment terms are negotiated together.
Closing and Transition
Funds move, the rollover closes and the owner steps into the agreed role.
Frequently Asked Questions
Have a question that isn't answered here? Call us at (817) 631-8842 or send a message.
Ask a QuestionWhat is the difference between an indication of interest and a letter of intent?
An indication of interest is an early, non-binding range of value, often given before the buyer has seen detailed financials. A letter of intent comes after more review, names a specific price and structure, and usually binds the seller to a period of exclusivity.
Will I have to keep working for the company after the sale?
Usually, if you are central to how the business runs. Many private equity buyers want the owner to stay for a transition period or longer, under an employment or consulting agreement with set pay, duties and a non-compete. Those terms, and any incentive equity, are negotiated alongside the purchase agreement.
Does representations and warranties insurance end my liability after closing?
Not entirely. The policy has a retention, similar to a deductible, that the seller may share through a small escrow, and it doesn't cover known issues, purchase price adjustments or breaches of covenants. The seller usually stays responsible for those, and an insurer that pays a claim can generally pursue a seller who committed fraud.
Do private equity buyers acquire smaller companies?
Yes. Many private equity firms and their platform companies buy in the lower middle market, and most of the acquisitions we handle are $2 million to $25 million. Smaller companies are often bought as add-ons, and buyers backed by search funds and independent sponsors work in the same range.
More in Business Acquisitions
- Mergers and AcquisitionsBuyer and seller representation in Main Street and lower middle market deals.Learn More
- Buying a BusinessStructure, diligence, negotiation and closing for buyers.Learn More
- Selling a BusinessPreparation, negotiation and closing for owners selling their companies.Learn More
- Asset PurchasesBuying or selling a company's assets while the seller keeps the entity.Learn More
- Stock PurchasesBuying a corporation's shares, with its contracts and its history intact.Learn More
- Membership Interest PurchasesBuying an LLC's ownership under a membership interest purchase agreement.Learn More
- Partner BuyoutsBuying out a co-owner, or selling your stake, on clear terms.Learn More
- SBA-Financed AcquisitionsPurchase agreements and closings built around SBA 7(a) lender requirements.Learn More
- Seller FinancingSeller notes with clear payment terms, security and remedies for both sides.Learn More
- Earn-OutsContingent price terms defined clearly enough to measure, report and pay.Learn More
- Rollover EquitySellers reinvesting in the buyer, on terms that protect the stake they keep.Learn More
- Search Funds and SponsorsVehicles, investor terms and acquisitions for searchers and independent sponsors.Learn More
- Franchise ResalesBuying or selling an existing franchise location, with the franchisor's approval.Learn More
- Letters of IntentSetting the price, structure and key protections before the deal is drafted.Learn More
- Due DiligenceFinding the legal issues in a business before the buyer owns them.Learn More
- Purchase AgreementsThe negotiated terms that decide who carries the risk in a business sale.Learn More
- Closing an AcquisitionChecklists, payoffs, funds flow and the follow-up that finishes a deal.Learn More
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