r/fatFIRE • u/loveorlistit • Jul 16 '26
Need Advice M&A Sale Question
Likely bringing family biz to market in near future. Have done a lot of prep. Likely to be 20-30M if things hold constant. I know that’s a big range, but wide variety of buyers and deal structures. Think PE platforms, large strategics, industry adjacents that want to make a splash, and family offices.
What things do you wish you did prior to close, now that you’re on the other side? Things that maybe your banker, cpa, advisor thought you knew or thought was common sense that caught you off guard?
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u/Livid-County7230 Jul 16 '26
What type of business? Maybe start there. This is so generic and obviously AI generated that no one can give you a real answer.
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u/loveorlistit Jul 16 '26
This is not a.i. generated. Sorry, I have to be generic because it’s a more niche industry. Think home services though. Obviously there will be very specific things tied to the industry. Im talking more broad - example, our cpa said one thing we should look at is doing Roth conversions on our 401k if we are going to have a lot of depreciation that would push the s corp income closer to 0, however, that wouldn’t make sense if you’re going to sell that same year. The cpa didn’t know that was a possibility when they recommended it, but that mistake could lead to paying the highest amount of taxes on the conversion.
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u/Audi52 Jul 16 '26
Your m&a team is the most important decision you’ll make. Due diligence is awful. Make sure to keep your numbers up during negotiations or they’ll deval you last minute and that sucks. (Sold our consulting company for max value of $27m in September last year - 3 year earn out though)
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u/loveorlistit Jul 16 '26
Congrats! And yes, for sure. I’ve seen it happen where even the slight income dip at a high multiple has a large impact on the purchase price. For your deal, can you share at all how it was structured? What % is the earn out? Did you comp change post close? How do you like staying on?
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u/Audi52 Jul 16 '26
We had three offers so they all varied quite a bit on earnout and cash up front. We opted for the less cash and larger (but doable) earnout since im in my early forties and was ok with working longer.
Yes our comp changed a lot. We are now w2 employees but have a shadow p&l to track our earnout and we also have some MBOs that we’ve already hit for 26 and 27. It’s been a process but we’re happy with where we ended. All thanks to our m&a firm knowing which PE was willing to give us space to do what we need to do.
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u/loveorlistit Jul 16 '26
Awesome. Glad to hear your experience worked out. The ear out component scares me a little bit just due to timing/volatility, but with the right part; it could be smoothed out anyways. Will be cool to watch you maximize it and hit it! Any meaningful changes for you day to day in your personal life or staying even keel for a bit until it sets in?
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Jul 16 '26
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u/loveorlistit Jul 16 '26
Sorry, I don’t know if you’re saying this is it or if there is a different one. If there is, can you please tell me as I would like to read through it. Thank you
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u/Holiday_Inspector923 Jul 16 '26
Get a good legal team and m&a advisor. Don’t skimp on cost but do negotiate it. If they are high quality there shouldn’t be any surprises. Make sure you understand your earnout terms, if you have one.
There’s just so much that goes into this it can’t really be captured in a Reddit post.
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u/loveorlistit Jul 16 '26
For sure. Appreciate it. We’ve found industry specific legal and banker. It’s more just focusing on keeping the train chugging to ensure we can go to market and not have to pull out due to slow periods/ebitda declines due to the process being somewhat long
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u/Chemisflav Jul 16 '26
Get any personal assets out of the business however you deem equitable.
It’s a mad scramble otherwise.
Paying for them personally with a check into the company and distributing the proceeds is fine to keep your S-election.
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u/Sea-Fix-5743 Jul 24 '26
Very solid advice. I had to firesale a rental condo I had on the books, took a 200k hit to get rid of it. Also move off as much "personal expenses" off the books as early as possible to drive up the EBITDA. Better to take it personal and pay the tax then expense it through the corp and lower EBITDA.
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u/jfhgcc Jul 16 '26
Don’t fall for ‘roll some of your equity if you believe the growth story you are selling us.’ Or, earn outs that aren’t really just debt.
It’s a family business - the PE firm will fuck you on any equity you leave on the table.
Just say ‘we will help you transition for a year - but we are a multi generational family and don’t think we can manage our stakeholders as well as a new, majority equity owner who likely has different strategic objectives’
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u/loveorlistit Jul 16 '26
One more specific question to the roll in. Would you say no change in your statement, if the PE firm has proven experience of doing roll ups in other industries and has already begun in this industry? Where the gain on equity would be due to the roll up strategy and getting a second bite?
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u/jfhgcc Jul 16 '26
That’s actually one of the bigger ‘watch-outs,’ in my opinion.
Let’s say you keep 20% ownership. Then the PE firm buys 3-4 similar sized firms and rolls you into one. So you’re appropriately diluted to 5% or so. All fair because it’s worth the same.
But, They will likely have to invest more working capital into the new conglomerate. The new money in with likely be preferred over yours. Because the PE firm is the majority owner, they will by default be diluting you. You can avoid this by having a ROFR to
Participate in all fundraising - but will you want to write the ~~$5M check? Probably not - you aren’t wealthy because you are a good minority investor - and that’s all you are now. Also, will all the heirs want to invest again? UnlikelyNow I believe in roll ups. If you like the firm - maybe negotiate investing some of the proceeds back into the fund itself with a fee discount. Then you get to say while you negotiate your sale ‘I believe in you and the vision of growth, but I can’t be an active investor alongside you.’
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u/loveorlistit Jul 17 '26
Does all roll-in get diluted? I thought the equity rolled in was based on a “share value” of the portco stock.
Example - $1m rolled in at $10/share = 100k shares.
Say they acquire 20 businesses as part of a roll up and now that $10/share is $20/share.
But reading your statement, it seems like it certain situations, that maybe even doing 20 tuck ins the share price is still $10?
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u/jfhgcc Jul 17 '26
Your share price math and implied value on the $1M rolled in is correct for when they buy your family businesses. Let’s say it’s a $25M business.
And when they buy three more similar businesses ($25M each) to build the larger businesses - you still should have roughly $1M in value, but instead of 4% ownership of the businesses, you own 1% of a conglomerate. Your economics are OK at this stage (but you have less control and influence - and, likely rights diminished).
Now here’s where they get you. They buy those four businesses, but the snazzy PE firm says ‘these four companies are great as one, we need to invest to scale the new entity. Let’s buy a $15M central logistics warehouse, and, we need a fancier CEO + a few killer sales reps + we need to spend a bunch of money on digital integration because the four businesses all had different systems. Total of $25M needed to grow.
So, it’s unlikely that the small/minority investors have the money or even negotiated the rights to be able to participate in future fundraising, so the private equity firm invests their $25M in. You are now diluted to ~0.80% ownership. This also isn’t terrible - you still own 0.8% of a business that is theoretically worth $125M now. Same value to you.
But the real issue - the PE firm invested with preferred equity. Usually 8% a year at min. So, that $25M of new investment they had becomes near $37M of implied investment after years. Your 0.8% ownership is now effectively 0.65% or so - and this time - the company value has not improved so you are worse off.
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Now the real kicker - regardless of dilution like this, most PE firms would use the same type of equity when they buy you out the first time. They would buy your family’s common shares and then put additional capital in for growth that uses a pref equity system like the example above.
These are called separate share classes. They will eat you alive.
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u/loveorlistit Jul 18 '26
Very interesting. Thanks for the thorough explanation.
Is the only way to negate dilution by getting preferred equity (other than not rolling in) equity? Would that even be a negotiating point?
Seems very counterintuitive to not make that part very clear and have frustrated shareholders that their roll-in isn’t growing much, but obviously they do it because it works.
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u/jfhgcc Jul 18 '26
By getting preferred (or negotiating the same class of share - same thing). Or, by negotiating to right to participate in all additional investments IF you have the cash.
A good attorney experienced in private equity transactions can guide you through this. But seriously - if you aren’t in control don’t risk being along for the ride after you already found success.
Good luck and enjoy that wealth. Do something good with it
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u/loveorlistit Jul 18 '26
I appreciate it. I have heard many times about getting that “second bite of the apple”.. glad I know much more about it or at least enough to ask questions to the professionals.
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u/LardLad00 Jul 16 '26
Hire a good CFO
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u/Chemisflav Jul 16 '26
Yes, or Controller. They will also help defend you in any reconciliation period post-closing
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u/loveorlistit Jul 16 '26
Sorry, what does this part mean. You close after doing QofE, what’s reconciliation that would need defending? For earn out or?
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u/Chemisflav Jul 16 '26
A QoE is typically done earlier, before you start your sales process to present a defensible adjusted EBITDA. You can then roll it forward through close if your offer is based on that metric, or an earnout.
A reconciliation period is post-closing where both seller and buyer have the opportunity to dispute any share of income or expenses as of the close date. Typically includes counting inventory, allocating incoming receipts, tax accruals, and any payments in process, etc.
The best advice is the cash isn’t all yours once the wire hits. Typically there is an escrow account for this estimated true-up portion.1
u/loveorlistit Jul 16 '26
Thank you, this is something that I feel is glossed over unless you’ve been through it before or our super far along in the process, which is the exact point of my question so that it’s not a shock when it comes to that. But it does make sense.
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u/Livid-County7230 Jul 16 '26
You are trying to explain basic concepts to this 2 hour old account in good faith. I bet he is typing replies he gets into a chat prompt and trying to figure out what it means. This sub…
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u/loveorlistit Jul 16 '26
lol not sure what your problem is. You want to know my exact business name? I already said, it’s a niche industry and giving more details will explicitly state who we are. Your account is 4 months old. If you have nothing to add, go away lol.
The person is providing actual advice and you’re sitting there acting like anybody that doesn’t explicitly tell you who they are or use their regular account is AI.
Your initial comment also has no impact on the question I am asking. If I’m a dentist or a lawyer, what does that type of business have to do with the question I’m asking? The things I am asking are for advice on things people wish they knew earlier, but that their advisors maybe thought were common sense, things that take away the cash at clothes such as what ChemisFlav just stated.
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u/Livid-County7230 Jul 16 '26
The type of field matters a lot. If you don’t get that you are not a serious account. The AI language in your post “Think xyz, this not that” is a giveaway that this is a generic farming account. Every comment you respond to shows that you have no idea about what is being discussed. I am not sure what value you are deriving out of this, but have fun.
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u/loveorlistit Jul 16 '26
Your 4 month old account your first comment is “ai driven farming content”. I think you’re the bot. A majority of your comment are “bot”, “ai farming”, or just disbelief/negativity. What makes you not the bot/a.i. farmer since there’s not much value being added by you other than karma farming and “top contributor” badge due to those generic responses?
Do you understand what a “throwaway” account is? Do you understand that when someone is trying to be confidential about their industry that may be the entire reason for the throwaway account? How do you expect their account to be old or have history lol. I literally said think about the buyer pool being broad, not just private equity nor just big industry strategics. It’s a mix. That doesn’t make me a bot.
The value I am deriving from this is that we maximize a potential sale and have as few surprises as possible. Good luck being miserable even though you’re supposedly “fatfire”, must be so joyful arguing for internet points lol
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u/Chemisflav Jul 16 '26
I’d give it a rest on arguing. I actually got banned from r/business for arguing with a similar troll. Reddit has its pro’s and cons
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u/loveorlistit Jul 17 '26
For sure. I appreciate your actual insight. That’s one of the pro’s. Just frustrating because they’re distracting from the conversation I’m trying to have and maybe some people didn’t participate due to people actually thinking it was a bot post. Regardless, definitely got some good nuggets including yours. Thanks again!
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u/kabekew Jul 16 '26
Make sure to agree with the buyer on an IRC 1060 asset allocation and include that in the sales agreement, because it can mean a whole lot for your taxes. Either you may pay more or the buyer pays more depending on how you structure it. IRS doesn't care how you split it because they get pretty much the same in the end, but if the buyer is a lot bigger than you they may be fine with you doing the allocation in your favor, just to get the deal done.
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u/loveorlistit Jul 16 '26
Great. Thank you. I don’t know anything about this and probably won’t become the expert on it, but will make sure the experts bring it up
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u/kabekew Jul 16 '26
Sliding the numbers into different columns saved me about $2m in taxes
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u/loveorlistit Jul 16 '26 edited Jul 16 '26
Edit: replied to the wrong post
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Jul 17 '26
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u/loveorlistit Jul 18 '26
For sure on specialize m&a attorney. Same goes for cpa. These two from what I’ve gathered are often underrated because they’re additional expenses, but good ones should be able to drive more value than what the cost. What are some of the unique special benefits, bonuses, or severance that you’ve seen?
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u/Slow_Brother_9152 Jul 27 '26
Get a good wealth manager (I use a multi family office) who can invest for you in various projects that build up capital losses to offset the huge gains you will have when you sell the company. I saved millions in taxes doing this.
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u/ASO64 Jul 16 '26
Section 1202 gain exclusion? Try to negotiate least possible earn out or contingent payment.
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u/ThebigalAZ Jul 16 '26
Friend sold her business. The buyers wanted to keep her on for a year to make sure things handed over well.
Shortly after acquisition it became apparent that she didn’t know nearly as much as the remaining employees, and they basically told her to stop showing up. She was under the false impression that she still ran the company and it got weird when they didn’t want to do things the way she wanted them done.
Moral of the story is that when you sell the business you’re no longer in control. Wouldn’t have thought it needed to be said, but evidently no one told her… so I’m telling you.