The Assumption Costs Money
Tell a business owner you're running a sell-side process, and the first question is almost always the same: Are we talking to any strategics?
The implication is understood. Strategic buyers, usually a competitor, a supplier, or a larger player in your industry, are presumed to pay more. The logic is intuitive: they have synergies, they can eliminate redundant costs, they see your customer relationships as immediately additive. The math should work in your favor.
Sometimes it does. Often, the more important question is what you're actually taking home; and when.
The Structure Problem
Strategic acquirers frequently offer the highest headline number. They also frequently structure deals in ways that erode the value of that number.
Here is what that erosion looks like in practice:
Earnouts. A strategic buyer offers $18M for your business. $12M at close, $6M contingent on hitting revenue targets over the following 24 months. The targets are achievable in isolation; but you will no longer be running the business. You'll be navigating a new corporate structure, reporting to someone else's leadership team, and dependent on decisions made in an organization you don't control. Earnouts tied to post-close performance in integrated businesses are, statistically, only partially paid.
Rollover equity. A PE-backed strategic offers a strong multiple but requires you to roll 20-30% of your proceeds into equity in the combined entity. The new equity is illiquid, its value depends on a future exit you won't control, and it's typically in a holding company structure that insulates the buyer from early redemption requests. Rolled equity has real value in some structures. It also has real risk; and that risk is often underweighted in the initial pitch.
Working capital adjustments. Strategic buyers have M&A teams. They know how to set working capital pegs, true-up mechanisms, and post-close adjustment periods in ways that systematically favor the buyer. The gap between the LOI price and the final wire amount in strategic transactions averages more than most sellers anticipate.
What Financial Sponsors Actually Offer
Private equity buyers are not paying for synergies. They're paying for cash flow; which means their underwriting is more systematic and more transparent. They need a return on capital over a defined hold period, and they'll model what they can pay to achieve it.
What this produces, in a competitive process, is a clear ceiling; but also a clean structure. PE buyers close on clear terms. They have established playbooks for working capital, representations and warranties, and management transition. They are, in aggregate, more predictable counterparties than strategic buyers.
The rollover equity they require, typically 10-20% for the selling owner who stays involved, can also be genuinely valuable. A well-structured PE deal with a 30% rollover and a clean five-year hold to a secondary transaction has produced better total outcomes for selling owners than a full-price strategic exit paid in earnout-dependent consideration.
How to Think About This
The question is not strategic or PE. The question is: what is the net present value of what you're actually receiving, accounting for structure, contingencies, and probability of payment?
A $20M strategic offer with $8M in earnout, a 20% rollover, and an 18-month integration risk period may be worth $14M with reasonable probability. A $17M PE offer with clean consideration and a structured rollover into a business with strong growth momentum may net more.
This is not a hypothetical distinction. These analyses are done in every serious sell-side process. The owners who understand them before an offer arrives are the ones who negotiate from clarity rather than reacting to numbers they don't know how to compare.
Running a competitive process, one that generates interest from both strategic and financial buyers simultaneously, is how you create the context to make this comparison with real data.
That process doesn't start when you decide you're ready to sell. It starts with the preparation that makes the process worth running.
If you're thinking about the difference between what you've been told your business is worth and what a real process would produce, let's talk.
Related Structures
