Selling to Private Equity vs a Strategic Buyer: Price, Terms, and What Happens After

Two letters of intent land in the same week. The strategic buyer offers $15 million. The private equity firm offers $16 million. The reflex is to take the bigger number. On these two offers, that reflex costs the seller money.

The rule is simple. Compare cash you control on closing day, after tax and deductions, first. Then put a probability on every dollar that arrives later. A private equity offer usually pays less at close and more later, through rollover equity. A strategic offer usually pays more at close but ties more of the rest to an earnout that the buyer's own systems control. The higher headline price only wins if the deferred part is likely to show up.

This is written for owners of US service businesses doing roughly $5M–$20M in revenue who have, or expect, competing offers.

Why the two buyers price differently

A strategic buyer already runs a business like yours. It can cut overlapping costs: a second finance team, duplicate software, a lease. It can also sell its products to your clients. That expected synergy is what lets a strategic buyer stretch on price, but it rarely pays you for the full synergy. The synergy belongs to its shareholders.

A private equity buyer is buying a platform, or an add-on to one it owns. It funds the purchase with a mix of its fund's equity and acquisition debt. It needs to sell the business again, usually within a few years, at a higher value than it paid. So it prices off what your earnings can support in debt today and what the business might sell for at exit. It also likes you to keep some equity so you stay motivated. That retained stake is rollover equity.

Neither one is a kinder buyer. They make money in different ways, and each LOI is built to suit how that buyer makes money.

The same company, two offers

Here's a hypothetical $14M-revenue IT services firm with $2.5M of adjusted EBITDA. Both buyers see the same numbers.

Now deduct what comes off the top in either deal: the target working-capital shortfall, transaction fees, and the debt-like items buyers subtract from price. Say $450,000 in both cases. The strategic deal leaves about $12.3M of closing cash, and the PE deal leaves about $10.75M.

That's a $1.55M gap in certain money, running in the strategic buyer's favor, even though the PE offer reads $1M higher.

Put a probability on every deferred dollar

The deferred pieces aren't worth face value. Weight them. Here's an illustrative way to do it:

The earnout scenario model walks through why a revenue earnout measured inside the buyer's CRM and pricing deserves a hard haircut. You stop controlling the drivers on the day you sign.

On these assumptions, the strategic deal is worth about $13.3M risk-weighted. The PE deal, before the rollover, is about $12.1M. The PE offer wins only if the rollover is worth more than roughly $1.2M in today's dollars. That's possible, and sometimes likely, but it's a bet on the sponsor's leverage, its exit timing, and your next three years of work. Value the rollover as its own downside, base, and upside cases, not at the sponsor's purchase price.

Structure decides your tax, not just your price

The two buyers also tend to want different deal structures.

Strategic buyers often prefer an asset purchase. Both buyer and seller then file IRS Form 8594 and allocate the price across seven asset classes using the residual method. Goodwill and going-concern value land last, in Class VII (IRS Instructions for Form 8594). How much goes to equipment, receivables, a non-compete, and goodwill changes the character of your gain, so the allocation schedule belongs in the negotiation, not in the closing binder.

Private equity rollovers depend on tax-deferral rules. If you contribute property to a partnership, such as an LLC holding company taxed as a partnership, in exchange for an interest, no gain or loss is recognized under IRC §721(a). If the holding company is a corporation, IRC §351 requires the transferors, as a group, to control it immediately after the exchange. Control means at least 80% of voting power and of other stock under §368(c). Cash taken alongside the stock is taxable boot. Your deal counsel structures this. Your job is to know that the rollover isn't automatically tax-free and to ask how it's handled before the LOI is signed.

If you can't yet say which of your earnings a buyer will treat as real, the offer comparison is built on sand. Before the second round of LOIs, use a Leak Check on the add-backs a buyer will challenge to find the margin, tax, and cash items most likely to be re-priced in diligence.

What happens after you sign

Price is only part of the decision. The other part is what your next three years look like.

With a strategic buyer

• Your role usually shrinks fast. Expect a fixed-length transition agreement, then an exit. If you want to keep running something, a strategic buyer is the wrong fit.
• Your team gets integrated. Finance, HR, IT, and often sales roles are where the synergies are. Some of your people won't survive the duplication review, and you should plan retention bonuses accordingly.
• Your clients get the buyer's pricing and process. That can lift revenue per client or trigger churn, and if your earnout depends on retention, you carry that risk.

With a private equity buyer

• You keep running it, with a board. Monthly reporting gets tighter, covenant tests start, and the board approves the budget. The reporting a PE-backed service company needs is a real step up from owner-run financials.
• The company now carries acquisition debt. Leverage that looks manageable at $2.5M of EBITDA gets uncomfortable in a down year, and lenders don't care that you're the founder.
• Add-ons follow. Expect the sponsor to buy competitors and bolt them on. That's where the second bite of your rollover usually comes from, and it's also where execution risk lives.

Five terms that move the answer

These clauses can flip which offer is better:

1. Working-capital peg. A peg set above your normal level takes cash out of your proceeds at closing. Model it using the working-capital peg math.
2. Debt-like items. Deferred revenue, accrued bonuses, and unpaid taxes can be treated as debt and deducted from price. The debt-like items ledger shows which ones service businesses miss.
3. Rollover security class. Is your rolled equity the same class as the sponsor's, or common stock behind a preferred return? Behind a preference, your 20% can be worth much less than 20%.
4. Earnout definition. Revenue, gross profit, or EBITDA, and measured under whose accounting policies? EBITDA earnouts absorb the buyer's overhead allocations.
5. Escrow and indemnity. The holdback percentage and survival period are negotiated, not set by law. Every point held back is cash you don't control on day one, so move it out of the closing-cash line in your comparison.

A Bennett decision rule

Run the comparison in this order and stop when one offer clearly wins:

1. Closing cash after the peg, debt-like items, fees, and estimated tax.
2. Risk-weighted value of the note and any earnout.
3. Present value of the rollover under a downside, base, and upside case.
4. The post-close life you actually want: out in a year, or running a bigger company for five.

If the PE offer only beats the strategic offer when you use the upside rollover case, treat the two as roughly equal on money. Then choose on step four.

Fractional CFO support can build this model with you before the second round of LOIs, which is when your leverage to change terms is highest. If the comparison already hinges on whether your adjusted EBITDA will survive a buyer's diligence, start with a Leak Check on the margin and tax items most likely to get re-traded. Then come back to step one with numbers you can defend.