The Offer on the Table
An unsolicited call comes in from a private equity-backed platform, or a strategic buyer in the industry, and the number attached is real. For a business owner who has spent years building a company, the temptation to sign and be done is immediate and understandable. The instinct is to treat the offer as a closing window: take the full-cash exit now, or risk that the opportunity never returns in the same form.
That instinct deserves scrutiny before it becomes a decision. Many owners assume the choice is binary, either sell everything now or keep running the business status quo with all the operational and financial risk. In reality, a substantial share of middle-market transactions today are structured so the owner sells a majority stake, retains a meaningful minority position, and participates in a second transaction years later when the business is sold again, often at a materially higher valuation. Owners who understand this structure before the first term sheet arrives are in a fundamentally better negotiating position than those who first encounter it mid-process.
Clearer thinking about this structure does not mean assuming a partial sale is always the right answer. Owner’s should be equipped to compare a full exit against a partnership structure on genuine economic terms, rather than choosing under pressure between an offer they understand and a structure they do not.
What a PE Partnership Structure Is
A private equity partnership, often referred to as a recapitalization or a rollover transaction, involves an owner selling a majority interest in the company, typically 60% to 80%, to a financial sponsor while retaining the remaining equity. The owner continues to hold an ownership stake and typically assumes an operating or advisory role within the company going forward. Generally, within three (3) to seven (7) years the sponsor will exit allowing the owner to participate in the proceeds of their remaining equity. The retained equity is frequently referred to as a “second bite of the apple” because it allows the owner to benefit twice: once at the initial transaction, and again when the business is sold under new ownership, ideally at a larger valuation driven by the growth achieved during the sponsor’s hold period.
Why This Warrants Independent Evaluation
The appeal of a full sale is its simplicity. The owner receives cash, the tax treatment is straightforward to model, and there is no continued exposure to the business. A partnership structure trades that simplicity for the possibility of larger total consideration, but introduces variables that most owners have not evaluated before: rollover percentage, waterfall mechanics that determine how proceeds are split between the sponsor and management at the second exit, governance rights that affect how much control the owner retains post-close, and the sponsor’s own track record of value creation during a hold period.
These are not variables that an internal finance function is typically equipped to model, because few owners or their internal teams have negotiated transactions in their careers. A wealth manager or CPA can advise competently on what to do with proceeds once a deal is signed and can model after-tax outcomes under a given structure, but neither is generally positioned to run a competitive process among multiple sponsors, negotiate rollover terms, or evaluate how one sponsor’s proposed capital structure and growth plan compares to another’s. The gap is not one of expertise in taxation or wealth planning; it is a gap in transaction structuring and negotiation specific to this type of deal.
What is at stake becomes clear at the point the term sheet is signed. An owner who accepts the first proposal without a comparative process has no basis for knowing whether the rollover percentage, governance terms, or implied second-exit value are favorable relative to what other sponsors would have offered. That determination is difficult to make in hindsight, and by the time the business is under new ownership, the terms are set.
When This Becomes Relevant
- An owner receives inbound interest from a PE-backed platform seeking to acquire the business as an add-on to an existing portfolio company.
- The owner is approaching a personal or professional transition point but wants to remain involved in the business and retain a degree of ownership, rather than exit entirely.
- The business has recently posted strong growth in revenue or EBITDA, and the owner suspects a full sale now would not reflect the value the business is likely to generate over the next several years.
- A competitor or industry peer has completed a similar recapitalization, prompting questions about whether the same structure could apply to the owner’s business.
- Existing advisors, such as legal counsel, a CPA, or a wealth manager, hold differing views on whether a full sale or a partnership structure is preferable, and the owner needs an independent, process-based perspective.
Key Considerations
Rollover percentage is not the only term that matters. Two sponsors may offer the same retained equity percentage but attach very different governance rights, veto provisions, or requirements around the owner’s continued operating involvement. Owners should weigh the full term sheet, not just the headline number.
The sponsor’s growth plan and track record shape the size of the second bite. A financial sponsor’s stated intention to grow the business through acquisitions, geographic expansion, or operational improvement is only useful if there is a credible basis including whether that sponsor has executed similar plans successfully in past investments.
Liquidity timing carries real personal and financial weight. A partnership structure defers a portion of the owner’s liquidity often for several years, and that deferral should be weighed against the owner’s financial requirements, time horizon, , risk tolerance, and need for diversification away from a single asset.
Waterfall mechanics determine who benefits first at the second exit. The order in which proceeds are distributed between preferred shareholders, management incentive pools, and common equity holders can materially change what an owner ultimately receives, even when the headline sale price at the second transaction appears attractive.
The Houlihan Capital Approach
Houlihan Capital structures its sell-side engagements to solicit full-sale and partial-sale proposals concurrently, rather than defaulting to a single-track process built around one type of buyer. This means the same competitive process used to identify strategic acquirers is also used to identify and qualify financial sponsors willing to structure a rollover transaction, giving the owner a direct, apples-to-apples comparison.
Because Houlihan Capital also maintains an active valuation practice, the firm is able to build second-exit models that reflect multiple hold-periods, leverage, and sponsor-return scenarios for each competing proposal. This allows an owner to compare not just the initial purchase price across bidders, but the projected value of the retained equity stake under a range of assumptions about how each sponsor is likely to grow and eventually exit the business. That analytical layer is what separates this engagement from a purchase price negotiation conducted on headline terms alone.
This service is structured differently from other engagements in the Houlihan Capital practice. A standalone Business Valuation produces an independent opinion of enterprise value at a point in time, without running a process or negotiating terms with a counterparty. A conventional Sell-Side M&A engagement is built around a single, complete exit event for the owner. This engagement is built around a different objective entirely: structuring and negotiating continued ownership economics alongside an initial transaction, which requires diligence, deal structuring, and negotiation work specific to rollover equity and second-exit modeling.
What This Positions an Owner to Do
An owner who works through this process is positioned to evaluate a rollover proposal on its underlying economics, not its headline multiple, and to explain that evaluation clearly to family members, business partners, or a board when the decision requires their support. That owner is also better equipped to resist timeline pressure from an eager acquirer, having already modeled the range of realistic outcomes under a partnership structure rather than confronting those questions for the first time under deadline.
The result is not a guarantee of a larger outcome. It is the ability to make a fully informed choice between a full exit and a continued ownership position, using comparative analysis and financial modeling.
Next Steps
To learn more about PE partnership structures or discuss how this fits within an existing succession or exit plan, contact:
Connor Fabian
Senior Associate
cfabian@houlihancapital.com
(312) 450-8608
