By: Daniel J. Fetter, Esq. The SMB M&A series provides insights into buying and selling a small business. If you own a small business, you may have been approached by a private equity firm regarding the sale of your company. A private equity firm is an investment company that pools capital from its investors to buy and manage companies with the goal of selling for profit within 5-10 years. Our firm has been involved in a growing number of PE deals over the last several years. The typical deal structure we see offered to small business owners is the purchase of assets in exchange for cash (around 75-85%) and equity (around 15-25%) in the new company. Owners will temporarily work at the company for a period of time to assist in the transition, and in some cases, do so for an earn-out. What are some of the pros and cons of selling your business to a PE firm? Pros: PE firms can offer an attractive purchase price and potential for significant returns. PE Firms tend to bring industry knowledge and have more access to resources to boost growth. Many structures offer Sellers with "rollover equity", i.e., equity in the buyer company. This offers owners a "second bite at the apple" if the new buyer is successful in growing the business and the value of the equity increases over time. In some cases, the rollover equity can provide tax benefits by deferring taxes that would otherwise be due in an all cash transaction. This may be beneficial for owners looking to minimize immediate tax liability. Cons: Owners with rollover equity are exposed to the risks associated with the business. If the business is poorly managed by its new owners, the value of your equity can decline. We advise clients to prepare themselves for the possibility that they may never "cash out" the rollover equity. Your equity in buyer's company may be diluted if the company issues equity in the future (unless you are willing to contribute more cash, which is very unlikely). If your interest is diluted it could reduce future gains. In some cases, the buyer relies on the current owners to continue working in the business. This may not be ideal for those sellers hoping to retire. Owners have little to no control over the management of the business. While they may be offered a seat on the board, it tends to be a minority position with no power. Selling to a PE firm typically involves an extensive due diligence investigation and complex legal documents and negotiations which lead to increased transaction expenses. In some cases, PE firms are not willing to negotiate its "standard agreements" since it has used those same documents in past transactions with other acquisition targets. The Scolaro Law Firm handles small business M&A transactions throughout New York State, Vermont, Pennsylvania and Florida. If you are interested in buying/selling a business, please contact Daniel Fetter or the attorney at our firm with whom you work. This article is intended to be for informational and discussion purposes only and is not to be construed as legal advice or as a legal opinion on which certain actions should or should not be taken.