Dana's Four Doors: Headline Multiple vs. Spendable Dollars

Define the metric first. Not headline enterprise value - after-tax cash she can spend or reinvest within 24 months, discounted for probability and counterparty risk. Assume ~25% combined tax on gain for illustration; Dana's CPA must confirm.

1. Strategic buyer - $22M all cash. After tax ≈ $16.5M. No rollover, no employment hook, no earnout. Highest certainty, lowest complexity. Strongest risk-adjusted outcome despite the lowest headline multiple.

2. PE platform - $26M headline.

• Cash at close: $18.2M → ~$13.6M after tax.
• Rollover $7.8M: illiquid, minority position, no control, subject to the sponsor's exit. It is not an exit - it is a second investment with a concentrated, levered risk profile for someone whose entire net worth is already in this industry.
• Earnout $3M: assume 50–70% realization absent strong mechanics; likely tied to EBITDA she partly controls and partly doesn't post-close.
• Employment: three years; rollover vesting and forfeiture provisions can punish her for leaving or being terminated. Realistic risk-adjusted value is materially below $16.5M unless the rollover performs.

3. ESOP - $20–22M.

• 30% seller note ≈ $6.0–6.6M of credit exposure to a company that is now leveraged to pay her.
• Potential deferral under IRC §1042 if the ESOP holds 30%+ after the sale (deferral generally capped at $10M plus a payroll-based amount; confirm current limits and eligibility with tax counsel). Real value if it applies, but it converts tax savings into illiquid qualified replacement property.
• Ongoing repurchase obligation and, in many deals, a personal guarantee.

4. Management buyout - $1.5M cash, $18M note. She becomes the bank for two first-time owners of a thinly capitalized company, in the same industry she is trying to leave, with no diversification and no collateral beyond the business she just sold. Weakest on every axis; has a role only as a legacy/gifting strategy with a substantial discount and real security.

Recommendation: push the strategic buyer to re-engage at 5.5x and confirm it in writing; treat PE as the second choice, and only if she genuinely wants three more years and understands that 30% of her proceeds becomes illiquid. Do not let her compare 6.5x to 5.5x as if they were the same currency.

On the earnout:

• Which EBITDA definition - and does it include the corporate allocations the sponsor will layer on post-close?
• Does it survive a subsequent sale of the platform? Is it accelerated on a change of control?
• Who controls the levers (capex timing, hiring, intercompany charges)? An earnout in a business she no longer controls is a lottery ticket.

On the rollover:

• Valuation of the rollover units versus the price paid for her shares. Rollover is often struck at a lower per-unit value than the cash purchase price.
• Put/call rights, vesting, forfeiture on termination, drag-along to a future sale.
• Whether the rollover is taxable or tax-deferred, and whether it is structured to preserve QSBS or §1042 eligibility (get this in writing, not in conversation).

On employment:

• Termination "without cause" and what happens to unvested rollover and any earnout.
• Non-compete scope - if she's 62 and wants a board seat at another company in five years, this matters.

On the sale mechanics:

• Working capital peg and how a post-closing true-up could take another seven figures from her.
• Escrow size and duration; R&W insurance and whether she bears a deductible.
• Representations and indemnity caps, and whether they survive as a percentage of proceeds.

On the ESOP/MBO alternatives:

• Personal guarantee exposure, repurchase obligation funding, and what happens if EBITDA drops 30%.
• §1042 timing: the election and qualified replacement property reinvestment window must be planned before closing, not after.

The one-line version for Dana: the difference between 6.5x and 5.5x is $4M; the difference between a well-drafted and a badly drafted earnout and working capital peg can also be $4M. Sign the structure, not the multiple.

Test it with three forced choices rather than a conversation about feelings:

1. "Would you take $16.5M you can invest tomorrow, or $18.5M where $7M is locked in a company you can't sell for five years?"
2. "If the buyer asked you to stay three years but report to a 34-year-old VP of operations, would that change your number?"
3. "Your employees - do you care whether the buyer keeps them, or is that not your problem after closing?"

Why this matters mechanically: her stated objective is not actionable. "Highest number" cannot be optimized, because every structure has a different mix of timing, certainty, and control. Once you know whether her real driver is liquidity, legacy/employees, staying busy, or family, the ranking of the four paths changes:

• Liquidity/simplicity driver: strategic buyer wins outright. Advise her to stop negotiating with the sponsor and start re-engaging the strategist before the 18-month-old expression of interest goes stale.
• Legacy/employees driver: ESOP moves up sharply, and the §1042 deferral may make it competitive after tax. But she must accept the note risk and a governance role she may not want.
• Staying busy/identity driver: the PE path genuinely fits, and the rollover is not a bug - but she needs to be told that she is trading liquidity for a job and a second, more concentrated bet.

The practitioner point: a 62-year-old whose entire net worth is one illiquid asset usually says "highest number" and means "I can't afford a mistake." Your job is to convert that into a written objective - a target after-tax number, a date, and a ranking of non-financial priorities - before any advisor runs a process. Otherwise every structure looks equally good and the loudest advisor wins.