A private equity-backed platform company is trying to buy us at a five-times multiple, but we know their platform trades at a ten-times multiple. How do we structure the deal to capture a portion of this multiple arbitrage instead of letting them pocket all the valuation gain?

Question

Tyler Smith · Accepted Answer

Private equity sponsors make their money by buying smaller businesses at lower multiples and rolling them into a larger platform that commands a much higher multiple. This is multiple arbitrage, and if you accept a standard standalone valuation, you are leaving millions of dollars of enterprise value on the table for the sponsor to collect. To capture your share of this arbitrage, you must adjust your deal structure. Do not settle for a simple cash-at-close exit. Instead, negotiate a rollover equity component or a structured unitranche instrument that lets you retain a stake in the parent platform entity. By rolling fifteen to twenty percent of your equity into the sponsor's platform, you align your incentives with theirs and participate directly in the eventual high-multiple exit of the combined entity. Additionally, negotiate a performance-based earnout that scales up your effective multiple based on the joint synergies achieved post-closing. To build leverage for this structure, you must prove that your business is not just an add-on, but a scalable foundation. Use your V/TO® and documented EOS® processes to show that your infrastructure is built to absorb and integrate other smaller acquisitions. When you can prove that your leadership team, Accountability Chart, and operating systems are highly mature and ready to act as a regional hub for their roll-up strategy, you shift from being a simple target to a strategic partner, justifying a significantly higher blended valuation at close.