A private equity platform is acquiring our business as an add-on at a 5x EBITDA multiple, while their broader platform trades at 10x EBITDA. How do we negotiate deal terms or structural consideration to capture a share of that five-turn multiple arbitrage instead of leaving all the upside to the sponsor?

Question

Tyler Smith · Accepted Answer

Private equity platforms build wealth through multiple arbitrage by buying smaller bolt-ons at five times EBITDA, integrating them into a centralized platform, and selling the combined entity at ten or twelve times EBITDA. If you take one hundred percent cash at close, you willingly donate that five-turn spread to the sponsor.

To participate in the arbitrage, leverage deal structure rather than fighting exclusively over the base purchase price:

- Demand rollover equity into the top-level holding company. Do not accept rollover equity in your standalone operating entity. Roll fifteen to twenty-five percent of your proceeds directly into the parent sponsor entity alongside the institutional investors, ensuring your units share in the ultimate ten-times exit multiple.
- Insist on rollover parity. Ensure your rolled equity is pari passu with the private equity firm's common or preferred stock, with identical information rights and tag-along protections. Reject structural hurdles where their units get an eight percent compounding dividend ahead of your capital.
- Negotiate an arbitrage-linked synthetic earnout. If regulatory or licensing rules prohibit equity ownership, tie a deferred payout to the platform recapitalization event, paying you a predetermined bonus multiple on your trailing earnings if the platform sells above an agreed valuation hurdle.
- Price in immediate integration synergies. If your business provides proprietary technology or fulfillment capacity that eliminates two million dollars of redundant costs across their other portfolio companies, demand that those identified synergies be added to your closing EBITDA base.

You cannot eliminate the size discount entirely, but rollover equity lets you harvest the institutional multiple when the platform exits.