A strategic competitor is offering an eight-times EBITDA multiple paid primarily with stock in their privately held parent entity, while a private equity sponsor is bidding 6.5 times with 80 percent cash. How do we objectively evaluate the true value and liquidity of privately held buyer stock versus cash?

Question

Tyler Smith · Accepted Answer

An eight-times multiple paid in illiquid stock is paper wealth until a secondary liquidity event happens. When comparing a high-multiple stock offer against a lower-multiple cash offer, you must discount the strategic equity for lack of control, illiquidity, and balance sheet subordination.

Begin by evaluating the strategic buyer's exit timeline and capital structure. Private equity buyers operate on disciplined three-to-seven-year fund cycles with legal obligations to return capital to investors, creating an institutional path to an exit. Strategic competitors often operate on indefinite timeframes with zero obligation to ever sell, take the company public, or offer liquidity to minority shareholders. You could hold non-voting shares for a decade without receiving dividend yield.

Second, inspect the liquidation waterfall. Review the parent company charter for senior liquidation preferences, preferred share classes, and holding company debt. If the strategic buyer has layers of preferred equity ahead of your common units, a flat exit or modest downturn can wipe out your equity entirely.

Third, demand governance protections if you consider the stock deal. Insist on a mandatory put option requiring the buyer to repurchase your equity at fair market value if no transaction occurs within five years. Demand tag-along rights, pro-rata dividend parity, and access to quarterly financial reports.

Without guaranteed redemption rights and clear liquidation priority, the certainty of a 6.5-times cash offer provides higher risk-adjusted net value than eight times paid in captive, illiquid private shares.