18 Aug What a Nine-Figure Exit Requires Before the Letter of Intent
A family that owns a business worth $50 million or more owns something unusual: a single asset that represents most of the family’s net worth, generates most of its income, employs some of its members, and cannot be sold quickly or partially without a transaction that takes the better part of a year.
Every serious conversation about that asset eventually narrows to a single threshold. Before a letter of intent is signed, nearly everything remains available: price, terms, which buyer, what structure, how the family holds ownership going into the transaction, and what has already been committed to charity. After the letter though, most of that list is settled. Purchase price is still negotiable. The rest largely is not.
Pat Trysla has spent forty years around that threshold, first as a mergers and acquisitions attorney and now as founder and CEO of Frontier Investment Banking, a referral-only firm whose clients have run as large as $75 million of EBITDA. In this episode of the StoryLens™ Podcast he walks John Christensen and Cameron Bond through how a company gets ready, how a real process runs, and why the period before exclusivity is worth more than most owners realize.
How early is early enough?
How early is early enough?
The guiding principle is to build a company you plan never to sell while keeping it ready to sell at any moment. The first half is an operating discipline: quality decisions, no shortcuts, clean agreements, real systems and controls. The second half acknowledges that opportunity does not arrive on a convenient schedule.
When a buyer begins due diligence, the company is examined historically, presently, and prospectively, and the examination extends past the financials into customer relationships, contracts, controls, documentation, and background checks on the management team. A buyer will commission a quality of earnings report. Where the documentation is thin, the consequence is not a disclosure problem. At best it reduces the premium, and at worst it introduces enough risk to stop the deal.
An owner who engages three years ahead gives a banker time to run the due diligence a buyer would run, correct what surfaces, and let the improvements appear in the trailing twelve months that ultimately get presented. On the family side the lead times are longer still. Entity structure, whether S corporation, C corporation, or LLC, is decided years earlier and governs which transaction structures, which tax outcomes, and which charitable vehicles are even available. Qualified Small Business Stock (“QSBS”) treatment, to take one example, is unavailable to a company that was never a C corporation, and the holding period requirement means that decision has to precede the sale by years rather than months.
Is the right time to sell when you are ready, or when the market is?
An owner who intends to run the company until retirement and sell on the way out is making a market timing bet.. If it works out, the honest reality is that the seller was lucky.
Industries consolidate on their own schedule. A private equity firm acquires a $10 million EBITDA platform, completes five acquisitions, integrates toward $50 million of EBITDA, and exits. Selling into the front half of that cycle, as the platform or as a priority add-on, is worth materially more than selling the same company into the back half, when the consolidator no longer needs it to move the needle. Capital conditions shift as well. More than a trillion dollars of dry powder currently sits with private equity firms, family offices, and corporate balance sheets, and private credit finances transactions on terms regulated banks are not permitted to match.
The standard is not that every owner should sell. It is that every owner should decide. A family that has never tested what the market would pay has not chosen to hold the business. It has defaulted into holding it.
Why does private equity negotiate one-on-one when it buys and run an auction when it sells?
This is the most instructive asymmetry in the episode, and it is worth more than any argument about competitive process in the abstract.
Private equity firms work hard to negotiate one-on-one when acquiring a business. They are sophisticated, repeat participants with excellent counsel and accountants, and a bilateral negotiation is where that advantage compounds. But when the same firm sells a portfolio company, it runs a competitive process every time. Not as a preference, as an obligation. Failing to run one would breach the fiduciary duty owed to its own investors.
An owner deciding how to respond to an unsolicited call does not need to be persuaded that competition creates value. The owner needs to notice that the party making the call already knows it does, and behaves accordingly when the positions are reversed.
What does a real process actually look like?
At institutional scale, the process is considerably larger than most owners expect. On one recapitalization described during the episode, the target list of logical buyers ran to 100 or 150 private equity firms, and the firm went out to more than 1,500 contacts. That produced roughly 200 interested parties, more than 75 offers, and, after several rounds, three finalists who brought genuine operating capability in addition to the highest price paid in that sector.
The sequence begins with a blind teaser that describes the company without naming it, followed by an eight-to-ten page confidentiality agreement, indications of interest, and successive rounds of disclosure and management meetings. The defensive architecture matters as much as the offensive: non-solicitation and non-circumvention provisions, and competitors seeing redacted information last, if at all.
Buyers price off internal models the seller never sees. And while the process does not reveal those models, the pattern of questions disclose what information moves the buyer. Competitive processes routinely produce a premium no one anticipated.
The asymmetry of a failed deal is worth understanding as well. If a broad process loses the lead bidder, the seller pivots to the runner-up with due diligence substantially complete. If a bilateral negotiation collapses, the seller has disclosed pricing, margin structure, and competitive advantage, potentially to a competitor, and has nothing to pivot to.
What gets decided in the letter of intent that cannot be revisited?
The letter of intent is where exclusivity attaches.
Buyers generally prefer a short one: purchase price, confidentiality, expenses, exclusivity, and everything else deferred. That preference is rational. Once exclusivity is granted the competitive tension is gone, and the remaining terms get negotiated against a seller who no longer has an alternative.
The better approach uses the final competitive round to require written responses on every material issue, economic and non-economic, and converts those responses into a detailed letter of intent. The effect, in the words of the episode, is that it turns your attorney from negotiator into draftsman. Purchase price, indemnification, working capital, rollover equity, employment arrangements, treatment of key people, facility and community commitments are resolved while several parties are still competing. There are deals where the employment agreement consumes more time and expense than the definitive agreement itself, because post-closing control mattered more to the founder than the last increment of price.
The family’s window closes at the same signature, and for a related reason. Transfers of business interests completed while a sale is speculative are valued as illiquid interests in a private company. Transfers attempted after a deal is reasonably certain face a materially more difficult valuation argument, and a charitable gift made after the sale is effectively a foregone conclusion and loses the treatment that made it worth making early. Exclusivity does not merely reduce negotiating leverage. It closes doors.
Should the family sell all of it, or restructure ownership and keep participating?
For many owners the more useful question is not whether to sell but for how much, and the episode provides arithmetic that makes the comparison concrete.
Take an illustrative $100 million valuation on an 80/20 structure. The owner receives $80 million at closing and rolls 20 percent ownership back into the new entity. Because the buyer finances the acquisition with leverage, and because the rollover is structured to be tax-deferred rather than taxed at closing, that 20 percent generally converts into 30 to 35 percent of the ownership of the go-forward company. The family has taken $80 million off the table and still owns roughly a third of a business that now has institutional capital and an acquisition engine behind it.
Both structures are worth running. A minority sale of 40 to 49 percent preserves control. A majority sale, which most financial buyers prefer at 80 to 85 percent, brings more capital and a different governance relationship. Running the two processes in parallel lets the owner compare real bids rather than hypotheticals.
The underlying logic is a risk calculation rather than a valuation one. An owner who has built a $10 million EBITDA regional or niche leader and sees a national opportunity can fund the next leap alone, keep all of the upside, and carry all of the risk. Or the owner can bring in a partner who has taken companies from $10 million to $40 million of EBITDA before, absorb less of the downside, and hold meaningful liquidity outside the operating business for the first time. What changes is that the family is playing with house money, and the business becomes considerably more interesting to run.
Rollover equity deserves particular attention from the family’s side, because it is the one piece that survives the closing. It is tax-deferred, not tax-free, and the second liquidity event can be larger than the first. Whether that position is held by the founder individually or by a trust for the family is determined during structuring, and it governs which generation ultimately receives it.
What should be given away before the company is sold?
Most families with a nine-figure business have charitable intentions. Far fewer fund them at the only moment when the funding is efficient.
A gift of appreciated shares before a sale carries no capital gain to the donor and produces a charitable deduction. The same generosity funded after closing comes out of after-tax proceeds, which means the family pays the tax first and gives second. In practice, families commonly move 10 to 20 percent of the company before a transaction.
The vehicle determines the result. Closely held stock contributed to a donor advised fund is generally deductible at fair market value, subject to a 30 percent of adjusted gross income ceiling with a five-year carryforward. The same shares contributed to a private foundation are generally deductible at basis and capped at 20 percent. Founders often assume the private foundation is the more serious vehicle, and for this particular move it is usually the more expensive one.
Entity type reaches forward here as well. C corporation stock is the clean contribution. S corporation shares generate unrelated business taxable income for the recipient charity on both operating income and the eventual sale gain, and many sponsoring organizations will not accept them. The entity decision made years earlier decides what is available now.
Two mechanics matter. The transfer has to be complete before the sale becomes a foregone conclusion, and closely held shares require a qualified appraisal. Shareholder agreements, buy-sell provisions, and rights of first refusal routinely restrict transfers to a charity, so they have to be cleared well in advance rather than discovered during due diligence.
The arithmetic is worth seeing. A family selling for $65 million that contributes $20 million of stock before the transaction removes that gain from its return entirely and shelters a substantial portion of the remaining gain, carrying any unused deduction forward for up to five years. The same $20 million written as a check after closing accomplishes neither. The gift has to exist before the sale does.
If the buyer performs due diligence on you, what should you perform on the buyer?
The same thing, and for a longer horizon. The transaction closes in a day. The partnership can run five to seven years, and if the family rolls equity, the buyer becomes a partner in the family’s remaining wealth rather than simply a purchaser of it.
There is a real distinction across the private equity universe. Tier one and tier two firms have deployed across many funds and hundreds of portfolio companies. Others describe themselves as private equity without committed capital behind them. Even a strong firm can be the wrong partner if its senior people are near the end of their careers and have not handed off to the next generation. Family offices, now active as buyers in a way they were not five years ago, resist generalization entirely. If you have seen one, you have seen one.
What has to be done before the letter of intent that has nothing to do with the buyer?
This is the question the family owns, and the episode hands it over explicitly. Describing an owner who de-risks so that children and grandchildren are provided for, our guest stops and calls it a whole estate planning issue. Later, describing how his clients evaluate alternatives, he includes the family’s personal advisors, the people who will manage the proceeds, as participants in the decision rather than recipients of its outcome.
The work on that side is sequenced, and every item has a deadline that precedes the letter of intent. Which entity owns the business, and whether that structure supports the transaction being contemplated. Whether interests intended for the next generation have been transferred while a sale is still speculative enough to support the valuation. Who will hold rollover equity. Whether charitable intentions have been funded with company shares rather than deferred to after-tax cash. Where the owners are resident and how the gain will be sourced among states. And whether the proceeds, once received, actually fund what the family says they are for.
None of this improves the purchase price. All of it determines what the family keeps and who eventually receives it. And unlike price, none of it can be renegotiated later.
A sale is not the end of a business story. For most families it is the point at which the story changes form, from an operating company with a founder to a balance sheet with heirs. Nearly every decision that governs how that transition goes is made before a letter of intent is signed, and a good many of them have nothing to do with the buyer.
At StoryOne Family Office, our work begins well before there is a buyer to negotiate with. Good investment bankers maximize the number. Our concern is what the family keeps, what it gives, who receives it, and whether the life on the other side of the transaction is the one the family actually intended.
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