Your Equity, Their Company: Why Every Seller Taking Stock Is Also a Buyer

When part of your purchase price is paid in equity, you are not only selling your firm. You are also buying into someone else's.

How much that matters depends on your goals and those of your fellow shareholders. Some owners want a clean exit with as much cash at closing as possible. But if any shareholders want to stay and roll equity, this article applies to them. Most buyers also want to see some skin in the game, so equity comes up in many conversations whether you raise it or not.

Most AEC business owners spend significant time scrutinizing the headline number and the multiple. These are all important, how much cash, the terms of any seller/promissory note, or earnout all impact your closing proceeds, but far fewer apply the same rigor to the stock they receive. Yet in many of today's deals, 10% to 40% of total consideration can arrive as equity, and that slice can end up being worth more, or far less, than the cash.

Not all equity is created equal. Objectively, the terms, the buyer, and its prospects vary widely. Subjectively, the right equity depends on what you and your shareholders want. This article walks through how to define those goals, the equity you are likely to be offered, how equity from a privately held strategic differs from equity in a private equity (PE) platform, how to measure what it might return, and when you can turn it into cash.

Start with your own goals

Before comparing offers, get clear on what you and your shareholders want. Your answers will point you toward a buyer type, a cash and equity mix, and the terms worth negotiating hardest.

• Is my primary goal liquidity or growth? If cash certainty matters most, take more at closing or consider a platform close to its exit. If upside matters most, equity in a growing buyer earlier in its life offers the higher ceiling.
• When do I need the money? PE equity has a defined exit, typically three to seven years out. The sponsor ultimately controls the timing, but good sponsors take input from the platform's shareholders, including add-on sellers and other equity holders. Private strategic liquidity sits on a spectrum, from annual distributions to redemptions paid over several years, and is often somewhat more flexible than PE.
• How much risk can I tolerate? PE equity can lose value. Losses have been rare so far, and in PSMJ's experience we have not seen one. That could change with an economic downturn, fading investor appetite for AEC, or a weak platform thesis, which is why your diligence should look for warning signs. Private strategic equity usually has a narrower range and a lower ceiling.
• How much of my price can I afford to hold in equity? Take enough cash that a downside outcome on the equity does not change your retirement plans.
• Do I want income along the way or a payout at the end? Private strategics often pay distributions. PE rollover holders usually see little until exit.
• How long do I plan to keep working? Vesting, redemption triggers, forfeiture on departure, and non-competes all turn on how long you stay.
• How much control do I want? In either case you will likely be a minority holder. In PE, the sponsor decides when and how to sell, but good sponsors do not drag shareholders along against their will. AEC firms are built on people, so if a significant part of the shareholder group opposes a buyer or a timeline, most PE firms will respect that. It is meant to be a team effort.
• Do I believe in the buyer's strategy and team? Once you hold their equity, your return depends on their growth and acquisitions, not only on your own firm's performance.
• What kind of firm do I want to join? Independent and PE-backed strategics can both be true peers, engineering and architecture firms at heart. The difference is ownership: continuity of a familiar private model, or sponsor capital and resources with a defined exit.
• Am I comfortable being sold again? A PE exit may mean another rollover. And if you are choosing a private strategic because you would rather not sell to PE, ask whether that buyer plans to sell to PE down the line. If it does, you may effectively be selling to PE anyway, just later. That may not be the partner you want.

The forms equity takes

Equity in an AEC deal usually shows up in one of two ways, and each puts you in a different seat.

A note on public company buyers: equity is much less common in their deals, which are usually structured as cash and a note. If you want to own a public buyer's stock, you can simply buy it in the open market with your sale proceeds, applying the same analysis discussed in this article.

Two mechanics apply to both:

• Valuation at entry. Do your diligence to confirm your equity is going in on the same terms, and at the same valuation, as other recent sellers and investors. If you buy in at a richer price than they did, you are effectively accepting a lower purchase price.
• Tax treatment. Properly structured rollovers and stock exchanges can defer tax on the equity portion until you sell it. Get tax counsel involved before the LOI, not after.

Equity in a privately held strategic

Stock in a private strategic is a long-term ownership stake in a firm that plans to stay independent. Its value grows slowly and steadily if the firm performs, and it is only as liquid as the buyer's internal ownership transition plan.

Many employee-owned and closely held AEC firms value their stock with a formula, often tied to book value or a discounted multiple of earnings. That formula sets both the price you buy in at and the price you are eventually redeemed at. As a firm grows, its formula often shifts closer to external market values. That can help or hurt you, but either way it changes your potential outcome, so scrutinize how the formula works today and how it might change.

Strategy drives the outcome

Strategic equity has a lot of variability, and much of it comes down to the buyer's own strategy. The same principles that apply to a PE thesis apply here. A firm content to grow slowly will produce slow equity growth, no matter how well your team performs inside it.

If you want to see aggressive growth in your equity value, start by understanding:

• How the internal equity is valued, and whether that method can capture real growth.
• Whether the firm is growing at a rate that supports your return expectations.
• Whether it is making acquisitions of its own, and how successfully.
• Whether it plans to sell or recapitalize someday.

There is no harm in asking that last question directly. A future sale or recap could turn formula-valued stock into market-valued stock. And if you would be opposed to a sale, you need to know now.

Pros

• Cultural continuity. You join a peer firm with a familiar ownership model.
• Distributions. Profitable private firms often pay annual dividends or bonuses tied to ownership.
• Lower financial risk. These firms typically carry little acquisition debt.
• Optionality. If the buyer later sells to a larger strategic or a PE platform, your shares may be bought at a market multiple well above the formula.

Cons

• Modest appreciation. Formula values tend to track book value growth, not market multiples.
• Minority position. You will rarely have meaningful control over strategy, compensation, or a future sale.
• Slow liquidity. Redemptions are usually paid over years and depend on the firm's cash and the next generation's appetite to buy.
• Valuation asymmetry. If the formula undervalues the buyer's stock at redemption, you absorb the gap.

Questions to ask

1. Who sets the valuation formula, and can it change?
2. What is the distribution history, and how is it decided?
3. Are redemption notes subordinated to bank debt, and is there a cap on annual repurchases?
4. Does the firm have a written ownership transition plan, and is it funded?

Equity in a PE or PE-backed platform

Rollover equity in a PE platform is a leveraged bet on the platform's growth, with a defined exit in roughly three to seven years. That is where the "second bite of the apple" comes from, and it is also where the risk sits.

Many PE-backed platforms are still peers: they were engineering or architecture firms before their sponsor arrived, and they still are. When you roll equity, you typically exchange part of your firm for units in the platform's holdco, alongside the sponsor. Your outcome depends less on your own firm than on the whole platform: its acquisitions, its debt, and the multiple a future buyer pays.

The team and the thesis matter as much as the structure

By now, most owners have heard about the outsized gains PE can generate. Those gains depend heavily on the management team running the platform and the investment thesis it is pursuing.

Think about it the way buyers think about your firm. You are valued on your margins, EBITDA, visibility into future work, strength of leadership, services, end markets, and the macroeconomic backdrop. A platform's thesis should be judged the same way. If its services and end markets are in high demand and its leadership is strong, the thesis has a real chance to succeed. If not, it may face years of challenges.

It is also easy to follow the crowd. When every sponsor is pursuing the same thesis in the same hot end market, they are all competing to acquire the same firms. Competition drives up acquisition multiples and makes good targets harder to win.

A thesis can also miss by being too narrow or too broad. Too narrow, and there are too few acquisition candidates to fuel inorganic growth. Too broad, and the platform buys almost anything, which can dilute the quality and value of the combined firm. Either one limits how much your equity can grow.

That makes the sponsor's acquisition track record critical. A platform that cannot consistently find, win, and integrate acquisitions will not deliver the growth its model assumes, and the plan, and your exit, may take much longer than promised. Ask:

• How many acquisitions has the platform closed, and over what period?
• How many deals did it pursue and lose, and why?
• How has the leadership team performed at past platforms?
• What makes this thesis different from the other sponsors chasing the same market?

Pros

• Upside from scale. Platforms buy smaller firms at lower multiples and aim to sell the combined business at a higher one.
• Defined liquidity event. Sponsors are built to exit, usually within a fund's hold period.
• Professional resources. Capital for growth, recruiting, technology, and further acquisitions.
• Alignment. The sponsor only wins if the equity grows, so incentives generally point the same way as yours.

Cons

• Leverage cuts both ways. Acquisition debt magnifies gains and losses on the equity.
• Capital structure risk. Sponsor equity may sit in a preferred class with an accruing return that gets paid before your common units.
• Dilution. New equity raises and management incentive pools shrink your percentage.
• Limited control over timing. The sponsor decides when and how to exit, though good sponsors seek buy-in from the shareholder group rather than dragging them into a sale.

Questions to ask a PE sponsor

PSMJ screens every PE firm seeking a recap with an AEC owner using a set of structure fairness questions. The core ones are below.

Rollover size and timing

• What is your expected time horizon for a second exit, and is a fund timetable driving an exit deadline?
• What are the liquidity options and timing for the rolled equity, and are any available before a change of control or recapitalization?

Where the equity sits and how it ranks

• Will the rollover equity be in the sold entity only, or at the parent holding company level that owns the whole platform?
• Is the rollover the same class of stock, at the same price per unit, as the sponsor and all other shareholders, including employees?
• Is the equity split based on paid-in capital, and is management equity pari passu with investor equity with respect to the debt placed on the company?

Capital structure

• What is the projected capital structure: percentage of debt, type of debt, and any mezzanine debt?
• What is the leverage ceiling, and how will debt in the capital structure be managed?

Profits and growth

• Will excess cash be retained for growth, used to pay down debt, or distributed annually?
• How will additional acquisitions be funded: more capital from the fund, additional debt, or management participation, and is that participation optional or required?

Governance, employment, and future buy-ins

• What is the governance plan, including my tag-along, drag-along, and information rights?
• Will there be an ongoing buy-in opportunity for current shareholders and key employees, on what terms, and is it mandatory or optional?
• Can non-shareholder employees buy equity at closing?
• Will there be an incentive equity pool for key employees, such as stock options, a profit incentive plan, warrants, or a buy-in process?

Deep dive: how PE measures returns with MOIC

PE sponsors measure returns with MOIC, and their pitch for your rollover will usually be framed in those terms.

MOIC (multiple on invested capital) is total value returned divided by what you put in:

MOIC = Total value returned ÷ Equity invested

A 2.0x MOIC means every dollar you roll comes back as two dollars at exit. MOIC does not account for how long that takes, so always ask about the expected hold period alongside it.

What MOIC to expect

Across the AEC industry, we see PE platforms return on average between 2x and 4x MOIC to their equity holders. Here is how that range plays out for a seller who rolls $6M into a platform held for five years, on the same terms as the sponsor.

On a $6M rollover, the difference between the low and high end of the typical range is $12M. That spread depends almost entirely on how the platform performs after you join it, which is why the diligence questions later in this article matter.

Comparing potential returns: private strategic vs PE

PE equity offers the higher ceiling, while private strategic equity offers the narrower range of outcomes. Which is better depends on how much variance you can tolerate and how soon you need the money.

The illustration below assumes a seller takes $6M of the purchase price in equity. The private strategic case assumes the stock's formula value grows 8% a year with a 3% annual distribution, held seven years. The PE cases use the platform from the previous section, held five years, with the rollover on the same terms as the sponsor.

Three takeaways:

Figures are illustrative, not a forecast. Actual results depend on the specific buyer, structure, and market conditions.

Liquidity: when the equity becomes cash

Equity is only worth what you can eventually sell it for, and the two buyer types answer "when" very differently.

A few points deserve extra attention.

A near-term exit can be a plus. Always ask a platform for its estimated exit timeline. If the answer is the next year or two, that can work in your favor: your second bite of the apple arrives sooner. Your equity may not grow as much as it would have if you had invested earlier in the platform's life, since much of the value creation has already happened. But if you would rather turn your equity into cash quickly, a platform close to exit can be the right fit.

Private strategic liquidity is a spectrum. Some firms pay annual distributions based on share ownership or run an earnings club. Others are part ESOP and part privately held, with a portion of compensation invested in the ESOP. Some let you sell your shares but pay you out over a set number of years. Overall, this tends to offer more liquidity than PE, where the norm is that you keep your equity until the next recapitalization. Early carve-outs or payouts in PE are the exception, not the rule. In both cases, whether you can keep your equity after retiring or moving to part-time is a diligence question, answered in the shareholder agreement.

Private redemptions are a promise, not a guarantee. A firm with several owners retiring at once can struggle to fund them all. Look at the buyer's projected repurchase obligations, not just its current balance sheet.

Questions to ask about the equity before you decide

Whether the buyer is a private strategic or a PE platform, these questions apply to any equity offered as part of your purchase price.

The bottom line: diligence the buyer like an investor

If equity is part of your price, run the same diligence on the buyer that the buyer is running on you. Before you sign an LOI:

Private strategic equity is usually a slower, steadier ownership stake. PE rollover is a higher-variance investment with a defined exit. Neither is right or wrong. What matters is that you choose it with your eyes open, because the moment you accept equity, you become a buyer too.

Are you ready? Bring PSMJ’s 52 years of strategic knowledge to bear in sharpening your goals whether it’s to define your business strategy, execute an M&A transaction with professional transaction advisors, or establish a succession plan to ensure the firm survives for decades more, PSMJ is ready to help your firm achieve more. Click here to start that conversation.

This article is intended for informational purposes and does not constitute legal, financial, or investment advice. Firms considering intellectual property strategy or M&A transactions should consult qualified legal advisors.