What to Do If Your Private Equity Deal Hits a Snag

In the unpredictable world of mergers and acquisitions (M&A), deals can fall through for a multitude of reasons. Whether it's a disagreement over valuation, fluctuating interest rates, or a lack of transparency during due diligence, private equity deals can stumble at any stage. While market dynamics and financing issues are common deal-breakers, the failure of a transaction is often more personal for founder-led or family-owned companies.

What Kills a Private Equity Deal?

Common causes of failure in private equity deals include:

• Valuation gaps: A misalignment between the buyer’s and seller’s expectations of the business’s worth can stop a deal in its tracks.

• Fluctuating interest rates: As borrowing costs rise, deal structures become more expensive, leading to hesitations on both sides.

• Insufficient due diligence disclosure: If material information is not disclosed in a timely manner, trust can erode, jeopardizing the deal.

• Loss of funding: Market shifts or changes in investor sentiment can result in lost financial backing for a deal.

However, for many privately held businesses, one of the most significant obstacles comes from within: misaligned expectations.

Misaligned Expectations: A Common Deal Killer

Private equity firms and business owners often enter a transaction with different priorities. Private equity (PE) buyers are focused on delivering strong returns for their investors, often through aggressive cost-cutting, staffing changes, and strategic growth initiatives. On the other hand, business owners are often initially attracted to private equity by the promise of upfront liquidity and growth capital.

As a deal progresses, however, business owners—particularly founder-led or family-run businesses—may begin to value business continuity, employee security, and legacy preservation more highly than they initially anticipated. These shifting priorities can create a disconnect. Strategies like staff realignment, expense reductions, and other PE-driven optimizations often conflict with the seller’s desire to preserve the culture and security of their business.

For some business owners, the reality of private equity-driven changes becomes more jarring than they had expected. While promises of premium pricing or sustained managerial control may help soften the blow, these assurances aren't always enough to alleviate concerns about the future of their business.

What to Do If Your Private Equity Deal Falls Through

A failed deal isn’t necessarily the end of the road. If a private equity transaction stalls or breaks down, it’s important to recognize that the groundwork you’ve laid isn’t wasted. The preparation that goes into a potential sale—whether it’s updating financial statements, organizing legal documentation, or normalizing earnings—can be leveraged to pursue other opportunities.

Here’s what you should do next:

1. Undertake a Strategic Review

When a deal falls apart, it’s often a good time to step back and reassess your business’s goals and priorities. A failed deal may reveal important insights about what you truly want out of a transaction. This process of reflection can help clarify whether you still want to pursue an exit, or if there are other growth opportunities to consider.

2. Reevaluate Your Options

Even if the private equity deal has failed, other opportunities may still be viable. Consider these alternatives:

• Non-equity capital: Raise capital through debt financing or leveraged dividends to fund expansion without giving up equity.

• Corporate partnerships: Forge partnerships with other businesses to accelerate growth without selling control.

• Strategic sale: Engage an investment bank or business broker to explore selling to a strategic buyer, who may align better with your goals.

An often-overlooked alternative is selling equity to an employee stock ownership plan (ESOP). ESOPs can be a valuable tool, particularly for companies with strong management teams and shareholders who value business continuity and employee security. For many business owners, an ESOP can offer a meaningful alternative to private equity—especially for those who prioritize long-term stability over immediate liquidity.

Why ESOPs Are a Meaningful Private Equity Alternative

Although ESOPs and private equity deals are both forms of leveraged buyouts, the two strategies are fundamentally different. In an ESOP, the buyer is not an external investor but an employee trust that represents the interests of the employees. While a private equity firm may look to maximize returns at any cost, an ESOP can prioritize employee well-being, company culture, and business continuity.

Here’s how an ESOP compares to a private equity deal:

1. Tax Advantages

In an ESOP, shareholders may benefit from capital gains tax deferrals or even eliminate taxes on the sale proceeds through a 1042 rollover. In contrast, a private equity sale typically results in a 30% tax hit on sale proceeds, including federal and state taxes. This tax savings can help bridge any valuation gap between an ESOP sale and a private equity transaction.

• For C corporations, sellers can defer capital gains by reinvesting sale proceeds into Qualified Replacement Property (QRP), a tax benefit unavailable in private equity sales.

• For S corporations, the company may become 100% tax-exempt on the portion owned by the ESOP, resulting in significant long-term tax savings for the company.

2. Ongoing Control and Legacy Preservation

In an ESOP, the company’s board of directors continues to manage the business, and the employees retain their jobs. Selling shareholders may also choose to remain involved in the company’s leadership or gradually phase out their responsibilities. For business owners who are deeply connected to their company’s culture and employees, an ESOP offers continuity that private equity deals rarely provide.

3. Employee Retention and Ownership Culture

One of the biggest risks in a private equity transaction is the potential loss of key employees or shifts in company culture. An ESOP fosters employee ownership, which can lead to increased productivity, employee retention, and a sense of shared responsibility. When employees own a stake in the company, they are often more motivated to contribute to its success.

4. Flexibility for Future Transactions

Selling to an ESOP doesn’t rule out future M&A opportunities. After an ESOP is in place, the company still has the option to engage in third-party sales or private equity transactions down the road. However, in the event of a sale, employee-owners are also entitled to a share of the proceeds, creating a positive outcome for all stakeholders.

Navigating the Path Forward

If a private equity deal falls through, don’t panic. Use this as an opportunity to reassess your goals, recalibrate your strategy, and explore alternative exit options. For some businesses, private equity may still be the best choice. However, for companies that prioritize employee retention, long-term stability, and legacy preservation, an ESOP may be the perfect alternative.

When a deal hits a snag, it’s important to take a step back, reevaluate the bigger picture, and ensure that your next move aligns with your long-term vision. In the world of M&A, patience and strategic flexibility often reveal new paths forward, helping businesses achieve their exit goals without compromising what matters most.

In the end, even the biggest transactions are about more than just the numbers—they’re about ensuring that your business continues to thrive after you’ve moved on.