Unsolicited Private Equity Offer & LOI Checklist for Texas Sellers
When a private equity platform or strategic roll-up approaches a Texas business owner directly, the headline enterprise value in a non-binding Letter of Intent (LOI) is never the net check at closing. In lower-middle-market proprietary deals ($2M–$25M enterprise value), binding 60-to-120-day exclusivity ("no-shop") clauses lock the seller out of the market while Quality of Earnings (QoE) adjustments, Net Working Capital (NWC) peg deductions, subordinated rollover equity, and contingent earnouts routinely shift 20% to 40% of the headline price out of guaranteed closing cash.
1. Six LOI Terms That Separate Headline Price From Guaranteed Closing Cash
Direct corporate development callers and PE add-on scouts promise a "fast, quiet closing with no broker fees." Before you sign an NDA that shares customer lists or an LOI that grants exclusivity, inspect these six clauses against our Private Equity Offer Structure guide:
| LOI Clause | Standard Buyer Draft (High Risk to Seller) | How It Cuts Your Net Check | What to Require Before Signing the LOI |
|---|---|---|---|
| 1. Exclusivity ("No-Shop") Window | 90 to 120 days of binding unilateral exclusivity with automatic 30-day extensions. | Buyer stalls until month 3, then uses QoE findings to re-trade the price when your deal fatigue is highest. | Cap exclusivity at 45–60 days with milestone gates (e.g., buyer must deliver QoE draft and initial Purchase Agreement by Day 35). |
| 2. Net Working Capital (NWC) Peg | "Seller shall deliver normal working capital, to be determined during buy-side QoE diligence." | Leaving the NWC peg undefined lets the buyer set an inflated accrual target and deduct $150K–$500K at close. | Define the exact 12-month trailing NWC formula and dollar target (or collar) inside the LOI, excluding cash and funded debt. |
| 3. Rollover Equity Class & Subordination | 15%–30% rollover into parent HoldCo units "on terms customary for platform management." | PE sponsor takes Preferred Units with an 8%–12% compounding liquidation preference; your junior common units sit behind debt and preferred return. | Specify pari passu (same class, same strip) economics with the sponsor, tag-along rights, and clear tax treatment (IRC §721 or §351). |
| 4. Subordinated Seller Note | 10%–20% seller note at 5%–6% interest, subordinated to the platform's senior credit facility. | Senior bank intercreditor agreements can block seller-note payments whenever platform-wide leverage covenants tighten. | Cap seller financing, require market interest (7%–9%), and define whether default remedies sit at your operating subsidiary or parent HoldCo. |
| 5. Contingent Earnout Metrics | 15%–25% earnout tied to post-closing "Consolidated Adjusted EBITDA" over 24 months. | Once the buyer controls pricing, corporate overhead allocations, and hiring, your shop's standalone EBITDA can be engineered below the cliff. | Tie any earnout to gross revenue or gross profit with a sliding scale (no all-or-nothing cliff) and covenant against corporate management-fee loading. |
| 6. Tax Structure & IRS Form 8594 | Asset purchase or IRC §338(h)(10) / F-Reorganization election at buyer's sole option without tax gross-up. | Step-up in basis triggers ordinary income depreciation recapture (IRC §1245) on service trucks, yellow iron, and CNC machinery. | Require an explicit IRS Form 8594 allocation schedule or tax-equalization gross-up before signing exclusivity. |
2. Worked Example: How an "$8,000,000 Unsolicited PE Offer" Delivers $4,620,000 at Close
Suppose a Texas commercial HVAC, electrical, or industrial services owner with $1,600,000 in claimed EBITDA receives an unsolicited LOI for $8,000,000 (5.0x multiple). Here is how the deal structure and diligence adjustments reduce Day-1 cash when the seller enters exclusivity unprepared:
| Transaction Component | LOI Headline View | Post-Diligence Closing Reality | Why the Gap Occurred |
|---|---|---|---|
| Headline Enterprise Value | $8,000,000 ($1.6M × 5.0x) | $7,150,000 ($1.43M × 5.0x) | Buy-side QoE disallowed $90K of undocumented owner perks and $80K of WIP over-billings (-$850,000 at 5.0x). |
| Less: Rollover Equity (20% of Headline) | -$1,600,000 (Illiquid Stock) | -$1,430,000 (Subordinated Units) | Rolled into HoldCo common units sitting behind sponsor's 8% preferred return; $0 cash at close. |
| Less: 2-Year EBITDA Earnout | -$800,000 (Contingent) | -$800,000 (At Risk) | Payable only if post-close EBITDA exceeds $1.65M after buyer adds regional corporate overhead. |
| Less: Subordinated Seller Note | -$400,000 (Promissory Note) | -$400,000 (48-Month Note) | Subordinated to senior lender; subject to buyer set-off rights for indemnification claims. |
| Less: Net Working Capital (NWC) Shortfall | $0 Assumed by Seller | -$220,000 Deduction | Buyer QoE excluded 90+ day AR and counted upfront customer deposits as a liability against an undefined peg. |
| Less: Indemnity & Tax Escrow Holdback | -$80,000 (1% R&W Retention) | -$350,000 (18-Month Escrow) | Held in third-party escrow pending Texas Comptroller Form 86-114 tax clearance and warranty period. |
| Less: Equipment Debt Payoff & Deal Costs | -$330,000 Fleet/Line Payoff | -$330,000 Payoff at Close | Cash-free, debt-free payoff of service-truck notes plus seller M&A legal and CPA fees. |
| Pre-Tax Cash Wired at Closing | $4,790,000 Expected | $3,620,000 Actual Cash Wire | 45.3% of the original $8.0M headline number lands in cash on Day 1 (model yours in our Seller Net Proceeds Calculator). |
3. Four Things to Fix in 30–90 Days Before You Open the Data Room
You do not have to say "no" to an attractive private equity buyer—you simply tell them: "We are finishing our quarterly close and pre-diligence package and will review your letter in 45 days." Serious buyers respect disciplined operators. Use that 30-to-90-day window to lock down four Texas diligence gates:
1. Reconcile Proof-of-Cash & Add-Backs
Tie 24 months of bank statements to your QuickBooks P&L and federal tax returns. Pull every personal vehicle, family payroll line, and one-time expense into a documented add-back binder with receipts before the buyer's QoE team sees the general ledger.
2. Calculate Your Own Accrual NWC Baseline
Build a 12-month trailing accrual balance sheet showing collectible AR (including contractual 10% retainage under Texas Property Code Chapter 53), verified inventory, and WIP over/under-billings so you set the NWC peg in the LOI.
3. Lock Down TDLR / TSBPE Qualifier & Key Bench
Under Texas Occupations Code Chapters 1301, 1302, and 1305, a buyer cannot operate an HVAC, plumbing, or electrical business on your personal license after you exit unless a designated Responsible Master Plumber, ACR contractor, or Master Electrician of record stays on staff (see Texas license transfer rules).
4. Audit Customer Concentration & Texas Tax Clearance
Review top customer contracts for change-of-control clauses (see Customer Concentration Risk) and verify Texas Franchise Tax and Sales & Use Tax filings so a buyer cannot freeze closing proceeds under Texas Tax Code §111.020 (Form 86-114 Certificate of No Tax Due).
Zero-commission operator review before you sign: SweetSpot Business Advisors is not a business broker and never charges a success fee. If you have a buyer circling—or want your business ready before one calls—start with the free Sale Readiness Self-Assessment, order a $250 Field Guide, commission a $2,500 Business System Inspection of your records, or book a confidential call (see why preparation comes before hiring a broker).
Questions Texas Owners Ask About Unsolicited Private Equity Offers
Is a private equity Letter of Intent (LOI) legally binding?
The purchase price and deal structure in an LOI are almost always non-binding, meaning the buyer can reduce the price during Quality of Earnings diligence. However, the exclusivity (no-shop) clause, confidentiality obligations, and expense-allocation provisions ARE legally binding the moment you sign.
How much of a private equity headline offer is actually paid in cash at closing?
In lower-middle-market add-on acquisitions ($2M to $25M enterprise value), cash wired at closing typically represents 60% to 80% of the headline price. The remaining 20% to 40% is commonly structured as subordinated rollover equity, contingent earnouts, seller promissory notes, indemnity escrow holdbacks, and Net Working Capital peg adjustments.
What is an exclusivity or no-shop trap in an unsolicited LOI?
A 60-to-120-day exclusivity clause bars you from speaking with any other buyer or advisor about competing bids while the PE firm's accountants comb through your general ledger. If your books, WIP schedules, or add-backs are unprepared, the buyer gains unilateral leverage to re-trade the price in week 8 of diligence.
What does subordinated rollover equity mean for a Texas seller?
When you roll 15% to 25% of your sale proceeds into the buyer's holding company or platform LLC, private equity sponsors frequently issue themselves Participating Preferred units with an 8% to 12% compounding liquidation preference while giving the rolling seller common or junior units. In a flat or modest second exit, the sponsor's preferred return is paid first before common units see a dollar.
What should I fix in the 30 to 90 days before opening a data room to an unsolicited buyer?
Before signing an LOI or uploading raw QuickBooks files, reconcile 24 months of bank statements to tax returns, document every owner add-back with third-party receipts, build an accrual WIP schedule, verify your trailing 12-month Net Working Capital baseline, and confirm who holds your TDLR or TSBPE trade qualifier license post-close.
Can SweetSpot review my readiness if a private equity firm has already approached me?
Yes. SweetSpot is an operator-led advisory firm, not a commission broker. For published fixed fees ($2,500 remote Business System Inspection or $4,750/day Owner Value Overhaul), we pressure-test your numbers, working capital, customer concentration, and operational handoffs before you lock into exclusivity.