IBO Advisors Insights

Independent Buyout vs. Private Equity: The Numbers-Based Comparison Every Owner Should See

By Michael Chasen · Updated April 9, 2026

Most owners comparing a private equity sale to any alternative do it on one number: the headline valuation. That's the wrong number. What matters is what lands in your bank account after taxes, after any equity you're forced to roll forward, and after any earn-out you may never fully collect.

Run the math side by side and the gap is bigger than most owners expect. Below is one illustrative example, built on a hypothetical $10 million EBITDA company, walking through both paths. It's not a projection or guarantee for any specific business - every transaction depends on its own facts - but it shows the shape of the difference.

The two numbers owners are usually shown

Private equity firms and the advisors who broker their deals like to lead with the multiple: "We can get you 7x EBITDA." On a $10 million EBITDA company, that's a $70 million headline enterprise value. It sounds definitive. It isn't the number you take home.

Lower middle market EBITDA multiples in the $10 million to $25 million range have averaged around 5.9x to 7.2x in recent GF Data figures, with the broader lower middle market landing between 6.2x and 8.8x depending on industry and quality (CapitalPad, citing GF Data; Mid-Market Advisory). We'll use 7x here, landing on a $70 million enterprise value before adjustments.

That headline number runs through three filters before it becomes cash in your pocket: rollover equity, earn-out risk, and taxes.

Filter 1: Rollover equity isn't optional in most PE deals

Private equity buyers typically don't let a seller walk away with 100% cash at close. Rollover equity - proceeds a seller is required to reinvest into the new deal rather than take as cash - typically runs 10% to 40% of proceeds, with some deals reaching as high as 49% (Growth Equity Interview Guide). That rollover isn't cash - it's an illiquid, minority stake in a highly leveraged company you no longer control.

Assume our sponsor requires a 20% rollover, a fairly conservative, seller-friendly number by current norms. On $70 million of enterprise value, that's $14 million that doesn't convert to cash at close - it converts to equity in a company now carrying the debt the PE firm used to buy it.

Filter 2: Earn-outs put another slice at risk

Earn-outs - deferred payments contingent on the business hitting post-close targets set by the new majority owner - show up more often at the lower end of the market. Roughly 24% of private-target deals outside life sciences now carry an earn-out per SRS Acquiom's 2026 data, rising to 29% for deals closing at $50 million or less and 35% at $25 million or less (Kadenwood Group, citing SRS Acquiom). Earn-out size can reach as much as 25% of total purchase price in some middle-market deals (Morgan & Westfield).

Assume a 15% earn-out on the remaining $56 million ($70M minus the $14M rollover) - $8.4 million - contingent on performance targets over two to three years, targets typically defined by the new majority owner, not the seller. Achievement rates vary by deal; the point is that this slice of proceeds isn't guaranteed at close.

Filter 3: Taxes take a real bite either way - but not the same bite

A standard taxable sale to a private equity buyer is generally taxed at long-term capital gains rates: 20% at the federal top bracket, plus the 3.8% net investment income tax for higher earners, for a combined federal rate of roughly 23.8% (Taxstra, 2026 capital gains brackets; IRS, Net Investment Income Tax). State tax adds more on top, depending on where you live.

An Independent Buyout works differently. It uses a financing and ownership structure that's existed in the federal tax code since 1984 under Internal Revenue Code Section 1042 (Cornell Law School, 26 U.S. Code § 1042), and depending on the seller's specific facts, it can be structured so proceeds aren't subject to that capital gains hit at all. This isn't automatic or guaranteed for every seller - it depends on the structure and the seller's individual tax situation, and should always be confirmed with a tax advisor. But it's the single biggest lever in this comparison, since it applies to the entire sale proceeds, not just a portion.

The illustrative math, side by side

The table below assumes a hypothetical $10 million EBITDA company sold at a 7x multiple ($70 million enterprise value) under two paths. These figures are illustrative only, meant to show the shape of the difference - not a projection, quote, or guaranteed outcome for any specific business. Actual results depend entirely on a company's specific deal terms, financing structure, and tax facts.

	Private Equity Sale (illustrative)	Independent Buyout (illustrative)
Headline enterprise value	$70,000,000	$70,000,000
Required rollover equity	~20% ($14,000,000) held as illiquid minority stake	Structured around the seller's actual liquidity goals - assume $0 forced rollover
Cash-eligible proceeds	$56,000,000	$70,000,000
At-risk earn-out (illustrative 15%)	$8,400,000 contingent on post-close targets set by new majority owner	Not typically structured as a buyer-controlled earn-out
Cash certain at close	$47,600,000	$70,000,000 (subject to deal-specific financing structure)
Federal tax treatment	Standard long-term capital gains, ~23.8% combined federal rate	Can be structured for tax-advantaged treatment depending on seller's facts - confirm with a tax advisor
Illustrative after-tax cash at close	~$36,270,000 (on the $47.6M certain portion, before state tax)	Potentially the full $70,000,000 before state-level considerations, depending on structure
Board control after close	Sponsor typically holds board seats and a veto	Leadership retains decision-making authority

The gap between roughly $36 million and something closer to $70 million, even before touching the rollover stake or earn-out outcome, is the entire point of running this comparison on paper instead of accepting the headline multiple at face value.

Why this math almost never gets shown to owners

Most M&A advisors and brokers are compensated by the deals they broker - typically a success fee in the 1% to 8% range of transaction value on a lower-middle-market deal (CT Acquisitions on M&A advisor fee structures). An advisor who only brokers sales to private equity funds and strategic buyers has no reason to walk you through a structure where the buyer is your own leadership team. That's not a conspiracy - it's an incentive most owners never think to ask about.

Frequently asked questions

Is the $10M EBITDA example in this article based on a real deal? No. It's a hypothetical example built from publicly reported market averages for multiples, rollover percentages, and earn-out frequency, meant to show the shape of the difference between structures - not to predict any specific company's outcome.

Does every private equity deal require a rollover and an earn-out? No. Terms vary by deal and market conditions, and some sellers negotiate all-cash deals. But both are common enough in current data that any owner comparing offers should model them rather than assume the best case.

Is the Independent Buyout tax treatment guaranteed to apply to my company? No. Whether a transaction can be structured for tax-advantaged treatment depends entirely on the seller's specific facts. Confirm your own situation with a tax advisor before assuming a particular outcome.

What size company can actually run this comparison? This structure is generally evaluated for companies with $3 million or more in EBITDA, though every business's specific facts determine what's actually achievable.

Why don't more owners see this comparison before they sign a term sheet? Most advisors in the room are paid based on the deal they broker - usually a private equity or strategic sale - and have no financial incentive to show a structure where the company's own leadership becomes the buyer instead.

Sources

The bottom line

A 7x headline multiple and a $70 million enterprise value mean nothing until you run them through rollover requirements, earn-out risk, and your actual tax treatment. Do that math before you sign anything, and compare it against what an Independent Buyout could put in your hands instead - a private equity outcome, without the private equity firm sitting on your board and setting your earn-out targets.

If your company is doing $3M+ in EBITDA and you want to see this kind of numbers-based comparison run against your own financials, talk to IBO Advisors about your specific business.

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