All-Cash PE Exit vs. Sale-Leaseback Plus Rolled Equity

Every founder selling a profitable lower middle market business hears two very different pitches. The first comes from a private equity fund offering a clean all-cash exit at a fair multiple, wire transfer inside sixty days, and the seller riding off into retirement. The second comes from a permanent-capital buyer offering less cash up front, a sale-leaseback on the building, and a meaningful slice of rolled equity in the operating company you just sold.

On the surface the PE offer looks bigger. On paper it often is. But the two structures generate very different after-tax outcomes and very different second-bite economics, and the gap between them is usually decided by four or five line items you can price yourself before signing an LOI.

What does the honest math actually look like on a $4M EBITDA deal?

The Two Offers on a $4M EBITDA Business

Assume a manufacturing or industrial-services company doing $4M of EBITDA, owned in an S-corp, with a $6M cost-basis facility that would appraise at $20M. Two buyers show up.

The PE buyer offers 8x EBITDA for the operating company on a cash-free, debt-free basis, with the real estate included in the enterprise value. That is a $32M headline number, all cash at close, standard reps and warranties, and the seller walks.

The permanent-capital buyer offers a different shape. It pays 7.5x for the operating company ($30M), asks the founder to roll 20% of that consideration back into the acquiring entity, and separately executes a sale-leaseback on the building at a 7.15% cap rate — roughly the Q1 2026 single-tenant industrial average. That produces $20M of real estate proceeds and a 15-year triple-net lease at about $1.43M of annual rent.

Headline totals: $32M all cash from the PE buyer versus $50M gross ($30M op-co + $20M real estate) from the permanent-capital buyer, of which $6M is rolled equity. Different animals. The interesting question is what lands in the seller's account after tax, and what the rolled paper is worth five years out.

Running the After-Tax Math Line by Line

The PE offer at $32M, assuming a low cost basis and an S-corp asset-sale structure, produces roughly $25M of long-term capital gain at the federal 20% top rate plus the 3.8% NIIT, plus state tax that varies from zero to about 13%. Call federal-plus-NIIT alone something in the $6M range on gain, leaving roughly $26M net of federal tax before state. Clean, simple, done.

The permanent-capital offer has to be unpacked in three buckets:

• Cash from op-co ($24M). $30M sale price minus $6M rolled. Fully taxable at long-term capital gain rates, same as the PE deal on a per-dollar basis.
• Rolled equity ($6M). Structured properly under IRC Section 351, taxes on the rolled portion are deferred, not eliminated. The cash portion remains fully taxable; the rolled portion carries over basis into the new stock.
• Real estate proceeds ($20M). Taxed as a mix of long-term capital gain and depreciation recapture at up to 25%. On a $6M basis property, that is meaningful but still leaves the seller with roughly $15.5M–$16.5M net depending on prior depreciation.

Add it up: roughly $19M net from op-co cash + $16M net from real estate = about $35M in after-tax cash today, plus a $6M rolled equity stake carried at deferred basis. Versus roughly $26M from the PE deal, all in.

The permanent-capital structure produces about $9M more after-tax cash on day one and leaves a second-bite option on the table. That gap exists mostly because the real estate is being priced by a cap-rate buyer, not by an EBITDA multiple buyer, and because deferring tax on the rolled slice is worth real money.

What the Rent Actually Costs the Business

The $1.43M of annual rent is not free. It comes straight out of EBITDA, and any future buyer will underwrite the company on post-lease numbers. So a $4M EBITDA business becomes roughly a $2.6M EBITDA business the day the lease is signed.

At exit, that matters. Torys' worked example on a $20M facility at a 7% cap shows exactly this dynamic: the sale price at a 10x multiple falls by roughly $15.4M because rent lowers EBITDA, but the buyer never had to repay the $20M pulled out at closing. The proceeds arrived earlier and were redeployable.

The counterweight is that removing real estate from the balance sheet can improve return-on-assets and make the operating company cleaner to sell as a pure operating asset later. Strategic buyers rarely want the building. Financial buyers rarely pay full market value for it. Splitting the two often unlocks value that a bundled sale hides.

Pricing the Second Bite Honestly

Rolled equity is where founders either make a second fortune or watch their paper get financially engineered into nothing. The mechanics matter more than the multiple.

Two anchor points to start with. First, rollover percentages in the middle market usually land between 10% and 30% of consideration, with founder rollovers sometimes higher. Second, GF Data found 28.6% of PE deals in the first three quarters of 2024 included some rollover. So rolled equity is common; the question is what it is worth.

Under a traditional PE sponsor, the second bite depends on the sponsor selling the platform again in three to seven years at a higher multiple, typically after loading it with acquisition debt. That path works when it works. When it doesn't — recession, integration failure, multiple compression — the rolled equity sits behind preferred stock and can go to zero even if the business is fine.

Under permanent capital, the second bite works differently. There is no forced exit clock. The equity typically compounds through retained earnings and dividends rather than a terminal sale event. The founder is trading a lottery ticket on multiple expansion for a bond-like claim on the cash flow of a business they already know. Which is better depends on the founder's age, liquidity, and appetite for another hold cycle. It also depends heavily on what the governance looks like on paper, which is why the economics of control premiums is a real diligence item, not a footnote.

Control Terms That Move the Outcome

The LOI economics get most of the attention. The terms buried in the definitive agreement often matter more. On any rolled-equity structure, the founder should price these before signing:

• Liquidation preference. Straight common versus 1x non-participating preferred versus participating preferred are three very different instruments wearing the same "rolled equity" label.
• Drag-along and tag-along. Who can force a sale, at what threshold, and does the founder get pro-rata treatment or a discount.
• Board and reserved matters. Board seats without reserved-matter vetoes are decoration. See how we structure decision rights for the categories that actually bind.
• Distribution policy. A permanent-capital buyer that distributes free cash flow annually turns rolled equity into a yield instrument. A PE sponsor that sweeps everything to debt paydown does not.
• Lease terms on the real estate. Rent escalators, renewal options, and repair obligations on a triple-net lease are the difference between a fair deal and a slow squeeze.

The same rigor applies to sale-leaseback diligence. Stout notes SLB investors can move on a decision inside 45 days when the seller shows up with clean historicals, projections, and a use-of-proceeds plan. That speed cuts both ways: a founder who negotiates rent, escalators, and renewals in a hurry gives up basis points that compound for fifteen years.

Which Structure Wins for Which Seller

The all-cash PE exit is the right answer when the founder wants full liquidity, has no interest in another five-to-seven-year hold, and either doesn't own the real estate or has already separated it. It is also the right answer when the business is a genuine growth story that a sponsor can plausibly triple.

The permanent-capital plus sale-leaseback structure tends to win in three fact patterns: the seller owns the operating real estate and it's undervalued inside enterprise value; the business is a durable cash generator rather than a rocket ship; or the founder wants meaningful liquidity now but is not ready to walk away from the equity story. The $14.4 billion in 2025 sale-leaseback volume is heavily concentrated in exactly those profiles.

Founders considering the second path should read our target investment criteria before running the numbers, since the shape of the offer follows directly from what a permanent holder is trying to own. It also helps to understand why operational excellence beats financial engineering, because that is the philosophical difference driving every line item above.

Seller profile	All-cash PE	Perm capital + SLB
Wants full liquidity, done selling	Strong fit	Weaker fit
Owns undervalued real estate	Weaker fit	Strong fit
Durable cash generator, not a rocket	Weaker fit	Strong fit
Genuine 3x growth story	Strong fit	Neutral
Wants liquidity + second bite	Neutral	Strong fit

Price Both Offers Before You Sign Anything

The mistake is treating the two offers as directly comparable on headline price. They are not. One is a single-bucket cash transaction; the other is three separate transactions stapled together, each with its own tax character, timing, and risk profile. On a $4M EBITDA deal with real estate involved, the gap between headline and net-plus-rolled can easily run into eight figures.

Build the model yourself, or have your CPA and M&A counsel build it, before the LOI is signed. Price the rent for fifteen years. Price the rolled equity under three scenarios: base, downside, and a genuine second bite. Price the tax on each bucket separately. Then compare.

The offer that wins on that page is usually the one that also wins in real life. It is not always the biggest number at the top.