Business Law and Transactions Law Blog
Business
Relocating to Florida? Consider Keeping Your Business’s Delaware Domicile
Florida's continued growth has attracted entrepreneurs, executives, investors, and owners of closely held businesses who have chosen to establish both their personal and professional lives in the state. For many of these individuals, relocation involves more than purchasing a residence or changing a mailing address. Business owners may relocate senior leadership, consolidate management functions, establish new offices, and ultimately move their companies' headquarters to Florida. As these operational changes take shape, it is natural to consider whether the company's legal domicile should move as well. Yet the decision regarding where a company should operate and where it should be incorporated involves different considerations, and treating them as interchangeable can have significant consequences for corporate governance, financing, and future transactions. In many circumstances, a company can realize the operational benefits of a Florida headquarters while preserving the advantages of its existing Delaware incorporation. The distinction is particularly important for established businesses whose ownership structures, financing arrangements, and long-term strategic objectives extend beyond the preferences of their founders or current management. A relocation that makes sense from an operational perspective does not necessarily justify changing the legal framework governing relationships among shareholders, directors, officers, and other stakeholders. For companies with outside investors, multiple owners, acquisition strategies, or anticipated liquidity events, that framework may influence how transactions are structured, how disputes are resolved, and how legal risk is evaluated. Delaware's longstanding position in American corporate law reflects the value that sophisticated market participants place on a developed body of legal authority and a judiciary experienced in applying it. Those considerations do not disappear when a company's executive leadership relocates to another state. Consequently, business owners considering a move to Florida should evaluate the company's operational location and legal domicile as separate, though related, strategic decisions. Corporate Headquarters and Legal Domicile Serve Different Functions A company's headquarters generally reflects where its business is managed, and its principal operational decisions are made. The selection of that location may depend on access to talent, proximity to customers and business partners, operating costs, tax considerations, and the personal circumstances of senior leadership. These factors can make Florida an attractive destination for companies seeking to consolidate management or establish a stronger presence in the Southeast. The state in which a corporation is incorporated, however, serves a different function by supplying the legal framework that governs many of its internal affairs. That framework addresses matters such as the authority and obligations of directors, the rights of shareholders, the procedures governing corporate transactions, and the standards applicable to disputes involving corporate governance. Although a company's headquarters and state of incorporation may coincide, there is no general requirement that they do so. This separation allows businesses to select an operational location based on commercial considerations while retaining a corporate structure suited to their governance and financing needs. A Delaware corporation may establish its principal executive offices in Florida, employ personnel throughout the state, and conduct substantial business there without changing its state of incorporation. It may need to register to transact business in Florida and comply with applicable state tax, reporting, and regulatory obligations, but those requirements do not ordinarily necessitate abandoning its Delaware corporate status. Nor does maintaining Delaware incorporation exempt the company from legal obligations arising from its Florida operations. Rather, the arrangement recognizes that different jurisdictions may govern different aspects of the enterprise's activities. The practical question is therefore whether changing the company's legal domicile would provide benefits sufficient to justify altering an established governance framework. The Value of Delaware's Established Corporate Law Delaware's prominence as a jurisdiction of incorporation is frequently attributed to the predictability of its corporate law. That predictability derives not merely from the existence of a comprehensive statutory framework, but from the substantial body of judicial decisions interpreting and applying it. Over many decades, Delaware courts have addressed recurring questions involving fiduciary duties, shareholder rights, mergers and acquisitions, conflicts of interest, and the allocation of authority between directors and shareholders. As a result, companies and their advisors can often evaluate proposed actions against a developed body of legal authority rather than confronting questions for which relatively little guidance exists. This does not mean that Delaware law resolves every issue with certainty or that corporate disputes necessarily produce predictable outcomes. It does, however, provide a substantial foundation for assessing legal obligations, identifying potential risks, and structuring transactions in a manner consistent with established principles. The economic significance of that predictability becomes apparent when legal uncertainty affects commercial decision-making. Consider a company evaluating a significant acquisition involving potential conflicts of interest among directors, controlling shareholders, or other transaction participants. The parties must assess not only the economic terms of the proposed transaction but also the procedures necessary to address fiduciary concerns and the standards under which their decisions may later be reviewed. A developed body of case law can inform the board's process, the negotiation of contractual protections, and the advice provided by legal and financial professionals. Although the existence of precedent cannot eliminate litigation risk, it can help parties understand the circumstances in which particular conduct may receive judicial scrutiny. This ability to evaluate legal exposure before committing substantial resources can influence transaction costs, negotiations, and the willingness of parties to proceed. In that respect, a familiar and well-developed legal framework may contribute to enterprise value even though its benefits are not readily reflected on a company's balance sheet. Delaware's judicial infrastructure reinforces these advantages. The Delaware Court of Chancery has extensive experience resolving complex disputes involving corporate governance, fiduciary obligations, shareholder rights, and significant business transactions. Its specialized jurisdiction and substantial body of decisions have contributed to the development of legal principles that corporate counsel, investors, and transaction professionals regularly consider when evaluating corporate conduct. The significance of this experience extends beyond the resolution of individual disputes because judicial decisions also provide guidance for future transactions and governance decisions. When boards and their advisors understand how courts have evaluated comparable circumstances, they are better positioned to identify procedural safeguards, assess competing interests, and anticipate potential challenges. Delaware's appeal therefore rests not simply on the availability of a respected forum for corporate litigation, but on the relationship between judicial expertise, accumulated precedent, and the ability of market participants to plan their affairs with greater confidence. The Role of Delaware Incorporation in Financing and Investment The advantages of an established legal framework can become particularly relevant when a company seeks outside investment or institutional financing. Investors evaluate more than the company's financial performance, competitive position, and prospects for growth. They also consider the rights associated with their investment, the authority exercised by management, the protections available to minority shareholders, and the procedures governing future transactions or changes in control. These considerations become increasingly important as ownership structures grow more complex and the interests of founders, management, and outside investors begin to diverge. Because Delaware corporate law is familiar to many institutional investors, private equity sponsors, venture capital firms, and their advisors, it often provides a common starting point for negotiating governance arrangements. That familiarity may reduce the need to resolve threshold questions about the governing legal framework and allow the parties to concentrate more directly on the economic and strategic terms of the investment. For example, a closely held company that has operated successfully under its founders' ownership may eventually seek private equity investment to finance expansion or facilitate a partial liquidity event. The proposed investment could introduce new governance arrangements involving board representation, shareholder consent rights, transfer restrictions, and protections applicable to future transactions. In negotiating those provisions, the parties must consider how contractual rights interact with the corporation's governing documents and applicable corporate law. Delaware's established legal framework offers a body of authority with which sophisticated investors and their counsel are often familiar, potentially making the negotiation and implementation of those arrangements more efficient. A company that changes its state of incorporation shortly before pursuing such a transaction may instead need to address the implications of a different statutory and judicial framework. Whether that change creates meaningful complications will depend on the transaction and the parties involved, but the potential consequences warrant consideration before a change in domicile is undertaken. Similar considerations may arise in commercial lending, although the relationship between corporate domicile and financing is more nuanced. Lenders primarily evaluate a borrower's financial condition, cash flow, collateral, repayment capacity, and the enforceability of their contractual rights. The borrower's state of incorporation is only one component of that broader assessment, and Delaware incorporation does not independently establish creditworthiness or guarantee favorable financing terms. Nevertheless, the governing corporate law may affect questions concerning organizational authority, corporate approvals, and the validity of actions undertaken in connection with a financing transaction. Lenders and their counsel may benefit from familiarity with the applicable framework when reviewing organizational documents, evaluating corporate authority, and documenting the transaction. For companies with established financing relationships or anticipated capital needs, preserving an existing legal structure may therefore offer continuity that should be weighed against the potential advantages of reincorporation. The Implications for Future Acquisitions and Ownership Transitions The significance of corporate domicile may become even more pronounced when business owners contemplate a sale, recapitalization, merger, or other ownership transition. These transactions often require careful consideration of fiduciary duties, shareholder approval requirements, contractual protections, and the rights of parties whose interests may not be fully aligned. The applicable corporate law can influence both the procedures followed in approving a transaction and the legal standards governing subsequent challenges. For businesses with multiple shareholders or complex ownership arrangements, those issues may be particularly consequential because disagreements can arise over valuation, control, transaction structure, or the allocation of proceeds. Delaware's extensive jurisprudence concerning mergers, acquisitions, and fiduciary obligations provides a substantial body of guidance for evaluating these matters. That guidance may be valuable not only to the company's directors and shareholders, but also to prospective acquirers and their advisors as they assess the legal risks associated with a proposed transaction. These considerations are also relevant to family-owned businesses and enterprises managed through family offices, particularly where ownership extends across multiple generations or family branches. A company that began as a closely held operating business may develop a more complicated ownership structure as interests are transferred, trusts become shareholders, or family members assume different roles in management and governance. Over time, questions concerning voting rights, distributions, director authority, minority shareholder protections, and succession planning may become increasingly important. The governing corporate law provides part of the framework within which those relationships are structured and disputes are addressed, even when estate planning documents, shareholder agreements, and other contractual arrangements also play significant roles. For family office advisors and other professionals involved in long-term ownership planning, changing a company's state of incorporation may therefore require consideration of existing governance arrangements and anticipated transitions. A decision initially prompted by the relocation of a principal shareholder could have implications for an ownership structure intended to remain in place long after that individual's involvement in the business has ended. Evaluating Whether Reincorporation Makes Sense None of these considerations establishes that Delaware incorporation is appropriate for every company or that a change in domicile should invariably be avoided. Florida's corporate law may adequately serve the needs of many businesses, particularly those with relatively straightforward ownership structures, limited financing requirements, and no anticipated need for complex governance arrangements. Maintaining incorporation in one state while operating principally in another can also create additional administrative obligations, including registered agent requirements, annual filings, and applicable fees. Those costs may be modest in relation to the overall operations of a substantial enterprise, but they remain relevant to a complete analysis. In addition, Delaware's corporate law has continued to evolve, and recent statutory developments and judicial decisions underscore the importance of evaluating the current legal framework rather than relying exclusively on its historical reputation. The appropriate jurisdiction should ultimately be determined by the company's circumstances, including its ownership structure, governance needs, financing arrangements, anticipated transactions, and long-term objectives. A proposed change in domicile also warrants examination of the company's existing contractual and organizational arrangements. Reincorporation may involve statutory procedures, shareholder approvals, amendments to governing documents, and a review of agreements that reference the company's jurisdiction of incorporation or otherwise impose restrictions on structural changes. Depending on the circumstances, the company may also need to evaluate tax consequences, licensing requirements, financing covenants, and the treatment of existing shareholder rights. These considerations are especially important where the company has outside investors, outstanding debt, multiple classes of equity, or contractual obligations negotiated in reliance on its existing corporate structure. Although the mechanics of changing domicile may be manageable, the broader implications are not necessarily limited to administrative filings. A comprehensive evaluation should therefore consider not only whether reincorporation is legally available, but also whether it advances a meaningful business objective. Conclusion For business owners relocating to Florida, the decision to move a company's headquarters and the decision to change its state of incorporation should be evaluated independently. The former generally concerns where the business can operate most effectively, while the latter concerns the legal framework within which its owners, directors, officers, and investors exercise their rights and fulfill their obligations. Delaware's established corporate law, experienced judiciary, and familiarity among sophisticated transaction participants may continue to provide significant advantages even after a company's operational center has moved elsewhere. Those advantages are particularly relevant for enterprises anticipating outside investment, institutional financing, acquisitions, ownership transitions, or other transactions in which governance and legal predictability can materially affect the parties' decisions. At the same time, the costs and benefits of maintaining Delaware incorporation should be assessed in light of the company's particular circumstances rather than treated as a universal preference. For many businesses, establishing headquarters in Florida while retaining Delaware incorporation may represent a deliberate and commercially sound allocation of operational and legal functions.
November 2, 2026
Business
The LOI Illusion: Why the Purchase Price Isn’t the Most Important Number in Your Deal
In an acquisition, the letter of intent (LOI) can feel like a victory lap. A buyer puts a number on the table, the seller can see the finish line, and both sides are eager to announce they have a deal. But for the seller, the LOI is not a ceremonial step before the “real” documents. It is often the moment when leverage begins to shift to the buyer. This is the LOI illusion: the purchase price appears like the deal, while the terms surrounding it are what determine how much value the seller receives, when that value is paid, and what the seller must do to earn or keep it. Remember, two offers with the same headline price can produce dramatically different outcomes. The Price Garners the Attention, but the Terms Control the Outcome Business owners naturally concentrate on valuation. After years building a company, the price feels like the most concrete measure of what that work is worth, and buyers know that. A strong headline number can make the rest of the LOI seem secondary or premature. It is neither of those things. The LOI sets the framework for the rest of the transaction. Although many of its provisions may be described as nonbinding, changing a negotiated term later can prove difficult. Once the seller has signed the LOI, stopped talking to other potential buyers, and opened the company to diligence, there is a swing in leverage to the buy side. The buyer now has more information, more time, and more negotiating power. What seemed to be negotiable prior to exclusivity may become a condition to closing afterward. Exclusivity Can Change the Power Balance An exclusivity or “no-shop” provision in an LOI prevents the seller from soliciting or entertaining other offers for a stated period. Buyers want this protection before they invest heavily in diligence and documentation. So, the issue is not whether this is a reasonable condition, but rather how much the seller gives away and what the buyer must do in return. A 30-day period tied to specific diligence and drafting milestones is quite different from a 90-day period that extends automatically. If the buyer can slow the process, reopen settled issues, or walk away with little consequence, the seller could find themselves months down the road with a disrupted business and no competing bidders. Therefore, exclusivity should be long enough to support a disciplined process but short enough to preserve pressure on the buyer to perform. Working Capital Can Quietly Reprice the Deal A purchase price is typically subject to adjustments, and working capital is one of the most common. The parties agree on a target amount the business is expected to deliver at closing. If actual working capital falls below that target, the purchase price could be reduced dollar for dollar. If the target or accounting methodology is wrong, a seller can lose meaningful value even though the headline price never changes. The LOI must address how the target will be established, which accounting principles will apply, and how unusual or seasonal items will be handled. Definitions also matter here. Cash, debt, transaction expenses, customer deposits, deferred revenue, and accrued bonuses can shift between categories depending on the drafting, and those classifications can materially affect the seller’s proceeds. An Earnout Does Not Equal Cash at Closing Earnouts are a way to bridge a valuation gap, but they also shift risk back to the seller. A buyer may offer an attractive total price while making a substantial portion contingent on future revenue, EBITDA, or other performance metrics. That means the real value of that promise depends on much more than the target itself. Before treating an earnout dollar the same as a dollar at closing, the seller should press for clarity on the following: The exact metric, measurement period, and accounting rules Who will control the business during the earnout period Whether the buyer can change budgets, staffing, pricing, or sales strategy How acquisitions, shared expenses, and corporate overhead will be treated What happens if the business is resold, or the seller is terminated How disputes will be resolved and who will have access to the supporting records If those issues are left for the definitive agreement, the parties may discover they agreed on an earnout in theory, but not in practice. Rollover Equity Comes with a Second Deal When a seller rolls part of the proceeds into the buyer’s platform, that equity is often described as an opportunity for a “second bite at the apple.” And in some cases, that may be true. However, rollover equity should be seen for what it is: an investment, not cash. The seller is making a second deal at the same time the first one closes. The seller must understand what security is being received, where it all sits in the capital structure, and how it can be diluted. Governance rights, information rights, future capital calls, transfer restrictions, drag-along provisions, and the buyer’s exit strategy will all affect the value of the rollover, as does the tax treatment. A percentage on a term sheet means little without the rights and economics attached to it. Post-Closing Obligations Can Outlast the Celebration A seller’s relationship with the business may continue long after the wire arrives. The LOI may introduce employment or consulting requirements, transition services, restrictive covenants, indemnification exposure, escrow or holdback arrangements, and obligations tied to customer or employee retention. Each one of these affects the seller’s freedom, risk, and access to the purchase price. The details cannot all fit into an LOI, but the major economic and personal commitments should not first appear later in the purchase agreement. If a buyer expects the owner to remain for three years, roll significant equity, guarantee performance, or accept a broad noncompete, those expectations belong in the conversation before the exclusivity period begins so they can be appropriately considered. The LOI is Your First Real Negotiation The LOI is not just a preliminary document that remains simple so the parties don’t lose their momentum. While simplicity does bring value, ambiguity does not. The goal is not to negotiate every line before diligence begins, but to establish enough clarity on the issues that drive value, certainty, and post-closing risk. A disciplined pre-LOI process usually involves the following: Build the team early. Bring legal, financial and tax advisers into the process before the business terms harden. Identify the nonnegotiable. Decide which issues matter most to the owner beyond valuation, including certainty, timing, continued employment, employee treatment and a clean exit. Pressure-test the economics. Model realistic downside scenarios for adjustments, earnouts and rollover value instead of relying on the buyer’s best-case presentation. Make exclusivity earn its keep. Tie the no-shop period to a credible timeline, prompt diligence and measurable progress toward definitive documents and financing. While the purchase price may open the door, the LOI determines the path forward. Owners who focus only on the biggest number on the page may sign away leverage in favor of dollar signs. But those who prepare early and negotiate up front put themselves in a far better position to protect both the value they built and the life they expect after closing.
November 2, 2026
Business
Corporate AI Governance & Privilege: Protecting Confidentiality in the Age of Generative AI
Recent AI products offer unprecedented efficiencies for corporate compliance, contract review, and legal research. However, these tools can open vulnerabilities in confidentiality and evidentiary privileges. As federal courts grapple with the discoverability and privilege status of AI-drafted documents, general counsel and corporate executives must balance technological adoption with rigorous risk management. Recent federal rulings continually echo a repeating principle: convenience cannot supersede foundational evidentiary standards. When corporate employees or outside advisors utilize public or unsecure AI applications to draft or analyze confidential documents and sensitive information, they risk inadvertently waiving the attorney-client privilege that protects a business’s important information. Evidentiary Vulnerabilities and Discovery Pitfalls The core of the attorney-client privilege requires confidentiality between the client and legal counsel for the purpose of obtaining legal advice. Introducing public AI products into that confidential relationship, particularly when the vendor’s agreement permits them to retain client data or train their models on user inputs, can destroy the essential element of confidentiality. Risk Factor Operational Impact Mitigation Strategy Data Retention Policies Commercial AI platforms often store prompt histories for model training, creating discoverable records. Deploy enterprise-tier, zero-retention API instances with strict data privacy addendums. Privilege Disqualification AI-generated legal briefs or analyses may lack the direct attorney oversight necessary to claim work-product protection. Ensure all AI outputs are actively reviewed, vetted, and substantially modified by licensed legal counsel. Inadvertent Disclosure Proprietary business strategies entered into unsecured prompts can leak into public model responses. Institute robust internal employee training and implement data-loss prevention (DLP) software blocks. Comparison: How AI Deployment Choice Affects Confidentiality The security exposure described above is not uniform across all AI tools. It is driven almost entirely by how an AI model is deployed and whether the vendor retains or trains on user inputs. The table below maps leading 2026 AI models against the confidentiality standard set out in this article. Deployment options, data-handling posture, and stated use cases are drawn from Dataiku’s “Comparison table of the best LLM tools for businesses.” 1 As Luca Berton’s 2026 frontier-model analysis notes, raw model quality and a deployment’s safety posture are separate axes: the highest-scoring model is not automatically the safest choice for privileged work. Model (provider) Deployment options Data retention / training on inputs Privilege & confidentiality posture Stated best business use Privilege verdict GPT-5.5 (OpenAI) API No training on API inputs by default Third-party processor in the confidential loop; requires enterprise terms and human review Complex analytics, long-document review Conditional — with governance GPT-5.4 (OpenAI) API No training on API inputs by default Same posture as GPT-5.5; consumer tiers are not suitable for privileged content General-purpose workflows, content generation Conditional — with governance DeepSeek V4 (DeepSeek) API, self-hosted Full data control when self-hosted; see Open Platform terms for API data handling Self-hosted preserves confidentiality; API terms must be vetted before any client data is entered On-prem reasoning, budget-constrained deployments Safe self-hosted / risky via API Llama 4 Maverick (Meta) Self-hosted, cloud partners Self-hosted deployments are not subject to vendor data-handling policies; data does not leave your own infrastructure Strongest confidentiality posture; data never leaves the firm's control Research, custom fine-tuning, niche verticals Safest for privileged work Grok 4.1 Fast (xAI) API Live X platform data access via Agent Tools API Platform-connected data flows raise disclosure risk; not indicated for privileged material Real-time trend monitoring, marketing intelligence Not for privileged content Reading the verdict: no commercial model is categorically “privilege-safe” out of the box. Enterprise API tiers with zero-retention terms are defensible with documented governance; self-hosted AI deployments offer the strongest protection because client data never leaves the firm’s infrastructure. Platform-connected or consumer-tier tools should be treated as unsuitable for privileged and confidential material. Developing Comprehensive Corporate AI Guidelines To safeguard corporate privileges, organizations must move beyond informal usage policies. A robust internal AI governance framework must define approved software tools, restrict the input of personally identifiable information (PII) and trade secrets, and establish clear workflows for legal department oversight. Furthermore, organizations must maintain a clear distinction between administrative automation and substantive legal evaluation. When outside counsel or corporate legal teams utilize generative tools, they must document human supervision to defend against future discovery challenges or privilege waiver motions brought by opposing litigants. 1 https://www.dataiku.com/blog/best-llms-for-business
October 29, 2026
Mergers and Acquisitions
AI Can Prepare You to Sell a Business, But it Can’t Replace Experienced Deal Counsel
Artificial intelligence (AI) is rapidly becoming a larger part of mergers and acquisitions (M&A). For a business owner preparing to sell, AI tools can organize information, accelerate document review, and reduce some of the burden of a demanding diligence process. While those capabilities are certainly meaningful, they should not be confused with deal strategy. AI can help prepare a seller for a transaction, but it lacks the ability to determine how to position the business, preserve the negotiated economics, or control liability after closing. Selling a business is much more involved than just collecting documents and answering questions. It is a negotiated allocation of value and risk. The seller may begin with an attractive headline price, but the amount ultimately retained can depend on dozens of provisions that require context, judgment, and a clear understanding of the seller's priorities. These are all things AI cannot understand. When used thoughtfully, AI can be helpful early in the transaction process. It may assist in generating a diligence checklist, classifying documents for a virtual data room, reviewing contracts for recurring provisions, and preparing summaries for the deal team. For a seller looking at years of agreements, corporate records, employment materials, and financial information, that organizational support can be invaluable, saving time and helping identify areas that deserve closer attention. But a well-organized data room is not the same as a well-positioned business. The critical question is not merely, “What information do we have?” It is, “How do we present this company in a way that supports its value while addressing risk before the buyer uses it as leverage?” Experienced deal counsel can strategically determine which issues should be resolved before going to market, how diligence should be sequenced, and how disclosures should be framed accurately without creating unnecessary exposure. The headline price is only the beginning Every seller wants the highest possible purchase price. But the stated price in a letter of intent or purchase agreement does not always equal what the seller receives at closing or what will remain after the deal is complete. Diligence findings can trigger price reductions, working capital adjustments can move significant dollars after closing, earnouts can make a portion of the sale dependent on future performance and buyer-controlled decisions, and escrows and holdbacks can delay access to proceeds. While AI may be able to flag these provisions or compare them with language found in other agreements, it is critical to have an understanding as to how the provisions interact and how they affect this seller's actual economics. A working capital definition that appears ordinary may exclude an item that is central to the business. An earnout metric may sound objective but become difficult to achieve after the buyer integrates the company. A seemingly modest indemnity can become costly if it is paired with broad representations, a long survival period, and an inadequate liability cap. Experienced counsel is trained to look beyond whether a term is simply present. They evaluate how it operates, where it shifts leverage, and whether it is consistent with the commercial bargain the seller believes it made. AI cannot negotiate post-closing liability For many sellers, the provisions governing post-closing exposure are among the most consequential parts of the transaction. The sale price loses some of its meaning if too much remains subject to claims, repayment obligations, or disputes long after closing. Controlling that exposure requires negotiation, not just identifying standard clauses. Deal counsel works to narrow representations and warranties, limit indemnification obligations, reduce escrow or holdback amounts, establish appropriate liability caps and baskets, define exclusions carefully, and shorten survival periods where the circumstances support it. Counsel also considers how those protections fit together. Winning a lower cap may offer little comfort if a broad exception effectively swallows it. A shorter survival period may not solve the problem if the most significant representations remain outside that limit. This is where experience directly impacts the economics of a deal. A lawyer who has seen claims arise under similar language can anticipate how a provision may be used when the parties no longer share the optimism of signing day. AI analyzes text. It does not advocate for the seller, read the negotiating dynamics, or make the tradeoffs required to bring the parties to agreement. A technically correct answer may still be the wrong deal decision M&A negotiations are filled with decisions that do not have a single correct answer. Should the seller resist a buyer's request or conserve leverage for a more important issue? Should a potential concern be disclosed now, investigated further, or addressed through a specific contractual solution? Is a provision worth extending the negotiation, or is accepting it the better choice given the buyer, the timing, and the seller's objectives? Coming to the right answer requires understanding context. It may turn on the strength of the buyer's alternatives, the seller's tolerance for delay, the likelihood that the issue will create real exposure, and the relative value of other concessions under discussion. It also requires an understanding of the personalities at the table and how aggressively a point can be pressed without jeopardizing the deal. That judgment is built through experience and cannot be generated from contract language alone. Overreliance on AI can create new risks The efficiency of AI can create a false sense of completeness. A seller may assume that an AI-generated contract summary captured every material obligation or that an automated diligence review identified every inconsistency. But incomplete context, ambiguous drafting, poor source documents, or a seemingly minor error can lead to inaccurate disclosures, missed consent requirements, incomplete diligence responses, and post-closing disputes. Confidentiality, data security and the handling of privileged information also require careful attention when AI tools are used in a transaction. The responsibility for the deal lies with the parties and their advisors, not the technology. They remain accountable for the accuracy of disclosures, the completeness of responses, and the meaning of the documents they sign. AI output should therefore be treated as a work product to validate, never something to accept without review. Use AI to support the deal team, not substitute for it Sellers should take advantage of AI tools that make transactions more efficient and allow for better organization, faster review, and earlier identification of potential issues. But the strongest approach is to use those tools under the direction of experienced advisors who understand what matters, can test the output, and know how to convert information into strategy.
October 5, 2026
Business
SBA’s Proposed Size Standards Overhaul Could Reshape Government Contractor M&A
On August 20, 2026, the U.S. Small Business Administration published two related proposals that could substantially change which companies qualify as small businesses for federal contracting purposes. One proposal revises the methodology SBA uses to establish size standards. The second applies that methodology across the economy and proposes new standards for 338 industry groups and industries. Comments on both proposals are due November 20, 2026. The proposals remain subject to change and would not affect contractors unless and until SBA issues a final rule. If adopted, the proposals could allow many contractors that currently exceed their applicable size standards to qualify as small, with corresponding consequences for competition and transaction planning. What Is SBA Proposing? SBA is proposing to simplify its size-standard system while substantially raising the ceiling for many companies to remain classified as small. Fewer and broader size standards SBA currently maintains size standards covering 978 six-digit North American Industry Classification System, or NAICS, industries. The proposal would replace that system with 338 standards. A shift toward employee-based standards and an increase in many revenue-based standards Where SBA has discretion, the proposed rules favor measuring small business size by number of employees instead of annual receipts (annual receipts generally means revenue). In SBA’s new proposed framework, the number of receipt-based standards would fall from 496 to 129, while 208 of the new standards would be employee-based. This change could be significant for contractors in industries that currently use a five-year average of annual receipts. For those companies, winning a large contract can contribute to eventually exceeding the applicable size standard. With an employee-based standard, increased revenue alone would no longer cause the company to lose its small-business status. The principal changes are two-fold: Measuring size by employees rather than annual receipts in many industries Increasing the thresholds for many industries that would retain receipt-based standards. For example, NAICS 541613, Marketing Consulting Services has a current size standard of $19 million that would increase to $295 million if the proposed rule is finalized as proposed, an increase of 1453%. These are proposed, not current standards, and companies should review the applicable tables carefully because treatment varies by industry. For industries moving from receipts to an employee-based standard, revenue growth would no longer be the principal driver of size status. Transaction diligence would instead need to focus on the combined workforce of the buyer, target, and their respective affiliates. Taken together, SBA estimates that the changes would cause approximately 114,541 additional businesses to qualify as small. According to SBA, 37,002 of those businesses held federal contracts during fiscal year 2025, representing more than $71 billion across approximately 105,655 contracts. What Could the Proposals Mean for Government Contractor M&A? SBA’s proposed rules could open new transaction opportunities, but they would not eliminate the fundamental SBA affiliation and recertification issues that arise when a small-business contractor changes ownership. More flexibility for small-business acquisitions Under SBA’s affiliation rules, a contractor generally must count the receipts, employees, or other measure of size of its domestic and foreign affiliates. Affiliation may arise when one business controls or has the power to control another, or when a third-party controls both. SBA considers ownership, management, contractual relationships, prior relationships, and the totality of the circumstances. Under current standards, that combined calculation can quickly make a small-business target other than small. However, higher thresholds could provide additional room for one small- business contractor to acquire another, without immediately exceeding the applicable standard. A potentially broader buyer pool for small-business sellers Small-business set-aside contracts can be difficult to value in a sale because a change in control may cause the contractor to lose its qualifying size or socioeconomic status. Current SBA regulations generally require size and applicable program-status recertification within 30 calendar days after a merger or acquisition involving the small business that results in a change in controlling interest. The recertification applies the size standard in effect at the time of recertification corresponding to the NAICS code originally assigned to the award. If the proposed standards become effective, a buyer that would be too large under today’s threshold might qualify as small under the new threshold after taking its affiliates into account. Higher thresholds may make some targets viable for buyers that would currently cause a disqualifying size recertification. Whether that benefit exists in a particular transaction will depend on transaction specifics such as the target’s assigned NAICS codes, the timing of recertification, and any separate socioeconomic-program (e.g., service-disabled veteran-owned or women-owned small business) requirements. Changes to diligence and valuation models Buyers should not simply assume that a higher threshold preserves the full value of a target’s small-business contract portfolio. Transaction diligence should model the combined company under each relevant NAICS code, identify whether the applicable standard is based on receipts or employees, and determine when post-closing recertification will be required. An acquisition that depends on future set-aside awards should therefore be evaluated under multiple scenarios. For example, the parties should consider whether SBA’s final standards could differ from those proposed and whether the transaction could close, triggering recertification, before any new standards become effective. Increased competition may affect projections Higher size standards would not benefit only a particular buyer or target. The pool of larger and more experienced firms competing for small-business set-aside work could increase. Incumbent small contractors could face competitors with more robust past performance, sophisticated proposal teams, and greater financial resources. A transaction model that assumes historical win rates will continue unchanged may be unrealistic. Buyers should assess the target’s competitive position and whether it depends on small business status or differentiated capabilities, customer relationships, key personnel, and past performance. Deal timing could become important Because current recertification rules apply the size standard in effect at the time of recertification, the timing of a final rule, closing, and change in control could affect the outcome of a transaction. Parties negotiating transactions during the rulemaking process may want to address this uncertainty through closing conditions, purchase-price assumptions, and representations concerning size calculations. Practical takeaways Contractors considering a transaction should identify their principal NAICS codes, familiarize themselves with current and proposed standards, and calculate size on a pro forma basis after including relevant affiliates. Buyers should also consider how a larger pool of eligible competitors could affect the target’s backlog, pipeline, projected win rates, and valuation. SBA’s proposals could provide meaningful room for small-business contractors to grow organically or through acquisition. Higher thresholds do not remove affiliation, recertification, socioeconomic-status, novation, or contract-specific considerations. Those issues should remain central to transaction diligence and structuring. Comments on both proposals are due November 20, 2026, and contractors that may be affected should submit comments before the deadline.
September 23, 2026
Business
OIG Advisory Opinion 26-12 Approves Concierge Program Warranty for Surgical Outcomes
On May 22, 2026, the Office of Inspector General ("OIG") issued Advisory Opinion 26-12, concluding that a proposed warranty program offered by an orthopedic surgery provider would not generate prohibited remuneration under either the Federal Anti-Kickback Statute ("AKS") or the Beneficiary Inducements Civil Monetary Penalty ("CMP") provisions. Accordingly, OIG stated that it would not impose administrative sanctions in connection with the arrangement. The opinion provides important guidance regarding the application of the AKS warranty safe harbor to innovative service delivery models. The Proposed Arrangement The Requestor, an orthopedic surgery provider, offers patients an optional concierge program that includes post-operative recovery support services and products for one (1) year following surgery. These services include wellness coaching, educational support, nutritional programs, digital health monitoring tools, and recovery-related products. The provider certified that none of these concierge services are reimbursable by Medicare, Medicaid, or commercial insurance, although the underlying surgical procedures may be covered by Federal health care programs. Patients who elect to participate pay a separate concierge fee and execute a membership agreement before surgery. Under the proposed arrangement, the provider would warrant that a patient's substantial compliance with the concierge program would result in the patient not requiring revision surgery within two (2) years of the initial procedure. If the patient nevertheless required revision surgery during that period, the provider would refund the concierge fees paid in connection with the original surgery. The provider would not refund medical expenses, cover revision surgery costs, or provide any additional remuneration. Nor would the patient be required to return to the provider for the revision procedure. Anti-Kickback Statute Analysis OIG recognized that the arrangement potentially implicates the AKS because the offer of a refund could make the provider more attractive to prospective patients seeking surgeries that are reimbursable by Federal health care programs. As a result, OIG examined whether the arrangement satisfied the regulatory safe harbor for warranties found at 42 C.F.R. § 1001.952(g). The warranty safe harbor protects certain written undertakings to refund, repair, replace, or provide other remedial action when an item, bundle of items, or related services fail to meet specified performance standards. OIG concluded that the proposed concierge fee refund met the regulatory definition of a warranty because: The commitment was memorialized in a written membership agreement The warranty formed part of the bargain between the provider and the patient The provider agreed to take remedial action in the form of a refund The refund would be triggered by the failure of the concierge program and related services to achieve the promised outcome of avoiding revision surgery within two years OIG further determined that the arrangement satisfied the applicable conditions of the warranty safe harbor. Among other things, the provider certified that it would accurately disclose and document any refund, require patients to provide information to government authorities upon request, and refrain from conditioning the warranty on exclusive use of the provider or minimum purchase requirements. Because the arrangement fit squarely within the warranty safe harbor, OIG concluded that it would not constitute prohibited remuneration under the AKS. Beneficiary Inducements Civil Monetary Penalties Analysis OIG likewise found no violation of the Beneficiary Inducements Civil Monetary Penalties (CMP). Although the refund offer could arguably influence a Medicare or Medicaid beneficiary's selection of a provider, the CMP's definition of remuneration excludes practices that are permissible under an AKS safe harbor. Having determined that the proposed arrangement qualified for protection under the warranty safe harbor, OIG concluded that the arrangement likewise posed no risk under the Beneficiary Inducements CMP. Key Compliance Considerations Several facts were central to OIG's favorable determination: The concierge services were separately purchased at fair market value The refund applied only to the concierge fees paid by the patient and not to medical, hospital, or surgical expenses Patients were not required to use the provider for any future procedure, including revision surgery The provider did not condition the warranty on exclusive use arrangements or minimum purchasing commitments Appropriate reporting, documentation, and disclosure requirements were incorporated into the membership agreement Conclusions Advisory Opinion 26-12 demonstrates OIG's willingness to recognize properly structured outcome-based warranty programs tied to non-covered services that satisfy the warranty safe harbor. The opinion may be particularly relevant to providers developing concierge, care coordination, recovery support, or other value-added patient programs. At the same time, OIG emphasized that its approval was limited to the specific facts presented. Notably, the agency distinguished the proposed arrangement from the provision of free concierge services or other free benefits to patients. OIG reiterated its longstanding concerns that free items or services connected to federally reimbursable care may present significant fraud and abuse risks and would not necessarily qualify for safe harbor protection. While advisory opinions bind only the requesting party, Advisory Opinion 26-12 offers a useful roadmap for providers seeking to design patient-centered warranty programs that reward outcomes without running afoul of the AKS or Beneficiary Inducements CMP. Proper structuring, fair market value pricing, careful documentation, and strict adherence to the warranty safe harbor remain essential to achieving a favorable compliance result.
September 9, 2026
Mergers and Acquisitions
The Earnout Trap: Hidden Post-Closing Risks in M&A Transactions
Earnouts are often presented as a solution that can help get a deal across the finish line. If a buyer and seller disagree on valuation, an earnout can help bridge that gap by tying a portion of the purchase price to the future performance of the company post-closing. It’s a simple concept in theory. If the company performs as expected, the seller will receive additional payments. If the company does not meet the established metrics, the buyer pays less. However, in practice, earnouts can introduce a significant layer of complexity, and they are one of the most heavily litigated provisions in M&A transactions. Why does this happen? Because after closing, the seller is no longer in control of the business – something that is often seriously underestimated during negotiations. Founders generally have a belief that the company they created and built is poised for substantial growth. And while that might have been true pre-sale, once there is an ownership transfer, things can change significantly. The seller no longer has the ability to make decisions to achieve growth targets. Hiring decisions, sales strategy, marketing budgets, staffing levels, pricing models, operational priorities, and integration efforts are all solely in the hands of the buyer once the deal is done. To further complicate matters, the acquired company may be integrated into a larger platform business or combined with another portfolio company. Revenue streams may be reallocated, expenses may be shifted, and key employees may choose to leave. Long-term integration might also be a higher priority for the buyer as opposed to short-term profitability. Each of these decisions can directly impact whether earnout metrics are achieved. And this is where disputes arise. Sellers must carefully negotiate earnout provisions to avoid losses or even the courtroom down the road. Establishing Clear Standards One of the biggest mistakes sellers make when negotiating earnouts is agreeing to vague or subjective standards. The more discretion the buyer has post-closing, the greater risk to the seller that they will never receive their full earnout payment. This is why sellers should work with legal counsel to establish objective, clearly measurable performance metrics. For example, revenue-based earnouts are typically easier to evaluate than EBITDA or profitability metrics because profit calculations can be heavily influenced by post-closing decisions. And even the most straightforward revenue metrics need to be carefully drafted. Sellers must understand exactly what counts toward the target, how revenue is recognized, whether certain contracts are excluded, and how deferred or recurring revenue will be treated. Properly Structuring Earnouts The structure of earnouts also matters, because when these are not structured properly, a seller could forfeit millions in earnout consideration if targets are barely missed. Therefore, the following provisions must be heavily negotiated or there can be a dramatic sway in the ultimate economics of the transaction: Is the earnout all or nothing? Will missing the target by a small margin result in no payment at all? Is there a sliding scale that allows for partial payments if performance reaches certain thresholds? If the company exceeds projections, does the seller benefit from that upside? Post-Closing Information and Enforcement Rights Another critical factor to consider are the seller’s post-closing information and enforcement rights. Sellers should negotiate their access to financial information, reporting obligations, audit rights, and dispute resolution procedures before signing any deal documents. Without having these kinds of protections in place, it becomes increasingly difficult to determine whether a buyer appropriately calculated the earnout or if operational decisions unfairly impacted performance. The Broader Financial Risk It is common for sellers to underestimate the broader financial risk that is tied to variable consideration structures such as earnouts and rollover equity. These can be extremely valuable tools in the right transaction, but they also shift risk back to the seller. The more price is tied to future performance, the less certainty the seller has regarding their proceeds from the sale. This is why legal counsel and deal advisors encourage sellers to limit the percentage of total deal value that is tied to earnouts whenever possible. Cash at closing equals certainty. While earnouts can provide an upside, they can also establish a continued dependency on a business that the seller no longer controls. These risks do not mean earnouts should be avoided in every situation. They do have value in their ability to bridge valuation gaps, align incentives, and move deals forward that otherwise would have stalled out. But sellers must approach earnouts with caution and a clear understanding of these risks. In M&A transactions, much of the important negotiations center on the purchase price. But remember, the most important disputes occur post-closing, with earnouts being at the center of them. Negotiate earnouts wisely.
August 3, 2026
Business
Pennsylvania Supreme Court Narrows Scope of Workers’ Compensation Anti-Referral Provision: Implications in Light of Federal Physician Self-Referral Law
On June 16, 2026, the Pennsylvania Supreme Court issued a significant decision interpreting Section 306(f.1)(3)(iii) of the Workers’ Compensation Act (the “Act”), commonly known as the Anti-Referral Provision. The Court held that the placement of the phrase “goods or services” following a list of enumerated medical services does not operate as a broad catch-all prohibition on physician self-referrals. Instead, the Court concluded that the statutory prohibition is limited strictly to the specifically enumerated services that precede that phrase. As a result, physician self-referrals to pharmacies in which they hold a financial interest (e.g., ownership interest or compensation arrangement) fall outside the scope of the Act’s anti-referral restriction. Employers and insurers are therefore required to reimburse for reasonable and necessary prescriptions, even where the prescribing physician has a financial interest in the dispensing pharmacy. This ruling represents a major shift in the interpretation of Pennsylvania’s healthcare cost-containment framework and invites comparison to the federal Ethics in Physician Self-Referral Law, 42 U.S.C. § 1395nn (“Stark Law”) enacted in 1989 and later expanded in 1993. Background The case arose from multiple consolidated claims involving two (2) physicians who issued prescriptions filled by 700 Pharmacy, an entity in which they held a financial interest. When the State Workers’ Insurance Fund (“SWIF”) denied payment for those prescriptions, the pharmacy filed Medical Fee Review Applications seeking reimbursement. The applications were denied at the administrative level, when the hearing officer concluded that the prescriptions constituted unlawful self-referrals under the Act. The Commonwealth Court affirmed that determination, relying on what it viewed as the plain language of the statute. In its view, the phrase “goods or services” reflected a deliberate legislative choice intended to broadly encompass all forms of medical care, including pharmaceuticals and pharmacy services. Supreme Court Opinion The Pennsylvania Supreme Court reversed. The majority applied a textualist approach, concluding that the statutory language does not extend beyond the specific categories of medical services expressly listed in the provision. Because prescription drugs and pharmaceutical services are not included among those specified categories, the Court held that they fall outside the scope of the Anti-Referral Prohibition. In doing so, the Court rejected the argument that “goods or services” should function as a residual clause capturing all forms of medical treatment. Instead, it interpreted the statute as intentionally limited, declining to expand its reach based on broader policy considerations. Two dissenting opinions highlight the stakes of that interpretive choice. Justice McCaffery emphasized that the Anti-Referral Provision was enacted to prevent financially motivated medical decision-making and argued that the phrase “goods and services” should be read broadly to effectuate that purpose. Justice Wecht, in a separate dissent, challenged the majority’s textual analysis, suggesting that the statutory language more naturally supports a broader interpretation. Legislative Context and Comparison to Stark Law The Anti-Referral Provision was enacted as part of Pennsylvania’s workers’ compensation reform efforts in 1993 (Act 44), legislation designed to control rising system costs and curb perceived abuses. Its purpose closely parallels that of the federal Stark Law, which Congress enacted in 1989 to address the risks posed by physician self-referrals and the resulting overutilization of healthcare services. The difference lies in execution. The Stark Law is deliberately expansive, covering a wide range of “designated health services,” including outpatient drugs, and imposing strict liability for prohibited referrals unless a regulatory exception applies. It is grounded in the premise that financial incentives can distort clinical judgment and therefore must be tightly regulated. By contrast, the Pennsylvania Supreme Court’s decision reflects a narrower, text-driven interpretation of state law. Rather than extending the Anti-Referral Prohibition to align with its underlying purpose, the Court confined its application to the statute’s enumerated categories. The result is a regulatory gap: a set of financial relationships that would raise significant concerns under federal law now fall outside the scope of Pennsylvania’s workers’ compensation anti-referral framework. Practical Implications for Healthcare Providers The Court’s decision opens the door for physicians to more freely integrate ancillary services into their practices, particularly in the area of pharmacy ownership. Physicians may now prescribe medications that are filled by a pharmacy in which they have a financial interest without violating the Anti-Referral Provision. This flexibility brings with it clear financial opportunities. Providers now have the ability to capture additional revenue streams tied to prescription medications, including dispensing margins and pharmacy-related services. Given the frequency with which injured workers require ongoing medication management, particularly in chronic or complex cases, this development may have a meaningful economic impact on certain practices. At the same time, the decision does not eliminate compliance risk; rather, it shifts the focus of that risk. Providers remain subject to the Act’s cost-containment measures, including fee schedules and utilization review. Prescribing decisions must still be medically necessary and defensible, and patterns of overutilization or unusually high-cost prescribing are likely to draw scrutiny. In practice, the question is no longer simply whether a referral is permitted, but whether it can be justified. It is also critical to recognize that this ruling is limited to Pennsylvania’s workers’ compensation system and does not alter obligations under federal law. The Stark Law and the Anti-Kickback Statute continue to impose strict limitations on financial relationships tied to referrals in Medicare, Medicaid, and other federal healthcare programs. As a result, providers must take care not to conflate what is permissible in the workers’ compensation context with what is allowed elsewhere. Maintaining clear compliance boundaries between these regulatory frameworks will be essential. From a strategic standpoint, the decision is likely to prompt providers to reconsider how they structure ownership and referral relationships. Investments in pharmacies, compounding operations, and related ancillary services may become more attractive, particularly where those services can be aligned with workers’ compensation patients. The ruling effectively invites more deliberate planning around the integration of care delivery and revenue generation. At the same time, providers should expect increased scrutiny from insurers and payers. Carriers are unlikely to accept this shift passively and may respond by intensifying utilization review and monitoring prescribing patterns more closely. High-cost medications, unusual prescribing volumes, or patterns suggesting financial motivation may face heightened challenge. In that sense, while the legal restriction has narrowed, the practical oversight surrounding these arrangements may increase. Conclusion The Pennsylvania Supreme Court’s decision represents a significant narrowing of the Workers’ Compensation Act’s Anti-Referral Provision, grounded in a strict textual reading of statutory language. While the ruling is consistent with principles of statutory interpretation, it departs from the broader policy approach embodied in the federal Stark Law and from the apparent cost-containment objectives underlying Act 44 of 1993. By excluding pharmaceuticals from the anti-referral framework, the Court has created a gap between legislative intent and statutory reach. For healthcare providers, the decision presents both opportunity and risk: new flexibility in structuring business relationships, coupled with continued regulatory oversight and the possibility of future legislative correction. Whether the General Assembly will act to close that gap remains to be seen, but the decision has already reshaped the compliance landscape for provider self-referrals in Pennsylvania’s workers’ compensation system.
July 28, 2026
Business
Search Funds, Independent Sponsors, and CCVs: Choosing the Right ETA Model
Entrepreneurship through acquisition has moved well beyond the traditional search fund. Today, ETA buyers can pursue small business acquisitions through several different capital models, each with different implications for fundraising, governance, control, and post-close operations. For emerging searchers, search fund entrepreneurs, and acquisition-minded operators, that creates both opportunity and confusion. The same target company may attract interest from a traditional searcher, a self-funded buyer, an independent sponsor, a committed capital vehicle, a family office, or a holding company. Each buyer may describe itself as part of the ETA ecosystem. But each model raises acquisition capital differently, allocates economics differently, and creates different expectations around governance, speed, control, and post-close operations. That matters because the structure you choose does more than affect fundraising. It affects: how sellers view you how lenders underwrite you how investors control decisions how much equity you may own after closing, and whether your structure works for one acquisition or a multi-acquisition platform For most emerging searchers, the first structure does not need to solve every future problem. It needs to fit the buyer’s current stage, capital access, risk tolerance, and first acquisition strategy. That distinction matters. A buyer may eventually want to build a roll-up, raise committed capital, or create a long-duration holding company. Those goals can inform the strategy, but they should not automatically dictate the structure for acquisition number one. Overbuilding the structure too early can create unnecessary legal expense, investor complexity, governance friction, and fundraising burden before the buyer has proven the core thesis. It can also push the searcher into a model that requires capabilities the buyer has not yet developed. In many cases, the better approach is to choose the simplest structure that supports the first credible acquisition while preserving room to evolve. A searcher who has not yet operated one business usually benefits more from building the foundational operator skills than from designing a vehicle for acquisition number five. The question is not only, “Where do I want to be in five years?” It is also, “What structure gives me the best chance to close and operate the first deal well?” The ETA Market Is Becoming More Fragmented Traditional search funds remain the most recognized and studied model. They have a long track record, a familiar investor base, and a relatively standardized playbook. For many first-time searchers, they remain the cleanest path into ETA. But they are no longer the only serious option. Self-funded search has become increasingly common, particularly among buyers who want more control, more ownership, and the ability to pursue small business acquisitions using SBA financing or smaller investor syndicates. Independent sponsors have also become one of the most active buyer categories in the lower middle market M&A ecosystem, especially for experienced operators and executives with investor relationships. Family offices continue to deploy more direct capital into private companies, sometimes backing searchers and sometimes acquiring companies directly. At the same time, committed capital vehicles and long-duration holdcos have become more visible. These structures are not entirely new, but their use within the ETA ecosystem appears to be accelerating. They reflect a shift from the classic idea of buying one company toward a broader effort to build repeatable acquisition infrastructure. That is the key development. ETA is no longer a single path. It is a group of related acquisition models that sit along a spectrum between individual entrepreneurship, lower middle market M&A, family office direct investing, and institutional private equity. Traditional Search Funds The traditional search fund is still the baseline model for many emerging searchers and search fund entrepreneurs. In a traditional search fund, investors provide capital to fund the search phase. The searcher uses that capital to source, evaluate, and negotiate the acquisition of a single target company. Once a target is identified, the same investor group typically has the right to participate in the acquisition financing. After closing, the searcher usually becomes the CEO or operating leader of the acquired business. This model works particularly well for first-time buyers who want structure, mentorship, and investor support. Many traditional search investors have seen dozens of transactions and can help a searcher evaluate industries, negotiate LOIs, manage acquisition diligence, structure financing, and prepare for post-close operations. The benefit is credibility and support. The tradeoff is control. Traditional searchers usually have investors deeply involved from the beginning. Those investors may have approval rights over the acquisition, the financing, the governance structure, major post-close decisions, and the searcher’s ongoing role. That involvement can be valuable, especially for a first-time operator, but it also means the searcher is not operating independently. Economically, traditional search funds usually give the searcher meaningful upside if the acquisition closes and performs well. The searcher typically receives a salary during the search phase, then earns equity through a combination of closing, time-based vesting, and performance-based vesting. While structures vary, many traditional search economics are designed to give the searcher a meaningful minority ownership position over time rather than majority control. The model is best understood as an apprenticeship into ownership. It is often a strong fit for a searcher who wants to buy and operate one good company with investor backing, guidance, and a known playbook. It may become less efficient if the searcher’s goal is to pursue serial acquisitions, build a multi-company platform, or retain more control over long-term capital allocation. Self-Funded Search Self-funded search is different in both psychology and economics, and it has become one of the most discussed alternatives to the traditional search fund. In a self-funded search, the buyer does not raise a formal search fund at the outset. Instead, the buyer funds the search personally or with limited outside support. Once the buyer identifies a target, the buyer raises capital for that specific transaction. In many small business acquisition strategies, SBA financing plays a central role. This model appeals to buyers who want more autonomy. A self-funded searcher usually has more freedom to define the target profile, negotiate directly with the seller, select investors later, and structure the deal around the specific opportunity. The model can also allow the buyer to retain substantially more equity than a traditional searcher, particularly in smaller transactions where debt financing (usually in the form of a SBA loan) covers a large portion of the purchase price. That ownership upside is one of the main attractions. But the model also places more risk on the buyer. Self-funded searchers often pay search expenses themselves. They may sign personal guarantees, especially in SBA-financed transactions. They may have fewer institutional resources during diligence. They may also have a thinner advisory network unless they intentionally build one. The economics can be attractive, but they are less standardized. The buyer may retain a large common equity stake, raise preferred equity from a small group of investors, and personally guarantee a portion of the acquisition debt. In a successful transaction, that can create better ownership economics than a traditional search fund. In a difficult transaction, it can create greater personal exposure. Self-funded search is often well suited for smaller acquisitions, local service businesses, business services companies, light industrial businesses, trades, healthcare services, and other lower middle market companies where SBA financing and hands-on operation can support the acquisition. The model is strongest when the buyer wants to own and operate a business with meaningful personal control. It becomes harder when the buyer wants to pursue larger targets, institutional equity, multiple add-on acquisitions, or a more formal acquisition platform. Independent Sponsors The independent sponsor model sits closer to private equity than traditional search and has become an important part of the lower middle market acquisition landscape. An independent sponsor typically sources a deal first, signs or negotiates the LOI, conducts diligence, and then raises equity for that specific acquisition. Unlike a committed fund or committed capital vehicle, the independent sponsor usually does not have fully committed capital available before the transaction is identified. This model works best for people with prior operating, investing, industry, or transaction experience. The independent sponsor must persuade three groups at once: the seller, the lender, and the equity investors. The seller wants confidence the buyer can close. The lender wants confidence in the sponsor, the capital stack, and the operating plan. The investors want confidence that the sponsor found a good deal and can manage it after closing. The model provides flexibility. The sponsor can choose different investors for different deals, customize governance, structure economics around the specific acquisition, and pursue opportunities that do not fit a traditional search fund profile. But the main weakness is capital certainty. Because the sponsor often raises equity after signing the LOI, sellers and intermediaries may worry about whether the buyer can actually close. That concern becomes more significant in competitive processes or situations where the seller wants speed and certainty. Economically, independent sponsor structures often include a mix of transaction fees, direct equity, management fees, and carried interest or promote. A sponsor might receive a closing fee, a minority equity position, and a promote above a preferred return to investors. The precise terms vary widely because independent sponsor economics are negotiated deal by deal. That variability is both a strength and a weakness. It gives the sponsor flexibility, but it also means the sponsor must negotiate economics repeatedly. If the sponsor lacks a strong investor base, the economics can compress quickly. The independent sponsor model is often a strong fit for a more experienced buyer who has deal access, sector knowledge, and investor relationships, but does not yet have a committed capital vehicle or fund. Committed Capital Vehicles Committed capital vehicles, or CCVs, are becoming increasingly relevant in ETA, especially for searchers and operators who want to move from one-off acquisitions toward a repeatable acquisition platform. A CCV generally refers to a structure where investors commit acquisition capital before a specific acquisition is identified or before a series of acquisitions is completed. The vehicle may be designed to acquire one platform company, pursue multiple acquisitions, or build a long-duration holding company. The basic appeal is straightforward: capital certainty. A buyer with committed capital can often move faster than a buyer who must raise equity after signing an LOI. That matters to sellers, lenders, brokers, and investment bankers. It also matters in fragmented industries where add-on acquisitions may become part of the strategy. This is why CCVs are gaining attention among more sophisticated searchers, acquisition entrepreneurs, independent sponsors, and operators. They are not simply trying to buy one company. They are trying to create a structure that can support multiple acquisitions, longer hold periods, and more repeatable capital deployment. The economic terms of CCVs usually look more like a small private equity or holding company structure than a classic search fund. The buyer often becomes an operator-sponsor and may receive management company economics, carried interest, direct co-investment rights, transaction-related fees, or long-term incentive economics tied to the performance of the vehicle. Investors may receive a preferred return, priority distributions, approval rights over major decisions, and protections around leverage, concentration, conflicts, related-party transactions, and sponsor removal. In many CCVs, the sponsor’s upside comes primarily through carry or promote after investors receive agreed economic thresholds. The model can create meaningful upside for a sponsor who builds a durable platform. But it also increases complexity. The sponsor is no longer just a searcher or operating CEO. The sponsor becomes a capital allocator, investor relations manager, acquisition strategist, governance manager, and platform builder. That is a different job. For emerging searchers, this distinction matters. A CCV may sound attractive because it offers more capital certainty and a more scalable structure. But it also requires a more developed investment thesis, stronger investor relationships, better governance design, and a clearer plan for how capital will be deployed. A CCV is usually more appropriate when the buyer has a repeatable acquisition thesis, a credible capital partner, a reason to pursue more than one acquisition, and the experience or support needed to manage a more institutional structure. It is usually less appropriate for someone who simply wants to buy one small business and operate it directly. Long-Duration Holdcos Long-duration holdcos overlap with CCVs but are not always identical. A holdco is usually designed to own operating companies over a long period of time. Instead of buying one company with the expectation of selling it in five to seven years, the holdco may be built around long-term compounding, cash flow reinvestment, and permanent or semi-permanent ownership. This model has become increasingly attractive to investors and operators who dislike the forced exit pressure of traditional private equity. For sellers, the holdco model can also be attractive. Founder-owned businesses often care about what happens after closing. They may prefer a buyer who plans to hold the business, retain employees, preserve culture, and invest in long-term operations. Economically, holdco structures can vary substantially. Some resemble private equity funds with preferred returns and sponsor carry. Others give the sponsor direct equity in the holding company. Some include management fees or shared services fees. Others rely more heavily on long-term equity appreciation. The central economic question is how value gets allocated between the capital providers and the operator-sponsor building the platform. That question can become complicated because the sponsor may be doing several things at once: sourcing acquisitions, managing executives, building systems, allocating capital, and creating the broader platform value. Holdcos can be powerful structures when the sponsor has a long-term vision and a patient investor base. They can also become difficult if investors want liquidity sooner than expected, if governance is unclear, or if the sponsor lacks the operational infrastructure needed to manage multiple companies. Family Office Direct Acquisition Models Family offices play several roles in the ETA ecosystem and broader lower middle market M&A market. Some invest in traditional search funds. Some back self-funded searchers. Some provide equity to independent sponsors. Some anchor CCVs or holdcos. Others acquire privately held companies directly. This makes family office capital both important and hard to categorize. In direct acquisition models, a family office may use its own balance sheet or investment vehicle to acquire a privately held company. It may install an operator, partner with a searcher, back an industry executive, or manage the company through an internal team. The main advantage is patient capital. Many family offices do not face the same exit pressure as private equity funds. They may be willing to hold a business for a longer period, prioritize cash flow, and structure a transaction around seller concerns, employee continuity, and long-term stewardship. But family offices vary dramatically. Some are highly institutional, with formal investment committees, detailed diligence processes, and experienced deal teams. Others are relationship-driven, informal, and dependent on a small number of family decision-makers. That variation affects everything: speed, governance, reporting, decision-making, and post-close expectations. Economically, operators working with family offices may receive salary, bonus, direct equity, phantom equity, profit participation, or equity vesting tied to long-term performance. The terms depend heavily on whether the operator is functioning as an employee, partner, sponsor, or acquisition entrepreneur. For emerging searchers, family office backing can be valuable, but it requires clarity. The searcher should understand whether the family office expects control, what decisions require approval, how future acquisitions will be funded, how economics vest, and whether the searcher is building personal ownership or merely operating a family-owned asset. Comparing the Models The models differ less by label than by what they are built to accomplish. A traditional search fund is designed to help a searcher find, acquire, and operate one company with investor support. A self-funded search is designed to give the buyer more control and potentially more ownership, usually in a smaller transaction with more personal risk. An independent sponsor model is designed to let an experienced buyer pursue deals without a committed fund, but it requires the sponsor to raise capital transaction by transaction. A CCV is designed to provide more capital certainty and support a broader acquisition strategy. A holdco is designed for long-duration ownership and compounding across one or more operating businesses. A family office model depends on the family office itself, but often emphasizes patient capital, direct ownership, and flexibility. The right model depends on the buyer’s objective. If the goal is to buy one strong business and become CEO, a traditional search fund or self-funded search may be the better fit. If the goal is to pursue larger or more complex deals with customized capital, the independent sponsor model may fit. If the goal is to build a repeatable acquisition platform, a CCV or holdco may make more sense. If the goal is to partner with patient capital and operate over a longer horizon, family office backing may be attractive. Economic Terms Matter Because They Shape Behavior Emerging searchers often focus on headline ownership percentage. That is understandable, but incomplete. The more important question is how the economic structure shapes behavior after closing. A buyer with too little equity may lose motivation. Investors with too much control may slow decisions. A sponsor with carry but no real capital at risk may create alignment concerns. A structure with no liquidity path may create investor tension. A self-funded searcher with too much personal guarantee exposure may become overly conservative after closing. The economics are not just financial terms. They are governance terms. We've discussed the importance of negotiating a governance structure in prior editions of Search Fund Operate. These terms influence who makes decisions, who bears risk, who receives upside, and how the company responds when post-close reality differs from the acquisition model. This is why vehicle selection matters before the LOI. By the time a buyer is under LOI, the structure has already started shaping the deal. A Practical Way to Think About Model Selection For an emerging searcher, the best starting point is not the structure. It is the strategy. If you want mentorship, institutional backing, and a proven path into operating one business, traditional search remains highly relevant. If you want control, ownership concentration, and are comfortable with personal risk, self-funded search may fit. If you have deal experience and investor relationships but no committed fund, independent sponsor may be viable. If you want to pursue multiple acquisitions under a repeatable thesis, a CCV or holdco may be appropriate. If you have access to a family office that understands your operating thesis, family office backing may provide patient and flexible capital. The mistake is choosing the model because it sounds more sophisticated. The better approach is to choose the model that matches the buyer’s actual capabilities, capital relationships, risk tolerance, and acquisition plan. ETA has become more institutionalized, but the core issue remains simple. The buyer has to close the deal, operate the company, and live with the acquisition structure after closing. That is where the differences between these models become real.
July 21, 2026
Mergers and Acquisitions
Breaking Down Rollover Equity: Why Buyers Love It and What Sellers Need to Know
For many business owners, the goal of selling their company is turning their years, and often decades, of hard work into liquidity. But in some cases, retaining a stake in the company could prove to be fruitful for both the buyer and the seller. That is where rollover equity comes into play. Below is a breakdown of the benefits and risks of rollover equity, and what sellers need to know. Rollover Equity Explained The concept of rollover equity is simple. Instead of paying a seller entirely in cash, a buyer acquires 100% of the target company while allowing founders and key shareholders to retain a stake in the new ownership structure. The seller still receives some immediate liquidity at closing, exchanging the remaining portion for equity in the post-transaction business. This is certainly not a new concept and has been common in private equity transactions for some time. However, it is becoming an increasingly important tool today as buyers and sellers work to bridge valuation gaps and align their incentives in today’s more cautious deal environment. The Benefits of Rollover Equity One of the most obvious benefits of this deal structure is that it reduces the amount of cash required to close a transaction. This is a significant benefit for buyers who are motivated to preserve capital whenever possible, particularly in today’s market when financing costs are elevated, and lenders are scrutinizing leverage more carefully. Buyers do not have to fully fund a transaction with cash, but they still obtain full control of the entire company. Additionally, when founders remain involved, there is an increased confidence that the management team and employees will remain motivated and stay onboard. Continued seller participation can also help to preserve relationships, maintain operational continuity, and retain institutional knowledge after the deal closes. These non-economic factors can be critical to the company’s future success. Rollover equity can also be a tool to bridge valuation disagreements between a buyer and seller. A frequent issue that arises is a seller’s belief their business deserves a higher valuation based on its growth potential vs. the buyer’s hesitation to fully underwrite those projections in cash. A rollover structure provides a bridge for both sides to move forward despite the disconnect on valuation. The seller gets to walk away with immediate liquidity while still retaining the opportunity to benefit from the upside if the company continues to grow. That second bite at the apple can prove to be extremely valuable for a seller if the company later sells at a higher valuation. They can see returns that far exceed anything they would have generated from an all-cash transaction up front. This makes rollover equity particularly attractive for sophisticated sellers who see the opportunity to continue participating in value creation alongside the buyer. The Risks of Rollover Equity While there are many upsides to rollover equity, it is not without risk. Most importantly, sellers must fully understand what they are receiving in exchange for the portion of the sale they are not receiving in cash. The rolled equity is typically a minority stake in a buyer-controlled entity. The seller will have minimal control over future decisions, including exit timing. Therefore, the rights associated with the rollover are incredibly important and should be carefully negotiated. Rollover equity can also include some restrictions for the seller. For example, there can be mandatory hold periods, drag-along provisions, or other limitations that can affect how and when the seller can monetize their investment. The capital structure of the post-closing entity also matters. If the new entity is highly leveraged, the seller may face a very different set of risks than they did as the original owner. As with any transaction structure, a rollover transaction comes with its own set of tax considerations as well. When structured properly, rollover equity can come with the added benefit of tax deferral in certain instances for sellers, but the rules here are complex and highly dependent on deal structure. It is essential to bring in legal and tax counsel early on to ensure everything is structured appropriately and aligns with the seller’s financial goals. Rollover equity can be a highly beneficial tool for both buyers and sellers, and it will no doubt continue to be increasingly used in today’s M&A environment. But there are many considerations, especially on the sell side, that must be addressed from the start. Working with effective legal counsel throughout the process can help to reduce the risk, increase the benefits, and set up sellers for even greater success in the future.
July 6, 2026
Business
Why the Friendly PC Model Remains Critical to Healthcare Private Equity Transactions with Medical and Dental Practices
Private equity (“PE”) activity in healthcare across the United States has caused continued focus by state legislatures and enforcement agencies on the doctrines of corporate practice of medicine and dentistry (“CPOM” or “CPOD”). Notwithstanding this attention, the often-referenced “Friendly PC” model remains the optimal corporate strategy to ensure post-closing compliance with CPOM and CPOD regulations in most jurisdictions. The following identifies some key considerations for the agreement's ancillary to the purchase of the non-clinical assets by the PE company’s management services organization (“MSO”), which are commonly used to ensure compliance with CPOM and CPOD. Friendly PC Model As a general matter, the term “Friendly PC” model in PE healthcare deals most often refers to a business arrangement where a physician or dentist-owned professional corporation (“PC”) sells all of its non-clinical assets to an entity owned by the MSO (controlled by the PE firm), which then takes responsibility for the PC’s non-clinical business operations. This model complies with fundamental CPOM and CPOD legal requirements, which are designed to restrict non-physicians from owning or controlling medical practices. Such a structure prevents the PE buyer from owning clinical assets or unduly controlling the clinical operations and decision-making of the providers employed by the PC. In the “Friendly PC” structure, the parties designate a single clinical professional to serve as the sole owner of the PC post-closing. This individual is referred to as the friendly physician or dentist (“Friendly Provider”), who is then expected to cooperate with the PE buyer in accomplishing its business goals. Such a transaction requires the drafting of a series of agreements to accomplish the necessary purposes of the arrangement. Although the nature and scope of such agreements may vary slightly based upon preference and applicable state law, below is a brief description of certain key agreements, and their most necessary elements, to ensure the PC’s compliance with CPOM and CPOD laws post-closing. Management Services Agreement The Management Services Agreement (“MSA”) is entered into between the PC and the MSO, which is owned by the PE buyer. Through this agreement, the MSO is responsible for providing and arranging for certain non-clinical administrative, business support, and back-office services on behalf of the PC. The MSA will clearly state that the MSO entity will not play any role in the care of patients and will specify the limitations of the actual services to be provided so as to ensure it will not fall within the applicable state’s definition of the practice of medicine or dentistry. It is also very important that the MSA define the independent contractor nature of this commercial relationship and seeks to avoid creating a de facto partnership between the MSO and the PC.1 Overly lengthy initial contract durations, requirements for minimum operational hours per period, the ability to negotiate payor and other agreements without the PC’s consent, and compensating the MSO through a percentage of the PC’s profits are all commonly mishandled deal points that could create an unintended partnership in the eyes of a regulatory agency.2 As such, legal counsel must carefully tailor these provisions to avoid such a problematic presumption. Equity Transfer Restriction Agreement This agreement establishes a highly restrictive framework which governs the ownership and transfer of the Friendly Provider’s interests in the PC, giving the MSO near-complete control over any change in ownership. As a baseline rule, no transfer of equity—whether voluntary, involuntary, or by operation of law—may occur without the MSO’s prior written consent, which may be granted or withheld in its sole discretion. The central mechanism is a set of transfer events (e.g., death, disability, termination of services, loss of licensure, legal disqualification, divorce, regulatory issues, or breach of agreements), upon which the Friendly Provider’s entire ownership interest is automatically and immediately transferred—without notice or further action—to an MSO–designated transferee. This transfer occurs by operation of contract, is effective upon the triggering event, regardless of administrative formalities and is typically priced at a nominal $1.00. In addition, the MSO typically holds a unilateral call option enabling it to trigger a forced transfer of all equity at any time by delivering notice, which itself constitutes a transfer event and results in the same automatic $1.00 transfer to its designated transferee. Following any such transfer, the Friendly Provider is automatically stripped of all ownership, governance roles, and economic rights in the PC. The agreement further reinforces this control structure through ongoing covenants that prohibit the Friendly Provider and the PC from taking a wide range of corporate, financial, and operational actions without MSO approval, ensuring that both ownership continuity and strategic direction remain fully aligned with the MSO’s interests. Provider Employment Agreement The provider employment agreement is often viewed as the most important by medical professionals who are divesting their interest in the PC. It includes terms and conditions regarding compensation and various restrictive covenants (i.e., non-competition, non-solicitation, confidentiality) that are critical to the clinician’s relationship with the PC. Legal counsel should ensure that the employment agreement also contains specific provisions or guarantees that the clinical professionals will maintain broad autonomy in all clinical decision-making and treatment of patients post-closing.3 Under no circumstances may the PC exercise any undue control over this aspect of their clinical professional employees’ job performance, and expressly stating as such within this agreement may help the arrangement survive future scrutiny.4 Clinical Liaison Agreement Lastly, the Clinical Liaison Agreement (“CLA”), typically entered into by the PE management entity and the Friendly Provider, is a frequently used means to outsource the development and implementation of the medico-administrative services of the PC. As a licensed professional in the state of operation, the Friendly Provider is the only party legally authorized to provide such services as the supervision of clinical staff, the development of clinical policies, and the leadership of patient-related programs and initiatives. The existence of such an arrangement is therefore imperative for the post-closing clinical management of the PC. As with the other agreements, the CLA should involve a reasonable term length and consideration for the Friendly Provider’s time and effort, and it should also protect the Friendly Provider’s necessary autonomy to perform their duties as outlined therein.5 Conclusion As scrutiny of “Friendly PC” transactions continues in light of consumer and legislative concerns over the affordability of health care services, the need for proper separation of clinical and non-clinical management post-closing is likely to be more important now than in years past. As such, PE buyers and their counsel must pay close attention to these frequently overlooked ancillary agreements to ensure the truly independent nature of their post-closing relationships. 1See Warren J. Apollon, D.M.D., P.C. v. OCA, Inc., 592 F. Supp. 2d 906; and OCA, Inc., et al . Kellyn Hodges, D.M.D., M.S., et al., 615 F. Supp. 2d 477. 2Id. 3The definitions of “Practice of Medicine” and “Practice of Dentistry” vary by state, however, guidance provided by the Pennsylvania Board of Medicine provides examples of the types of rights and privileges of licensed providers that must not be interfered with or influenced by unlicensed persons or entities. (See 63 P.S. § 422.1, et seq., 63 P.S. § 120, et seq.) 4Id. 5https://journalofethics.ama-assn.org/article/physician-engagement-private-equity-firms/2025-05
June 15, 2026
Business
Why Real Estate Issues Slow ETA Deals
Most buyers expect environmental issues to be the real estate risk. In many deals, the larger risk is operational disruption. Real Estate Is Involved in Most ETA Transactions Real estate shows up in the vast majority of lower middle market transactions in some form. According to the 2025 Small Business Credit Survey published by the Federal Reserve: approximately 59% of operating businesses with employees operate from leased facilities approximately 17% operate from owned facilities approximately 17% primarily operate from a residence or without a dedicated operating facility That means roughly 83% of entrepreneurship through acquisition transactions involve some form of real estate or occupancy issue. In many deals, the primary issue is not ownership of the property itself. It is whether occupancy, control rights, lease assignment provisions, lender requirements, zoning, or permits could interfere with the business continuing to operate after closing. Those risks often become the primary real estate issues affecting the transaction. Most Buyers Initially Focus on Environmental Risk Environmental exposure absolutely matters. Particularly in: manufacturing industrial logistics automotive fuel-related operations older commercial corridors Phase I and Phase II reports remain critical diligence tools. But many search funders, independent sponsors, and ETA buyers do not place enough weight on operational interruption risk. While the business may technically exist independent of the property, operationally, it often does not. Location Becomes Part of the Business Most of these businesses are highly dependent on their physical operating environment. Examples include: machine shops with specialized electrical infrastructure distributors dependent on loading access and trucking routes contractors relying on outdoor storage rights restaurants dependent on parking and liquor licensing healthcare operators dependent on permitted use manufacturers operating under grandfathered zoning protections The issue is not simply whether the business can move. The issue is: cost of relocation operational downtime customer disruption employee retention permitting risk lender reaction transition timing Many ETA buyers do not fully appreciate this until diligence deepens. Lease Problems Often Surface After LOI One issue that repeatedly appears in ETA deals is whether the business can continue occupying the property after closing under the existing lease arrangements. Many buyers initially assume that the lease will (and can) transfer automatically at the time of closing. That is often incorrect. Most commercial leases contain assignment restrictions, consent requirements, or change-of-control provisions that must be examined carefully during diligence. Buyers need to identify: anti-assignment clauses landlord consent requirements change-of-control provisions expired lease terms undocumented extensions side agreements reflected only in emails use restrictions relocation rights held by landlords personal guarantees tied to the seller While the business operated successfully under these arrangements for years, a transaction introduces scrutiny, diligence, lender review, and operational friction. Lenders Underwrite Real Estate Issues Aggressively Occupancy stability becomes especially important in financed transactions. Particularly: SBA-backed deals owner-occupied industrial acquisitions cash flow sensitive businesses location-dependent operations Lenders often focus heavily on: remaining lease term renewal rights assignability ownership structure related-party lease economics appraised value environmental exposure zoning compliance A business with strong EBITDA but only 18 months remaining on a lease can quickly become a financing issue. Especially if the landlord has leverage during the closing process. Owned Real Estate Creates a Separate Transaction (and Separate Issues) Buyers often assume owned real estate simplifies the acquisition. In reality, it frequently creates a separate parallel transaction with its own diligence process, timeline, costs, and risks. The buyer must now perform diligence on both the operating business and the real estate itself, including: title survey and boundary issues easements zoning environmental exposure permits deferred maintenance tax exposure utility access stormwater compliance shared access arrangements The ownership structure also becomes critical, with many ETA deals using separate entities for the business and real estate. For example: one LLC owns the operating business another entity owns the real estate the operating company leases the property from the real estate holding company That structure often creates cleaner liability separation, financing flexibility, estate planning opportunities, and long-term control over the property. The larger problems often appear when the business and property were never properly separated in the first place. Many older lower middle-market businesses operate under informal ownership structures where: the seller personally owns the property family members own portions of the real estate title ownership differs from operational control there is no formal lease occupancy economics were never documented properly related-party arrangements evolved informally over decades That creates a very different set of diligence and execution risks. Buyers now need to examine: who actually owns the property whether all owners are participating in the transaction whether any family members must consent whether the operating business has formal occupancy rights whether market rent materially changes EBITDA whether lender underwriting changes once rent is normalized whether personal use or mixed-use issues exist whether title, tax, or succession issues affect the property whether post-close disputes could arise around occupancy or control Real Estate Distorts EBITDA More Than Buyers Expect Normalized occupancy costs also frequently change the underwriting. This issue regularly shows up in entrepreneurship through acquisition transactions, causing the business to appear more profitable because the seller owns the building. The company may operate with: below-market rent no formal lease favorable related-party occupancy terms deferred maintenance underreported capital needs Once the buyer normalizes rent, maintenance, taxes, insurance, market occupancy economics, and other carrying costs, the cash flow can compress quickly. That affects: leverage availability DSCR calculations valuation purchase price expectations post-close cash needs This is particularly important in manufacturing, warehouse, automotive, and hospitality acquisitions. Zoning Problems May Remain Hidden Until Diligence It can be a misconception to assume: “The business already operates there, so zoning must be fine.” Not always. A lack of zoning compliance can significantly disrupt operations. Businesses sometimes operate under: grandfathered nonconforming uses historical variances undocumented expansions expired permits improper outdoor storage occupancy inconsistencies signage violations prior approvals tied to historical ownership A transaction can trigger: new permit review lender diligence insurance underwriting review municipal scrutiny updated inspections The business may have operated without issue for years, but that does not mean the use remains protected post-closing. Real Estate Risk Can Show Up Everywhere Real estate issues quickly spread into: financing operations integration employee retention transition planning insurance working capital timing of closing The issues then become larger than the property itself. Real estate issues are most prevalent in lower middle market acquisitions where: documentation evolved informally occupancy arrangements were relationship-driven operational processes were never built for institutional diligence In these ETA deals, the answer to the real estate question ultimately controls: “Can the business continue operating the same way immediately after closing?”
June 10, 2026
Business
Post-Close Alignment in Lower Middle Market M&A: Where Deal Stress Begins to Fracture
Most sellers and buyers in lower-middle-market M&A, including search funds, entrepreneurship through acquisition (ETA), and independent-sponsor transactions, begin to suffer from deal fatigue and welcome the post-closing phase of a business acquisition or M&A transaction. No more due diligence, no more negotiations, no more redlines. However, in many cases, the post-close phase is fertile ground for additional disputes to emerge. Most post-closing friction in lower-middle-market M&A deals is not caused by something that was absent from the deal. To the contrary, it is actually related to the negotiated documents governing the relationship between seller and buyer in the post-close transition phase. Consulting agreements, employment agreements, and corporate governance documents in rollover equity transactions seek to govern the relationship, but the relationship is still new in this phase. The parties are experiencing, for the first time, what it is like to work together after the change in dynamics (seller-owner to exited owner; buyer with funding to operator managing debt service and performance expectations). In this example, the seller rolled equity in the transaction and was now an equity holder in the buyer's platform company. The post-closing issues did not stem from a missing provision, but from ambiguities that existed across multiple documents that were meant to align and work together: seller notes, management agreements, and governance documents were all in play and created more confusion than clarity. That pattern is more common than most buyers expect, particularly in search fund, entrepreneurship through acquisition (ETA), and independent sponsor deals where post-close roles and governance tend to be more fluid. The LOI to Close Gap in M&A Transactions Most of these issues are not created at closing. They are created in the window between LOI and signing. At LOI, the parties align on high-level economics and general expectations: The seller will stay involved The business will transition smoothly Equity will keep everyone aligned in the case of rolled equity, or amounts due pursuant to the seller note will incentivize cooperation But those concepts get translated into separate documents depending on the deal: Employment agreement Consulting agreement Operating agreement Purchase agreement Each document answers a different question. Very few processes force those answers to be reconciled into a single operating model. That is where the gap forms. By the time you reach closing, the documents are “complete” but not always aligned. Where Post-Closing Issues Show Up in Business Acquisitions Employment Terms in Post-Closing Transition Buyers often assume that key individuals, particularly a selling owner transitioning into an operating role, will continue “as expected.” The employment agreement is where that expectation either becomes a reality or breaks down. The most common issues include: Role definition is too broad or not tied to actual authority Termination provisions do not reflect how performance issues will be handled Compensation structures do not match the deal model Example: A seller stays on post-close in a senior operating role (e.g., general manager) under a two-year agreement while the buyer installs its own CEO or operating partner. The buyer expects to reshape reporting lines and decision-making authority over time. The agreement, however, includes strong severance protections and defines material changes to duties or authority as “good reason.” Six months in, the buyer begins shifting responsibilities to its operating partner. The seller asserts “good reason” and triggers severance or other protections, despite the buyer viewing the changes as part of the planned transition. Nothing is technically wrong in the document. It just does not reflect how the buyer intended to transition control of the business. Consulting Roles and Transition Services Agreements Consulting arrangements are often treated as secondary or low-risk. In practice, they can drive real execution outcomes. This is especially true in customer transition and institutional knowledge transfer. Where this tends to go wrong: Scope of services is loosely defined Time commitment is not specified Compensation is not tied to outputs Example: A seller agrees to a 12-month consulting arrangement to support transition. The agreement references “reasonable availability” but does not define hours, deliverables, or response expectations. Post-close, the buyer expects active involvement in customer introductions and onboarding. The seller views the role as limited advisory support that can be provided from a remote location and not on-site. The result is predictable. The buyer feels unsupported. The seller believes they are complying with the agreement. Again, nothing is broken in isolation. The expectations were never aligned. Rolled Equity and Post-Close Governance Rolled equity is typically framed as a tool to align the parties in furtherance of a more profitable enterprise. In practice, it can be alignment in concept only, not in execution. Where this tends to go wrong: Different expectations around liquidity timing Limited clarity on governance rights Misunderstanding of distribution mechanics Example: A seller rolls 20% of proceeds into the new structure. The buyer plans to reinvest cash flow into growth and limit near-term distributions. The seller expects periodic cash flow similar to how they operated pre-sale. The operating agreement permits discretion on distributions, but the practical application of that discretion was never aligned. This is not a legal defect. It is an operating mismatch that surfaces quickly once capital allocation decisions begin. Why Post-Closing Misalignment Occurs in M&A Deals During the deal process, these items are negotiated in parallel: Purchase agreement Employment agreements Consulting agreements Equity and governance documents Each document may be internally consistent, but the following question should be asked: Do these documents, taken together, reflect how this business will actually be operated on day one? More specifically: Do they clearly define what the seller is required to do, what authority they retain or lose, how they are compensated for that role, and what happens if those expectations change or break down? If the answer to those questions is unclear, the issue is already embedded in the deal. Practical Considerations Pre-Close in Lower Middle Market Transactions This is almost always easier to address before closing than after. In practice, a strong lower-middle-market post-close package tends to do six things: Define the role with objective deliverables. Move beyond titles. Specify outputs, metrics, and decision rights that tie to how the business will actually be operated. Clearly classify the relationship. State whether the seller is an employee, consultant, or board-level advisor. Blurred status tends to create both operational and legal ambiguity. Precisely frame “cause” and “good reason.” If the buyer retains flexibility to change duties, reporting lines, compensation, or authority, that flexibility should be clearly bounded. Well-defined “cause” and “good reason” concepts are what translate flexibility into enforceable expectations. Separate consulting economics from deal economics. Consulting fees should stand on their own unless the parties intentionally link them to purchase price or earnout mechanics. Unintended overlap often creates disputes about what is being paid for performance versus transition support. Build explicit consequences for disruption. If authority is stripped or termination occurs outside the expected framework, the documents should address the outcome. That can include tolling, acceleration, deemed achievement, or extension concepts tied to equity or earnouts. Preserve a practical enforcement path. Rights are only useful if they can be exercised. Escrow access, information rights, expert determination procedures, and specific performance provisions tend to make these arrangements function in practice. Closing Thought on Post-Closing Risk and Deal Execution These are not technical refinements. They determine whether the post-close relationship functions when conditions change. Most post-closing issues do not come from a single broken provision. They come from small inconsistencies across multiple documents that were never forced to align into a single operating framework. If you are under LOI or in diligence, this is typically the window to fix that alignment without disrupting the deal. After closing, you are no longer interpreting intent; you are operating within the structure you drafted. If you are working through this in a live deal, step back and ask: Do these documents, collectively, dictate how decisions get made, how the seller participates, and how economics actually flow? If not, then the risk is not theoretical. It is already built into the deal.
May 29, 2026
Business
Virginia Reshapes Franchising with Ban on Post-Term Non-Competes
Franchisors with Virginia locations should prepare to revise their franchise agreements and Virginia-specific disclosure materials. Beginning July 1, 2026, Virginia law will prohibit most post-termination non-compete provisions in covered franchise agreements and will require those agreements to be governed by Virginia law. For franchisees, the amendments create greater post-exit flexibility and reduce the ability of franchisors to rely on out-of-state governing-law clauses to avoid Virginia’s statutory protections. The practical message is straightforward: franchisors should review Virginia-facing templates, renewal and amendment practices, confidentiality and trade secret protections, and enforcement strategies well before making any new offer, sale, renewal, extension, or amendment for a Virginia location on or after the effective date. Implications for Virginia Franchisors and Franchisees These changes matter immediately for drafting and compliance. A franchisor that continues to use a standard national form for Virginia deals without modification risks including provisions that will no longer be permitted once the new law takes effect. Agreements entered into before July 1, 2026, are not automatically displaced, but renewals, extensions, and amendments on or after that date may trigger the new requirements, making it especially important to review not only new-deal documents but also legacy agreements that may soon come back into circulation. Public commentary following the legislation has also noted guidance issued on April 14, 2026, by the Virginia State Corporation Commission’s Division of Securities and Retail Franchising regarding updates to franchise disclosure materials and Virginia addenda, underscoring that compliance will require attention not just to contracts but also to disclosure practice. How Virginia’s New Franchise Non-Compete Law Affects Franchise Agreements The amendments to Virginia’s Retail Franchising Act, enacted through House Bill 69 and the companion Senate Bill 240, apply to franchises that require or contemplate a place of business in Virginia, a concept broad enough to reach more than traditional brick-and-mortar outlets and potentially many service concepts operating in the Commonwealth. Effective July 1, 2026, the law makes it unlawful to offer or enter into a covered franchise agreement that restricts the franchisee’s right to engage in the business of offering, selling, or distributing goods or services at retail after termination or expiration of the franchise agreement. Just as significantly, covered franchise agreements must now be governed by Virginia law, preventing franchisors from selecting another state’s law in an effort to sidestep Virginia’s franchisee protections. Virginia Franchise Non-Compete Exceptions The statute includes a narrow exception when a franchisee voluntarily sells the franchise at a mutually agreed price, whether to a third party or back to the franchisor. In that setting, the franchisor or the buyer may require the selling franchisee to agree to a non-compete that is binding for up to two years after the sale. Outside that sale context, however, post-term non-compete restrictions in covered Virginia franchise agreements are no longer permitted. The law is also expressly prospective: contracts entered into, extended, or modified on or before June 30, 2026, remain unaffected, but activity on or after July 1, 2026, may bring an agreement within the amended statute’s reach. The Business Impact of Virginia’s Franchise Non-Compete Ban and Compliance Steps for Franchisors Taken together, the amendments materially rebalance franchise relationships for Virginia locations in favor of franchisees by eliminating most post-termination non-competes and requiring Virginia law to govern covered agreements. That governing-law requirement may prove especially consequential, because it reduces the usefulness of contract provisions that previously might have directed disputes toward more franchisor-friendly legal standards. It also means that franchisors evaluating renewals, transfers, terminations, and system enforcement in Virginia will need to assess those decisions against Virginia’s franchise-specific statutory framework. For franchisors, the likely response will be to strengthen other forms of system protection that do not depend on a post-term non-compete. Confidentiality provisions, trade secret controls, non-solicitation language where appropriate, access limits on customer data, tighter operational safeguards, and clearer brand-transition requirements may all take on greater importance. The statute does not prevent a franchisor from pursuing monetary remedies when a franchisee breaches contractual obligations during the term, so careful drafting around in-term defaults, de-branding obligations, liquidated damages, and post-termination transition steps may become more important than ever. The new law may also influence how franchisors think about renewal rights in Virginia. If a former franchisee cannot be restricted from competing after expiration in most circumstances, franchisors may revisit whether renewal should remain automatic or broadly available, and whether Virginia-specific renewal provisions should be adjusted to reflect the changed competitive landscape. For franchisees, by contrast, the law creates additional bargaining leverage and a more realistic ability to continue in business after the franchise relationship ends, provided they do so without violating enforceable contractual duties that survive termination. More broadly, Virginia’s action may be an early indication of where franchise regulation is heading in other jurisdictions. Franchisors operating nationally may therefore want to treat these amendments not as an isolated state-law issue, but as a signal to review their broader contract architecture and protective covenants across the system. For now, however, the immediate takeaway is clear: any franchisor with Virginia-facing agreements or pending registration materials should act promptly to align its documents, disclosures, and operational protections with the Commonwealth’s new rules before July 1, 2026.
May 18, 2026
Mergers and Acquisitions
First Time Buyers: Avoiding Analysis Paralysis
For first time buyers, the diligence phase of an acquisition can be overwhelming. Every document review, identified risk, and unanswered question, can lead to hesitation, and hesitation can quickly turn into something known as “analysis paralysis.” This can be a dangerous place for a transaction as it leads to a loss of momentum or even loss of the deal entirely. It is important for first time buyers to understand that no deal is without risk. You cannot eliminate risk entirely, but you can understand it, quantify it, and allocate it appropriately. When first time buyers recognize this reality early in the process, they are far more likely to move through the diligence process with confidence and ultimately have a successful closing. Below we look at some of the ways first time buyers can help to avoid analysis paralysis and build in the kind of protections that will allow them to move forward with ease. Bring in Advisors Early One frequent error among first-time buyers is delaying the engagement of experienced advisors, especially legal counsel. Legal counsel should be involved before the Letter of Intent (LOI) is signed, as their early participation enables the deal team to identify key issues, recognize potential risks, and structure the transaction to align price with risk effectively. Early involvement of advisors ensures that, upon reaching the diligence stage, the team is prepared to execute a strategy that has been thoughtfully designed from the outset, rather than developing one mid-process. Shifting Risks To allocate certain risks from the purchaser to the seller, it is essential to include precise representations and warranties, along with unambiguous indemnification clauses. When concerns arise, such as outstanding liabilities or matters identified during due diligence, targeted indemnities can significantly strengthen the buyer's protection. These safeguards enable buyers to move forward with a transaction even when not every issue has been conclusively resolved. Financial Structuring The financial structure of a transaction is equally significant as the inclusion of contractual safeguards. Transactions may be designed to incorporate financial protections for the buyer, such as escrow arrangements, holdbacks, or promissory notes. Additionally, earnouts provide further protection, particularly in situations where future company performance remains uncertain. By linking a portion of the purchase price to post-closing results, buyers can mitigate the risk of overpayment while enabling sellers to realize their preferred valuation. Deal Momentum One of the most important considerations for first time buyers is maintaining deal momentum. Conditions can shift quickly as transactions progress from market conditions to financing terms to business performance. If the diligence process is stalled, it allows more time for these conditions to shift, often leading to increased risk or erosion in value. When sellers lose confidence in the transaction, they could begin to entertain a competitor’s bid. Shifting conditions could also lead to a need for price adjustments or renegotiation of other terms. This is exactly where advisors prove invaluable. They can help buyers to distinguish between those issues that need immediate attention and are true red flags, as opposed to those that can be addressed through deal structure. Advisors can instill the kind of confidence in first time buyers that allows deals to move forward, even if every variable is not perfectly resolved. For those buyers entering the M&A process for the first time, the key is not to avoid risk, but to manage it intelligently. With the right team and a disciplined approach to maintaining momentum, buyers can avoid analysis paralysis and position themselves for a successful closing.
May 4, 2026
Business
Maryland Franchise Reform Act Passes
The Maryland General Assembly has enacted, by overwhelming majorities, the Franchise Reform Act (Senate Bill 415 & House Bill 730), marking the first significant changes to the Maryland Franchise Registration & Disclosure Law (the “Maryland Franchise Law”) since its enactment in 1981. Governor Moore is expected to sign the legislation into law shortly, and it will become effective on October 1, 2026. The House sponsor and primary driver of the legislation, Delegate Marc Korman, introduced the bill resulting from numerous constituents who had raised concerns about the franchise registration process in Maryland, concerns shared by franchisors nationwide. However, while part of the law will encourage streamlining the Maryland franchise sales registration process, it also provides changes that will be helpful to Maryland franchisees and Maryland-based franchisors. Having focused my practice on franchise law in Maryland for more than 25 years, I was privileged to be asked by Delegate Korman to work closely with him and his staff on the drafting and revising of the legislation, which included conducting workgroup focus meetings with members of the Maryland State Bar Association (“MSBA”) to gather feedback, and testifying on behalf of the MSBA in favor of the legislation multiple times throughout 2025 and 2026. The Maryland Franchise Law protects people considering the purchase of a franchise from being misled or under-informed when deciding whether to buy. The law requires franchisors to prepare a prospectus (called a “Franchise Disclosure Document” or an “FDD”) detailing a wide variety of information and submit it to the Securities Commissioner, who is an officer with the Maryland Office of the Attorney General (the “OAG”), and obtain that agency’s approval to sell franchises in Maryland. That approval, called registration, must be renewed each year in which the franchisor continues to sell franchises to Maryland residents or for the operation of the franchised business in Maryland (collectively, “Maryland Franchises”). Until now, the law has solely addressed the franchise sales process, rather than the ongoing relationship between the franchisor and the franchisee. The Maryland Franchise Reform Act does the following: For the Benefit of Franchisors Generally Following the bill’s initial introduction and passage by the House of Delegates during the 2025 session, the Securities Commissioner established a pilot program intended to expedite franchise registration renewals. The approved law requires the Securities Commissioner to continue the pilot program and to report to the legislature in 2031 on the program’s results, as well providing data on other aspects of the registration process, and an analysis of how Maryland’s exemptions from registration for experienced franchisors compares with those of other states that require registration before sale of a franchise. For the Benefit of Maryland Franchisors The law limits private parties who can sue a franchisor for violation of the Maryland Franchise Law solely to Maryland franchisees. This will eliminate the ability of out-of-state franchisees to use the statute as a weapon in disputes with franchisors that are or were headquartered in Maryland, which has been a deterrent to franchising from Maryland as compared to nearby states. For the Benefit of Franchisees Consistent with the Maryland Franchise Law’s purpose, parts of the law will benefit franchisees. Specifically: For the first time, the Maryland Franchise Law addresses the imbalance of power between franchisees and franchisors within the ongoing relationship, by prohibiting a franchisor from restricting or inhibiting Maryland franchisees from associating with other franchisees within their brand for the franchisees’ common benefit “for any lawful purpose” — which could include collectively raising grievances with the franchisor for the franchisees’ mutual benefit. Maryland franchisees will have the right to sue in Maryland courts for injunctive relief and damage suffered, if the franchisor violates this prohibition. This provision is similar to “free association” laws passed in several other states, including California and Illinois. The time during which a franchisee may bring a private claim for violation of the law’s registration or disclosure provisions has changed in a manner that benefits certain franchisees. Franchisees will now have until the earlier of four years from buying the franchise rights or two years after the date the franchise opened to the public. The limitations period was three years from the date the franchise rights were purchased, regardless of when the franchised business opened. The advantage will be for retail franchises that often take two years or more from buying the franchise to open due to challenges in securing an acceptable site and constructing the franchise, since those owners then will have time after opening to determine the viability of their investment and whether the franchisor violated the Maryland Franchise Law in selling the franchise. For franchises that open within a short time of purchasing the rights, the judgment of the MSBA and the legislature was that two years from opening is sufficient for a franchisee to make that determination and commence a lawsuit.
April 30, 2026
Business
Strategic Equity Partners: Expertise vs. Governance Friction
In many platform acquisitions (particularly in search funds, entrepreneurship through acquisition (ETA) transactions, and independent sponsor deals), adding a “strategic equity partner” is framed as a clear positive. There are real benefits like additional capital, operating experience, lender credibility, and often a higher probability of closing. The issue is less about whether to add a partner and more about when and how that partner is introduced. When a strategic partner is brought in after the LOI is already signed, the timeline to negotiate the governance framework is compressed. The narrative and excitement at that stage remain focused on upside, while the governance implications of adding another decision-maker are pushed into later negotiations. The LOI-to-close window is compressed, and incentives shift toward getting the deal done. As a result, governance is frequently finalized under pressure rather than designed deliberately. The impact is rarely economic at the outset. It shows up in execution. As additional partner approvals and consent rights are layered in, decisions that were previously within the operator’s control now require alignment across multiple stakeholders. More stakeholders mean more approvals, and more approvals tend to slow the process. That friction is not always visible during the transaction itself. It becomes more apparent in the first 100 days post-close, when the business needs to move quickly, and the governance structure does not support the pace that was underwritten. This dynamic is more pronounced in roll-ups, including those executed through search funds, ETA platforms, and independent sponsor structures, where speed and repeatability drive returns. Even modest governance drag can change outcomes. A structure that is directionally sound but operationally constrained can often underperform a simpler structure that can execute consistently. There is a counterpoint: more deliberate governance can lead to better decisions. The tradeoff between decision quality and execution speed should be explicit rather than assumed. What “Strategic” Usually Signals Introducing a strategic partner at LOI often reflects a gap in the team rather than a pure enhancement. This is especially common in search fund and independent sponsor transactions, where the operator is building infrastructure in parallel with executing the acquisition. The framing is additive, but the underlying driver is frequently a need to solve for something that is not yet fully built into the platform. This dynamic also mirrors a broader structuring question: where strategic partners sit in the equity stack—at the holdco or portfolio level—can materially impact governance and decision flow, not just economics. In many cases, the platform relies on capabilities that are still developing. Integration experience is a common example. The roll-up model assumes that acquisitions can be absorbed efficiently, but that capability is often unproven at the platform stage. Industry-specific operating knowledge may also be limited, particularly where the operator is entering a new vertical or scaling beyond prior experience. Systems and reporting infrastructure tend to lag the ambition of the strategy, creating a mismatch between what is modeled and what can be executed. The natural response is to introduce a strategic partner to bridge that gap. Lender dynamics often reinforce the decision. In leveraged transactions, the team is underwritten alongside the asset. A strategic partner can strengthen that narrative by adding perceived institutional support and a track record that lenders recognize. In some cases, this improves terms or increases certainty of a close. The partner effectively becomes part of the credit story, not just the equity stack. Integration bandwidth is another driver. Roll-ups assume the ability to absorb add-ons quickly, often without a fully built-out operating platform. A partner is expected to support that integration planning and post-close execution, thereby reducing execution risk. There is also an element of risk sharing. Particularly in first platform deals or more aggressive investment theses, bringing in a partner spreads exposure and introduces another perspective if/when performance deviates from plan. None of this is inherently problematic. In many cases, it is a rational response to real constraints. The consistent consequence, however, is that the partner brings governance, and governance changes how the business operates. The key is to enter the deal with a clear understanding of how that governance will function in practice. The below demonstrates a typical board structure in traditional search fund models. You can explore the different models and board structure further here: https://tinyurl.com/2rh74bk2 Where Friction Shows Up As briefly mentioned above, the friction impact appears in decision-making. As additional consent rights are layered in, more parties must agree before action can be taken. The underwriting model may assume speed and autonomy that no longer exists once governance is expanded. Board composition is often where this dynamic becomes real, because it determines who actually has the ability to approve or block decisions. A balanced board on paper can function as a checkpoint in practice once quorum and voting thresholds are applied. If control is not clearly aligned with the operating model, the board shifts from oversight to gatekeeping. Decisions that would otherwise be routine begin to require formal coordination, special meetings, and sometimes even input from professional advisors representing various stakeholders. Protective provisions compound the effect. In practice, these are the provisions that designate certain actions as “reserved matters” requiring supermajority or unanimous consent at the board or investor level. Common examples include: incurring or refinancing debt, approving capital expenditures above a threshold, deviating from the approved budget or business plan, issuing additional equity, or entering into material contracts or acquisitions. Each of these approvals is reasonable on its own. When each step requires a supermajority or unanimous sign-off, the process shifts from operator-led execution to coordinated approvals across multiple stakeholders, which slows the cadence of decision-making. The issue is not the existence of these rights, but how frequently they are triggered in the normal course of operating the business. Budget approvals can create the same constraint. When budgets require approval and variance thresholds are tight, routine adjustments turn into approval processes, limiting management’s ability to respond in real time. Roll-ups rely on speed, and competitive processes — particularly in lower middle market ETA and independent sponsor deals — tend to reward buyers who can move quickly with certainty. If each add-on requires layered approvals, the platform becomes less competitive. Opportunities that fit the thesis may still be identified, but the ability to act on them is constrained by structure rather than strategy. This is why the friction becomes most visible in add-on acquisitions, where speed is often the deciding factor in winning the deal. Management decisions can also migrate from operator discretion to investor approval. Hiring, compensation, and incentive alignment become slower to execute. Over time, this affects the quality and responsiveness of the team, particularly in periods where rapid adjustment is required. Deadlock and Forced Outcomes As additional stakeholders are introduced, disagreements become more likely. In many structures, those disagreements ultimately point parties toward formal deadlock mechanisms. These can include buy-sell arrangements (often structured as “Russian roulette” or “Texas shootout”), put/call rights, forced sales or buyouts, or redemption rights. These mechanisms are designed to break impasses, but they can be outcome-determinative and, in some cases, harsh to one side. A forced buyout may require a sponsor or the company to purchase an equity stake at a defined price or formula, which can create meaningful cash flow strain at the exact moment the business needs capital to execute. Alternatively, a party may be compelled to sell at a time or valuation that does not align with the original thesis. The key point is not that these provisions should be avoided. It is that once disagreements arise, the path to resolution is often binary and financially significant. If those dynamics are not considered upfront, governance can shift from a tool for alignment to a mechanism that forces outcomes under pressure. Why It Matters More in Roll-Ups Single-asset acquisitions can tolerate some governance friction because the operating model is relatively stable. Decisions are fewer in number and less time-sensitive. In that context, additional oversight may be manageable. A roll-up operates differently. The model depends on pace, repetition, and the ability to act decisively across a sequence of opportunities. Each add-on introduces new variables, and the platform must be able to respond quickly to integrate, optimize, and move forward. When governance introduces multiple layers of approval and frequent investor involvement in operational decisions, the strategy becomes harder to execute in practice. Decisions can still be made, but not at the speed required to maintain momentum. At that point, governance directly affects outcomes and is difficult to unwind without renegotiating core terms. The graphic below shows a sample board composition after numerous acquisitions. Note the increasingly limited decision-making power of the operator. Decision Rights to Resolve Early If a strategic partner is introduced around LOI, whether it be in a search fund, ETA, or independent sponsor context, decision rights should be aligned with how the business will operate in practice. Board control at closing needs to be explicit and consistent with the intended operating model. Ambiguity at this stage tends to create friction later. It is also worth recognizing why these protections exist. Investors are seeking to protect capital and, in many cases, bring real experience that can improve outcomes. A well-constructed board can provide discipline, identify risks early, and prevent decisions that would otherwise impair value. The goal is not to remove oversight, but to calibrate it to support execution rather than impede it. Management authority should allow day-to-day decisions without repeated escalation. The distinction between strategic oversight and operational control needs to be clear in both concept and documentation. Add-on acquisition parameters should be defined in advance, so execution does not depend on real-time approvals. Debt capacity should align with the expected capital strategy rather than restrict it. Budget processes should allow for adjustment as conditions change, rather than lock the business into a static plan. Management should retain sufficient control to build and adapt the team required to execute. Deadlock provisions should be evaluated based on how quickly they can resolve disagreement, not simply how balanced they appear. These are execution variables that ultimately determine whether the strategy can be implemented as underwritten or whether governance constraints begin to reshape the outcome. Structuring to Preserve Speed These dynamics point to a few practical governance principles. First, align control with the operating model. If the thesis depends on speed, decision rights should enable timely action at the management level. Second, reserve approvals for truly fundamental matters, not routine operating decisions that occur frequently. Third, define thresholds that reflect how the business will actually run, including pre-approvals for expected activities like add-ons and incremental leverage. Fourth, make approval processes workable in real time, not just balanced on paper. This is where experienced counsel matters. In this context, “sophisticated governance” means more than drafting protections; it involves translating the investment thesis into a decision-rights framework that will function under time pressure. That includes calibrating reserved matters, setting practical thresholds, designing board composition and quorum rules, and stress-testing deadlock outcomes against realistic scenarios. The goal is to preserve investor protections while ensuring the company can execute without repeated escalation. Closing Thought Strategic partners can add value, particularly where they address real capability gaps or strengthen the financing narrative. In many cases, they improve the quality of the deal and increase the probability of closing. But they also introduce a second layer of governance that must align with how the business will operate after closing. If that alignment is not addressed before close, it tends to be addressed afterward, when decisions need to be made quickly and flexibility is limited. That is where execution risk increases and the original thesis begins to drift. Not because the strategy was flawed, but because the structure does not support it. If you are navigating this dynamic in a live deal, it is worth addressing decision rights early and in practical terms — before they become constraints in the first 100 days.
April 23, 2026
Business
The Great Ownership Transfer: Why Execution Breaks Search Fund & ETA Deals
Most commentary on the “Great Ownership Transfer” or the "Silver Tsunami" focuses on sellers. It is right there in the name. Aging owners. Lack of succession planning. Uncertainty around exit. That framing is incomplete. This is not just a supply story; it is a buyer capacity problem. Particularly for search fund entrepreneurs, independent sponsors, and others pursuing entrepreneurship through acquisition McKinsey estimates that ~6 million SMBs will face ownership transitions by 2035, representing up to $5 trillion in enterprise value. Yet roughly 92% of exits are likely to occur through closure, not sale. McKinsey Report: The Great Ownership Transfer. If you are acquiring businesses in the $500K–$25M range, your primary competition is often not another buyer. It is the business quietly shutting down. This Is Not a Deal Flow Problem - It Is a Buyer Execution Problem in Search Funds and ETA There is no shortage of businesses to buy in the lower middle market. The challenge for search funds, independent sponsors, and ETA buyers is execution. It is likely that for some of these businesses, the rational step is closure, but there will remain a significant number of profitable businesses in search of a buyer during this economic event. The problem exists in the shortage of buyers who can: Source effectively Underwrite accurately Finance reliably Transition successfully The gap between going under LOI for a “viable business” and closing is where most deals fail. That gap is also where the opportunities and risks live. The Buyer Capabilities Stack In practice, buyer success in this market comes down to the four capabilities identified above. Sourcing: The Best Deals Are Not in Market Because closure dominates exit paths, many viable businesses never run a formal sell process. They speak with a CPA, a broker, or a peer about selling, and when friction appears, the process stops. Running a sell process is not without its hurdles, which is why the rewards are greater for those who do it. If your sourcing strategy depends solely on brokered deals, you are competing in the most efficient (and crowded) segment of the market. If a buyer wants to improve their odds at wining, they need to: Build referral channels with accountants, attorneys, and advisors Focus on specific industries to accelerate underwriting Embrace cold outreach Engage sellers before a formal process exists The winning edge is not price. It is access to top tier deals that are found through hard work and diligence. Seller Readiness: Most Deals Fail Before Diligence Another recurring issue in lower middle-market transactions is not business quality, but transferability. Common issues that cause buyers to avoid deals include: Incomplete or inconsistent financials Owner-dependent relationships Undocumented processes Unclear working capital needs The better initial question is not: “Is this a good business?” It is: “Can this business be transferred and financed cleanly?” Buyers can use a simple readiness screen when examining prospective companies to purchase by examining for: 24 months of monthly financials and tax returns Customer concentration and contract review Identification of key personnel dependencies Basic operational systems (billing, quoting, payroll) Working capital dynamics post-close Deals that fail this screen rarely improve during diligence. I recently posted about broken LOIs and the reasons why buyers walk away: Broken Executed LOIs By Reason. Over 45% of the reasons for failure can be categorized within the items listed above. Financing: The Constraint Most Buyers Underestimate Financing is not a closing step. It is a very serious pre-LOI workstream. That may seem like an obvious statement, but many failed deals share a common pattern: The buyer underwrites one version of EBITDA, and the lender underwrites another. That gap kills deals. Particularly in SBA-driven transactions common in search funds and small business acquisitions: Equity requirements and guarantees are real constraints Underwriting timelines introduce friction Smaller deals are treated as bespoke, not standardized Disciplined buyers: Underwrite to debt service, not seller-adjusted earnings Normalize add-backs conservatively Identify working capital needs early Seriously consider the structure pre-LOI (seller notes, holdbacks, transition-linked payments) The deal is not real until the capital stack is real. Nothing happens without financing. Post-Close Execution: The First 100 Days Decide the Outcome The most underappreciated risk in these transactions is not closing. It is transition. I believe buyers should familiarize themselves with at least some turnaround management practices during the search process because buyers inherit: Informal systems Relationship-driven revenue Limited reporting infrastructure Outdated systems Without a clear transition plan, value can erode immediately. It is not simply a digital transformation play (digital advertising, industry specific project management Saas, etc.). Effective buyers plan for: Defined transition services from the seller Retention of key employees Structured customer handoffs Weekly cash and operations cadence post-close This is not operational detail. It is downside protection and risk mitigation. It is also some of the hardest work because it cannot be brute forced - it requires soft skills, attention to detail, and time-consuming review of information. What This Means for Investors Backing Buyers For family offices, independent sponsor investors, and capital partners backing search funds and ETA buyers, the underwriting focus needs to shift. Similar to what we discussed above, the question is not: “Is this a good business?” It is: “Can this buyer execute this transition?” Key diligence questions for investors to ask should include: Does the buyer have a repeatable sourcing strategy? Is there a defined readiness filter? Is financing aligned with lender reality? Is a post-close execution plan in place? Most deals in this segment fail due to execution gaps, not thesis failures. The Structural Inefficiency Creates Opportunity The inefficiency in this market is not hidden. It is structural: fragmented deal flow, inconsistent advisor quality, limited financing standardization, and minimal post-close support. These are not isolated issues - they are systemic frictions that sit between a viable business and a closed transaction. Prepared buyers can benefit from this inefficiency because it creates: Less competition in off-market deals Pricing inefficiencies The ability to win through structure and not just valuation But those advantages are only available to buyers who can execute. This is not a market where capital alone wins. It is a market where taking a business from “viable” to “financeable” to “transferable” is necessary and may require a longer pre-LOI/pre-close relationship with the seller. If pre-screening raises concerns around financial quality, customer concentration, or post-close execution, the question is not just whether the deal is attractive. It is whether those risks can be mitigated before committing to an LOI. Most deals don’t fail because the business is bad. They fail because the buyer underestimated what it would take to close and operate it. Spending time with the seller (sometimes weeks or even months) before fully committing can be one of the most effective ways to de-risk a transaction before signing an LOI and set up a smoother, more profitable transition. The Real Takeaway The Great Ownership Transfer is often framed as a wave of supply. The data suggests the real issue is execution. This is especially true for those pursuing entrepreneurship through acquisition, where execution risk concentrates in a single asset. The challenge is not finding viable businesses. It is getting them across the finish line after turning viable businesses into successful buyer transitions, not closures. For buyers, the edge is not just identifying a good business. It is building the capability to move a deal from: possible → financeable → transferable → stable The market does not reward intent. It rewards execution. Buyers who can deliver that consistently will capture disproportionate value.
April 3, 2026
Business
Planning for a Sale: Engineering the Best Possible Outcome
Most business owners approach a potential sale by asking a single question: What is my business worth? While valuation is important, it is rarely the most important question. A more productive starting point is: What do I want the sale of my business to accomplish for my family, my legacy, and the next phase of my life? A recent series by Family Business Magazine outlines a useful framework for thinking through that question. It moves the conversation beyond price and into a broader discussion of life planning, liquidity planning, and post-sale purpose. I highly suggest taking at those articles here: Part 1: How to exit a family business with purpose, profit and peace of mind - Family Business Magazine Part 2: Planning for the best possible outcome of a business sale - Family Business Magazine The below focuses primarily on maximizing enterprise value while preparing for a sale, but the articles linked above are a must read for owners planning an exit. Many of these themes closely mirror what we see in transactions involving search funds, independent sponsors, and family office investors acquiring privately held businesses, because many of those deals pull from the same group of sellers. Sellers Should Define "Enough" Before Negotiating One of the most common mistakes founders make is negotiating a transaction before defining what success actually looks like. Owners should enter negotiations with clarity on: The lifestyle they want after the sale How much liquidity is required to support that lifestyle Legacy or philanthropic goals Whether they want to remain involved in the business Without defining what "enough" means, sellers can end up optimizing for headline price rather than overall outcome. Some reject reasonable offers while others accept deals that ultimately do not support their long‑term financial goals. From a planning perspective, this is where tax modeling, estate planning, trust structuring, and charitable planning should occur before a letter of intent is signed. Once negotiations begin, many of these planning opportunities become more limited. Transaction Structure Matters as Much as Price A higher purchase price does not always produce a better result for the seller. Owners should carefully evaluate the structure of a proposed transaction, including: Cash at closing versus rollover equity Earn‑outs and performance contingencies Seller financing Employment agreements and non‑compete obligations Indemnification exposure and escrow provisions Capital tied up behind unrealistic performance benchmarks, potential clawbacks, and unintended tax consequences can quickly change how a seller views the attractiveness of a deal. A Practical Example: How Structure Shapes the Outcome Consider a common lower‑middle‑market transaction. A founder sells a services company for $12 million to a search fund backed by several investors. The deal structure may look something like this: $8 million paid in cash at closing (often financed through SBA or senior debt) $2 million rolled over by the seller as minority equity $1 million tied to performance‑based earn‑out targets $1 million held in escrow to cover indemnification exposure On paper, the headline purchase price is $12 million. In practice, the seller only receives $8 million at closing, with the rest dependent on future performance and negotiated protections. For some sellers, this structure can be extremely attractive. Rollover equity allows them to participate in future growth, particularly if the buyer plans to pursue add‑on acquisitions or scale the platform. For others, the priority may be liquidity and simplicity. The Emotional Transition Is Real Selling a business is not purely a financial event. For many founders, the business represents years of personal effort and identity. The business may represent: A founder's reputation in the community Their daily structure and purpose Their primary social and professional network This is why many successful transitions incorporate some form of gradual change rather than an immediate exit. Options may include: A phased transition period A recapitalization instead of a full sale Minority liquidity events Installing professional management before a transaction These approaches can allow owners to preserve value while also managing the emotional realities of stepping away from the enterprise they built. Post‑Sale Wealth Requires Structure For many founders, the sale of a business represents the single largest liquidity event of their lives. The transition from operating income to investment income requires a completely different mindset and governance framework. A successful sale often creates a new set of challenges. A significant liquidity event can introduce complexity that many founders have never previously faced. Common considerations include: Investment governance Asset protection Estate and gift tax exposure (although much of this should be planned prior to the sale date) Family alignment around wealth management Many families explore options such as establishing a family office, joining a multi-family office platform, or pursuing their own investments in different asset classes (real estate, private equity, traditional stocks and bonds, etc.). The legal and governance infrastructure supporting these structures is just as important as the purchase agreement that completes the sale. Why Sellers Need to Have This Conversation Now Several market trends are increasing the number of potential transactions in the lower middle market. We are seeing: Growing number of retiring business owners Continued growth of search funds Increased independent sponsor activity Expansion of family office direct investing Strong buyer demand in certain service sectors As a result, many business owners are receiving inbound acquisition interest earlier than expected. But inbound interest does not necessarily mean a business or its owner is ready for a transaction. The most successful exits tend to occur when three elements align: The owner is personally ready The business is operationally prepared Legal, contractual, and financial structures are organized When those pieces are in place, a transaction can achieve far more than simply generating liquidity. It can provide the foundation for the next chapter of the owner's personal and financial life. Seller Readiness Checklist For founders considering a potential exit, several questions can help determine whether the business and owner are ready for a transaction: Have you defined what financial outcome is "enough" for your post‑sale goals? Are your financial statements, contracts, and corporate records organized and diligence‑ready? Do you understand how different transaction structures affect liquidity and taxes? Have you discussed succession and estate planning with your advisors? Do you know whether you want to exit completely or remain involved post‑transaction? Is your management team capable of operating the business during and after a transition? Owners who address these questions early often enter negotiations from a position of clarity and strength. Final Thoughts Selling a business is one of the most consequential financial decisions an entrepreneur will make. The best outcomes rarely result from focusing on price alone. Instead, they come from thoughtful planning that integrates transaction strategy, tax considerations, estate planning, and personal goals. For owners considering an exit, taking the time to plan intentionally, before negotiations begin, can make the difference between a good outcome and a transformative one.
March 17, 2026
Business
Investor Equity Placement: Why HoldCo vs. OpCo Matters
When a searcher or independent sponsor brings in outside capital, the conversation often centers on valuation and percentage ownership. But an equally important question is structural: Should the investor hold equity in the operating company (OpCo) or in the parent holding company (HoldCo)? This decision carries meaningful legal, economic, governance, and strategic implications. It affects dilution, future capital raises, control dynamics, exit flexibility, and long-term alignment. The analysis also becomes more nuanced depending on the investor’s role and non-monetary contributions. Consider a common scenario: a sponsor raises $2 million to acquire a $10 million HVAC company, with plans to pursue add-on acquisitions over time. In a roll-up strategy like this, what if one investor brings domain expertise, sourcing capabilities, or operational leadership that materially influences growth? That strategic contribution may justify equity at the HoldCo level, where the investor participates in platform-wide upside and profits. By contrast, a passive investor whose involvement is limited to board oversight may be more appropriately placed at the OpCo level, particularly in a single-asset acquisition. Of course, this assumes the target will operate as a subsidiary rather than being merged into an existing operating entity — which is itself a separate structural decision. An investor in this scenario will usually see investment income flow solely from OpCo (instead of the entire portfolio of companies). The structure and placement of an investor's equity is rarely mechanical. It should reflect strategy, bargaining power, long-term vision, and investor expectations. The considerations below provide a framework for both searchers/sponsors and investors to consider when evaluating this decision. The Two Primary Structures Investor Holds Equity at the Portfolio Company Level (OpCo) Under this structure, the investor owns equity directly in the acquired operating business. OpCo is typically maintained as a standalone entity or as a clearly defined subsidiary beneath a holding structure. Key Implications The investor’s economics are tied solely to the business of OpCo Governance rights are limited to decisions within OpCo Exit proceeds flow from the sale or recapitalization of OpCo The investor has no direct rights to unrelated subsidiaries or future acquisitions Common Use Cases Single-asset traditional search fund deals One-off independent sponsor acquisitions Transactions without a broader platform thesis Situations where negotiation dynamics support a narrower investment scope Advantages Structural simplicity Clear alignment around a single asset Cleaner distribution waterfall Reduced complexity in governance documents Easier return modeling tied to one business Risks and Considerations Limited investor participation in future add-on acquisitions Potential need to restructure if platform ambitions later emerge Dilution of equity will occur at the operating level if additional capital is raised, although usually unlikely unless part of a larger restructuring Misalignment if investors expect exposure to future platform growth OpCo equity works best when the investment thesis is narrowly defined and neither party anticipates a broader multi-asset strategy. Many first-time searchers/sponsors and their investors will fall into this structure. Investor Holds Equity at the Parent Holding Company (HoldCo) In this structure, a parent entity owns one or more subsidiaries, and the investor holds equity at the parent level. Key Implications The investor participates in the economics of all subsidiaries beneath HoldCo Add-on acquisitions can be completed without issuing new OpCo equity Governance is centralized at the parent level Platform value creation accrues across the entire enterprise Common Use Cases Platform or roll-up strategies Independent sponsor models contemplating multiple acquisitions Long-term scaling plans involving additional capital raises Advantages Centralized governance and decision-making Easier implementation of sponsor promote structures Ability to allocate management incentive equity across subsidiaries Greater flexibility for future capital formation Risks and Considerations Increased complexity in operating agreements and shareholder documents Need for carefully drafted distribution waterfalls Cross-subsidiary economic exposure if not properly structured Greater sensitivity to dilution stemming from future equity financing More robust negotiation of protective provisions and investor rights HoldCo structures reward forward planning but require thoughtful drafting and clear alignment among stakeholders. Legal and Governance Considerations In practice, HoldCo structures centralize power and economics at the parent level, while OpCo structures localize rights and obligations within a single operating entity. Where the investor equity sits directly impacts: Voting rights and approval thresholds Board composition and observer rights Protective provisions Information and reporting rights Drag-along and tag-along mechanics Transfer restrictions and liquidity rights Put and call rights, if negotiated If the investor sits at HoldCo, governance documents must anticipate: Future equity issuances Add-on acquisitions and layered capital structures Sponsor promote mechanics Reallocation of advisor and/or employee incentive equity pools Distribution waterfalls across multiple subsidiaries Potential conflicts between legacy investors and new investors If the investor sits at OpCo, documentation tends to focus more narrowly on: Operating distributions Exit triggers tied to a single asset Seller rollover alignment These differences materially affect control and economics. They also influence negotiations with senior lenders, particularly where covenants intersect with equity commitments. Strategic Questions Before Deciding Before finalizing entity placement, sponsors and investors should consider: Is this a single-asset investment or the foundation of a broader platform? Are add-on acquisitions part of the near-term or long-term strategy? Will additional investors likely participate in future rounds? How centralized should governance be? What is the intended exit pathway (strategic sale, recapitalization, long-term hold)? How does the structure align with sponsor promote economics and incentive equity? Does the investor bring strategic value beyond capital? Common Structural Mistakes Frequent errors to keep in mind (and avoid): Defaulting to OpCo equity without evaluating long-term platform goals Granting HoldCo equity without clearly defining dilution mechanics Misaligning promote structures with entity placement Overlooking interaction between investor rights and senior debt covenants Ignoring tax, estate, or succession planning implications Treating entity placement as a documentation detail rather than a strategic decision These choices are difficult to unwind and can create friction during future capital raises, refinancings, or exits. Final Perspective Bringing on an investor is not merely a capital event. It is a structural decision that defines governance, economics, capital formation, and exit flexibility. Whether you are a search funder acquiring your first business, an independent sponsor building a scalable platform, or a family office co-investing alongside operators, the level at which equity is issued matters. The best structures anticipate the second deal before the first one closes. Structure intentionally. Plan forward. Align incentives early.
March 3, 2026
Tax
Treasury and IRS Issue Interim Guidance on Prohibited Foreign Entity Rules with New Safe Harbors Under Notice 2026‑15
On February 12, 2026, the Department of the Treasury and the Internal Revenue Service released Notice 2026-15, the first substantive regulatory action implementing the prohibited foreign entity ("PFE") provisions enacted by the One, Big, Beautiful Bill Act ("OBBBA") on July 4, 2025. The Notice provides interim guidance on restrictions to the Section 45Y clean electricity production credit, the Section 48E clean electricity investment credit, and the Section 45X advanced manufacturing production credit, with respect to sourcing from a PFE. It establishes temporary safe harbors and reliance rules for determining whether a facility, energy storage technology ("EST"), or eligible component includes "material assistance from a PFE," while previewing how Treasury and the IRS intend to approach related concepts, including effective control, in forthcoming proposed regulations. Unlike the domestic content bonus credit, which merely offered an incremental adder, these rules are binary: a facility that fails is ineligible for the tech-neutral ITC or PTC entirely with potentially devastating consequences for project capital stack. The Statutory Framework The OBBBA added new Sections 45Y(b)(1)(E), 48E(b)(6) and (c)(3), and 45X(c)(1)(C) to the Code, providing that the terms "qualified facility," "energy storage technology," and "eligible component" do not include items that incorporate material assistance from a PFE. The OBBBA simultaneously amended Section 7701 to add new paragraphs (a)(51) and (a)(52), defining a "prohibited foreign entity" and "material assistance from a prohibited foreign entity," respectively. Under Section 7701(a)(52), "material assistance from a PFE" is present when a facility's, EST's, or eligible component's material assistance cost ratio ("MACR") falls below the applicable threshold percentage. The threshold percentages phase in over time based on the calendar year during which construction of a qualified facility or EST begins (for Sections 45Y and 48E) or the calendar year during which an eligible component is sold (for Section 45X). For example, a qualified facility beginning construction in calendar year 2026 must achieve a Clean Electricity MACR of not less than 40% (for qualified facilities) or 55% (for ESTs), and a solar energy component sold during calendar year 2026 must achieve an Eligible Component MACR of not less than 50%. Calculating the MACR: A Two-Track System Notice 2026-15 establishes a detailed framework for calculating the MACR, distinguishing between two tracks: the "Clean Electricity MACR" (for qualified facilities and ESTs under Sections 45Y and 48E) and the "Eligible Component MACR" (for Section 45X eligible components). Clean Electricity MACR For qualified facilities and ESTs, the Clean Electricity MACR equals the taxpayer's total direct costs attributable to all manufactured products ("MPs") and manufactured product components ("MPCs") incorporated into the facility or EST, minus the total direct costs attributable to MPs and MPCs that were mined, produced, or manufactured by a PFE, divided by the total direct costs. The calculation requires a taxpayer to: (a) identify MP and MPC types; (b) track relevant characteristics of each MP and MPC; (c) determine direct costs; and (d) determine PFE direct costs. A separate Clean Electricity MACR must be calculated for each qualified facility or EST placed in service during a taxable year. Eligible Component MACR For Section 45X eligible components, the Eligible Component MACR substitutes "total direct material costs" for "total direct costs," focusing on the constituent elements, materials, or subcomponents ("Constituent Materials") incorporated into or consumed in the production of the eligible component. The relevant costs are those paid or incurred by the taxpayer for direct materials under Section 1.263A-1(e)(2)(i)(A), including freight-in and tariffs. Interim Safe Harbors: The Core of the Notice The most consequential aspect of Notice 2026-15 is its three-tiered interim safe harbor framework, which is intended to significantly simplify the compliance burden. Identification Safe Harbor The Identification Safe Harbor allows taxpayers to use the 2023–2025 domestic content safe harbor tables (from Notices 2023-38, 2024-41, and 2025-08) as the exclusive and exhaustive list of MPs and MPCs (or Constituent Materials) for purposes of identifying what must be tracked and costed. Components not appearing in the tables are disregarded entirely and do not factor into the MACR calculation. This is material compliance relief, it obviates the need for deeper upstream tracing that many in the industry feared and instead limits the inquiry to a discrete, published list of components. However, this pathway is available only for projects and components listed in the safe harbor tables. Facility types without specified tables, such as nuclear, fuel cells, or geothermal, cannot use this safe harbor. Likewise, facilities relying on the incremental production rule cannot use the Cost Percentage Safe Harbor. The Treasury has acknowledged these industries’ interest in obtaining updated tables, but guidance remains forthcoming. Cost Percentage Safe Harbor Building on the Identification Safe Harbor, the Cost Percentage Safe Harbor permits taxpayers to use the Assigned Cost Percentages from the safe harbor tables in lieu of tracking actual direct costs. The taxpayer sums the Assigned Cost Percentages for each listed MP and MPC (the "Total Percentage"), sums the Assigned Cost Percentages attributable to PFE-produced MPs and MPCs (the "Total PFE Percentage"), and calculates the MACR as: (Total Percentage – Total PFE Percentage) / Total Percentage. Structural steel and iron are excluded entirely from the MACR calculation, consistent with their treatment under the domestic content rules. Used property in facilities qualifying under the 80/20 rule is also disregarded; only the costs of new MPs and MPCs count toward the calculation. The Notice’s examples, particularly the PV facility illustration walking through both safe harbors, will be invaluable in standardizing the calculation methodology. Certification Safe Harbor The Certification Safe Harbor provides an alternative pathway allowing taxpayers to rely on supplier certifications to determine direct costs, PFE direct costs, and PFE status. Three certification forms are available, tracking the statutory framework in Section 7701(a)(52)(D)(iii)(II)(bb): (AA) an attestation that the property was not produced or manufactured by a PFE and the supplier has no knowledge of PFE involvement in the upstream chain; (BB) for Section 45X, a statement of total direct material costs not produced or manufactured by a PFE; or (CC) for Sections 45Y/48E, a statement of total direct costs attributable to non-PFE manufactured products. Importantly, pathways (BB) and (CC) do not facially require the supplier to possess knowledge of the entire upstream chain, as does pathway (AA). Certifications must include the supplier's employer identification number (or foreign equivalent), be signed under penalties of perjury, be retained for at least six years by both the supplier and the taxpayer, and be produced upon IRS request. A taxpayer may rely on a certification unless it "knows or has reason to know" the certification is inaccurate. The “reason to know” standard is the most significant area of ambiguity in the Notice and is driving intense market discussions. Early practice suggests a tiered diligence approach: baseline certifications with PFE-status checklists from established suppliers, supplemented for higher-risk Tier 2 suppliers and battery storage components by third party supply chain audits. Suppliers offering compliance packages, including legal memoranda and compliance presentations, are gaining a competitive edge. Tracking and Averaging Flexibility The Notice provides meaningful flexibility in how taxpayers track components to specific facilities or eligible components. Three tracking methods are available: Individual tracking. The default approach requiring each MP or MPC to be traced to the specific facility or EST into which it is incorporated. De minimis assignment-based tracking. Allows MPs or MPCs of the same type to be assigned across qualified facilities or ESTs placed in service during the same taxable year without individual tracing, provided the assigned components represent less than 10% of the Total Direct Costs of each facility. Average-cost tracking for small ESTs. For ESTs of the same type, each under 1 MW, placed in service during the same taxable year, taxpayers may use averaged costs and PFE Production Percentages over specified periods within the taxable year. Section 45X manufacturers may use a similar averaging system for Constituent Materials incorporated into eligible components during specified time periods. Binding Written Contract Election A notable feature of the statutory framework, addressed in the Notice, is the elective grandfather provision under Section 7701(a)(52)(D)(iv). Upon a taxpayer's election, MPs, eligible components, or Constituent Materials acquired or manufactured pursuant to a binding written contract entered into before June 16, 2025, and placed in service before January 1, 2030 (or January 1, 2028 for applicable wind facilities) in a facility where construction began before August 1, 2025, may be excluded from the MACR calculation entirely. For Constituent Materials, the item must be used in a product sold before January 1, 2030 (or January 1, 2027 for Section 45X). Treasury has been granted anti-abuse authority to prevent stockpiling of components during any period prior to the application of the PFE requirements. Qualified Interconnection Property The Notice addresses the separate treatment of qualified interconnection property under Section 48E with a nuanced approach. A taxpayer seeking to include interconnection property expenditures in its qualified investment must calculate a separate Clean Electricity MACR for the interconnection property, apart from the facility itself. Each project component: solar, storage, and interconnection, qualify independently; failure on one does not disqualify the others. However, the safe harbors are unavailable for interconnection property, requiring the direct cost method, with practitioners view as significantly more invasive and more susceptible to error. Effective Control and Anti-Abuse Provisions Notice 2026-15 previews forthcoming regulatory action on two important fronts. First, the Notice clarifies that effective control under the foreign-influenced entity provisions of Section 7701(a)(51)(D) is determined independently under each prong of the statute. Notably, any licensing agreement for intellectual property with respect to a qualified facility entered into or modified on or after July 4, 2025, constitutes effective control, even absent any of the other enumerated prohibited provisions, such as limits on IP usage. Second, Treasury and the IRS intend to propose regulations to prevent entities from evading, circumventing, or abusing the PFE restrictions, including through temporary lapses of restricted foreign ownership or control. Suppliers restructuring ownership of supply chains mid-stream to achieve compliance raise particularly difficult questions, as the rule lack specificity on the timing of qualification relative to procurement and delivery. Enhanced Penalty and Statute of Limitations Framework The OBBBA established a robust penalty regime supporting the PFE rules. New Section 6662(m) lowers the substantial understatement threshold to 1% (from 10%) for credit disallowances attributable to overstating the MACR. New Section 6501(o) extends the statute of limitations to six years for deficiencies attributable to MACR determination errors. New Section 6695B imposes a separate penalty on suppliers who provide certifications they know or should have known to be inaccurate, equal to the greater of 10% of the resulting underpayment or $5,000, though a reasonable cause defense is available. Reliance and What Comes Next Taxpayers may rely on the guidance in Sections 3 and 5.01 of the Notice for projects that begin construction after December 31, 2025, and continue through 60 days after publication of the forthcoming proposed regulations. The Section 4 safe harbors may be relied upon through 60 days after publication of the forthcoming safe harbor tables under Section 7701(a)(52)(D)(iii)(I), which must be issued by December 31, 2026. While Notice 2026-15 resolves several of the most pressing compliance questions confronting the clean energy tax credit market, particularly around supply-chain depth, cost allocation methodology, and certification standards, it expressly defers comprehensive guidance on the PFE definitional framework, constructive ownership mechanics, and long-term recapture rules to forthcoming proposed regulations. Stakeholders should use the comment period strategically and begin integrating the safe harbor frameworks into project and deal structures without delay. The early market consensus is that Notice 2026-15, while demanding increased diligence and documentation relative to the domestic content regime, provides workable and solvable rules. Storage remains the highest-risk area given the battery supply chain’s continued dependence on Chinese components. Stakeholders should engage counterparties and advisors early, integrate the safe harbor frameworks into deal structures without delay, and prepare for escalating MACR thresholds in future years.
March 3, 2026
Mergers and Acquisitions
Preparing to Sell: The Most Common Deal-Killing Mistakes Business Owners Make, and How to Avoid Them
For many middle-market business owners, 2026 could present an ideal window to explore a sale. With financing markets improved and private equity (PE) sitting on significant amounts of dry powder, strategic buyers are in a prime position to pursue acquisitions that offer them growth and efficiency. Smart sellers will be prepared to take advantage of these improved conditions and strike while the iron is hot. But even in healthy deal environments, deals can fall apart, and most of these failures are preventable. As a corporate M&A attorney, what I typically see are the same avoidable issues that derail transactions. Below, we look at the most common mistakes business owners make before going to market and most importantly, how to avoid them. Sloppy or Unvetted Financials An easy way to erode buyer confidence is to present unreliable financials. Buyers expect clean financial statements, normalized EBITDA with clearly supportable add-backs, transparent revenue recognition policies, and thorough documentation. This requires significant preparation and engagement of advisors early in the process (at least 12 to 24 months before a contemplated sale). Taking the time to get your financials in order can help reduce friction, prevent re-trades, and ultimately protect your company’s valuation. Failure to Clean Up Your House Failure to clean your corporate house before going to market is a very common mistake owners make. Before engaging in any sale process, sellers should take a critical look at everything in the business, making sure it is all in order. This includes ensuring customer contracts are in writing, properly assignable, and free of any change of control termination rights that can present problems. Vendor agreements should also be scrutinized, making sure they clearly document pricing terms and are commercially sustainable. Do your debt structures contain restrictive covenants? And are your equity records and governing documents accurate and up to date? Is your intellectual property ownership properly documented? A deep dive into all of this and more is critical. Buyers do not like surprises in the diligence process. Further, having to “clean-up” the business in front of the buyer can cost credibility as well as deal value. Conducting a thorough pre-sale legal audit can help eliminate surprises as well as the costly delays (or worse). Limiting the Potential Universe of Buyers Assuming you already know your ideal buyer can be a major mistake. Many owners assume they will sell to a competitor or a PE firm, but the universe of buyers in 2026 is much larger. Limiting yourself to only certain types of buyers can materially depress value. Today’s buyers span strategic acquirers seeking bolt-on growth, family offices in search of long-term cash flow, international buyers looking to enter the US market, and more. To ensure you are maximizing your valuation and considering all options, there must be a broad, well-run process to vet buyers. This will increase competitive tension, which in turn, drives up the price and lays the groundwork for better deal terms. Overlooking Tax Structuring Tax structuring is not an afterthought. It must be a part of the strategy. After all, taxes drive transactions. How your transaction is structured matters. Whether it is an asset sale, stock sale, rollover equity arrangement, or partial liquidity event, it can materially impact net proceeds. Therefore, it is important to coordinate early with both legal and tax advisors who can dramatically change the “after-tax” outcome of your transaction. That is the number that truly matters. The Owner is the Business There are some red flags that buyers look for in an acquisition in relation to the owner and their role within the organization: Is the owner the primary salesperson? Are they the sole keeper of customer relationships? Are they the only decision maker? Without the owner, does the organization run into an operational bottleneck? If the answer is yes to these questions, then you do not have a truly transferable business. This creates a real issue for buyers, as they discount businesses that rely entirely on a founder. They want systems and processes in place, depth of management, and a company that can exist without its owner. Start working early to develop a solid management team, formalized processes, and institutionalized customer relationships to decrease risk and increase value. Failure to Incentivize Key Employees When key employees start to feel uncertain or that they are unprotected, it can negatively impact a transaction. Employees want some clarity, and buyers are looking for continuity. That means you must plan and communicate regularly and effectively. Retention plans, bonuses tied to the transaction, or equity offers are all incentives that can help preserve stability during and after the close. Failure to Plan Ahead Selling a business is a major financial event, but it is also a significant life transition. Most owners have spent years, if not decades, building their business, and it has become a part of their identity. So, it is surprising that they don’t often consider the role they will play (if any) with the company moving forward. Nor do they consider what’s next. What lies beyond the day after the sale? These might seem like afterthoughts, but they are not. They must be considered upfront so that expectations with the buyer are clearly communicated and there is no tension or dissatisfaction on either end. Waiting Too Long to Involve Advisors If you wait too long to involve your legal and financial advisors, you may have already lost your leverage. You cannot wait until you have received an unsolicited offer. Involving advisors early in the process is the key to success and to avoiding the mistakes we have discussed. Reach out to your advisors 12-24 months before considering a sale so that you can address any issues and ensure preparedness. By engaging experts early on, you are shortening diligence timelines and strengthening your negotiating position. And remember, valuation can be significantly eroded by avoidable preparation failures. Prepare your business, and yourself, for the outcome you want.
March 2, 2026
Tax
Tariff Litigation & Section 122 Tariffs
On February 20, 2026 the U.S. Supreme Court issued a landmark decision in Learning Resources, Inc. v. Trump holding that the International Emergency Economic Powers Act (IEEPA) does not authorize the President to impose tariffs. The decision invalidates the reciprocal tariffs and trafficking/immigration tariffs imposed in 2025 under IEEPA and confirms that the power to impose tariffs lies with Congress. The Court did not prescribe a refund mechanism; that responsibility now falls to the U.S. Court of International Trade (CIT) and U.S. Customs and Border Protection (CBP). Within hours of the decision, the Administration imposed a new 10% tariff under Section 122 of the Trade Act of 1974 (now 15%), effective February 24, 2026, and limited to 150 days (absent congressional action). This creates two immediate opportunities: Refund claims for prior IEEPA tariffs (available to domestic and foreign companies) Advisory and planning work related to new Section 122 tariffs and potential replacement regimes (Section 232/301) What Changed: 1. IEEPA Tariffs Invalidated The Supreme Court ruled that IEEPA does not authorize tariff imposition. IEEPA tariffs imposed in 2025 are unlawful ab initio. Refunds are not automatic. Importers must act. 2. Section 122 Tariffs Now in Effect 15% tariff on most imports entered on or after February 24, 2026 Limited to 150 days (approx. expires July 24, 2026 unless extended) USMCA-qualified goods excluded “Goods on the water” exception for certain shipments loaded before Feb 24 and entered before Feb 28 This is a temporary bridge. Section 232 (tariff imposed for national security) and 301 (tariffs imposed on foreign products to counter unfair trade practices) actions may follow. Who May Have a Refund Claim: Those who: Imported goods between February 2025 and February 24, 2026 Paid additional IEEPA ad valorem duties Are the importer of record Have entries that are unliquidated or recently liquidated Did not yet file a protective Court of International Trade (CIT) action Refund claims are available to domestic and foreign companies – the controlling factor: who is the Importer of Record on the customs entry Important: Only IEEPA duties are refundable — not Section 232 or 301duties. Downstream buyers may have contract-based reimbursement claims. Areas Where Offit Kurman Can Assist You: 1. Tax Litigation / Customs Litigation Refund analysis and quantification Protest filings Protective CIT litigation Federal Circuit appeals Strategic coordination of administrative and judicial remedies 2. Transactional Tax Tariff deductibility analysis Accounting method considerations Timing of refund recognition Contingent asset treatment Structuring to mitigate future tariff exposure 3. Corporate & Business Structuring Restructuring importer-of-record status Creating new import entities Evaluating transfer pricing implications Risk allocation between affiliates Supply chain realignment 4. Commercial Contracts Review of tariff pass-through clauses Reimbursement rights for downstream buyers Force majeure and change-in-law provisions Supplier renegotiation strategy Indemnification enforcement 5. Commercial Litigation Claims between buyers and suppliers over tariff allocation Breach of contract actions Indemnity disputes Class or coordinated actions among distributors 6. Restructuring & Insolvency Tariff-driven liquidity pressure Claims valuation in bankruptcy Recovery of tariff refunds as estate assets Documents You Should Be Gathering: Entry summaries (CF 7501) Duty payment records Liquidation dates PSC filings Contracts allocating tariff responsibility ACE and ACH refund account status SKU lists affected by Section 122 Bottom Line: IEEPA refunds are potentially significant. Deadlines are running. Section 122 tariffs create immediate planning needs. If you import goods, manufacture overseas, distribute foreign products, or rely on cross-border supply chains, connect with Offit Kurman for consultation.
March 2, 2026
Tax
So, The IRS Has Selected Your Return for Audit
The Internal Revenue Service (“IRS”) audits 1% to 2% of small business income tax returns annually for one of two reasons: (1) something about the return (or information reported on the return) flagged the return for a closer review and the revenue agent reviewing the return decided an audit was appropriate; or (2) (bad) luck of the draw – the return was randomly selected for audit. The first reason – a red flag – is far more common than a random audit. The IRS publishes Audit Technique Guides for use by revenue officers. These guides can be found on the IRS’s website here and provide insight into what the IRS checks for and hopes to discover. Regardless of the reason or type (more on that below), the IRS never emails you and never calls without first sending you correspondence BY MAIL (not email). There are Four Types of Audits There are four types of audits, listed from least to most intrusive. Correspondence Audit The first (and most common) is a correspondence audit, which constitutes about three-quarters of all audits. With correspondence audits, you never meet with a revenue agent face-to-face because everything is done through the mail. In the simplest of audits, the IRS asks for information only regarding certain specific entries on your return. For example, if your return reported sales of stock and the return failed to indicate the basis, the IRS will write and request you to provide them with basis information (how much you paid for the stock you sold). Once you supply the requested information, the audit may be over (assuming the information provided matches the gain or loss reported on the return). Office Audit The second form of audit is an office audit, which takes place at their office, not yours. Office audits arise when a return is too complex for a correspondence audit but does not meet the threshold for a field audit. Often, office audits are over itemized deductions, rental incomes and losses, or Schedule C filers. During an office audit, the examiner will ask you questions in an attempt to find other areas to examine. Often, the examining agent will ask for more information, usually documents, and will give you a reasonable amount of time to gather and supply the requested information. Field Audit The third form of audit is a field audit. This audit takes place at your office, not theirs. During a field audit, the examiner will frequently ask for additional information and expect you to provide it reasonably quickly, after all, they are at your office where (in their mind) the records should reside. Line-By-Line Audit The fourth form of audit is a line-by-line audit, otherwise known as a Taxpayer Compliance Measurement Program (TCMP) audit. In this audit, the IRS reviews the returns of lucky taxpayers, line-by-line. The stated purpose of the audit is to build and refine the data points used to tweak the algorithms that determine whether a return should be selected for audit. Still, it is an audit, nonetheless. No matter the type of audit, the IRS’s starting position is to count all income and deny all deductions. For example, in our correspondence audit example, if you claimed a loss on the sale of stock, unless and until the IRS receives the requested supporting documentation, they will deny the loss, adjust your return accordingly, and send you a tax bill with interest and penalties. Office, field, and TCMP audits are the same way. The IRS wipes out your deductions and makes you build them back, providing reasonable substantiation for each type and amount of deduction. All audits begin the same way regardless of the type: the IRS sends you a letter, often by certified mail, advising you of the audit. The letter always has a response date. Do not ignore this date. If you ignore the date and do not respond, the IRS will either escalate the audit or issue a 30-day letter in which the IRS tells you what changes they propose and how much additional tax, interest, and penalties you will need to pay. If you ignore the 30-day letter, the IRS will issue a Statutory Notice of Deficiency (SNOD), and you will have ninety (90) days to file suit in the United States Tax Court to contest the IRS’s findings. When Do You Need a Tax Lawyer Certainly, for office and field audits. During office and field audits, the audit examiner will be asking you questions. Audits are unpleasant, and many people simply think that if they answer all the examiner’s questions the audit will be over quicker. WRONG. The examiner is asking questions because they are looking for additional areas to audit. Equally important, statements you make to the examiner fall under 18 USC § 1001, more commonly known as a “1001 violation.” 18 USC § 1001 criminalizes knowingly and willfully making materially false, fictitious, or fraudulent statements or representations made to a federal agent. This is the statute under which Martha Stewart was convicted. What she lied about was not a crime, but lying about it to a federal agent was (and still is) a crime under 18 USC § 1001. Whether an incorrect answer is merely the fault of a bad memory or may be considered lying to a federal agent is a question over which reasonable minds can and do differ. Just as I often told baseball teams I coached, never put the calling of a close pitch a ball or strike in the hands of an umpire; you shouldn’t leave the decision whether it was your bad memory or something worse to an IRS agent. A tax lawyer can help keep this from happening. When Should You Call a Tax Lawyer The minute you get the notice in the mail advising you that your return has been selected for audit. An experienced tax controversy lawyer can meet with the audit examiner on your behalf and provide information in a limited, organized manner, which will help limit the scope of the audit. The audit examiner will address questions to your attorney, not you. Tax lawyers’ answers are measured and designed to keep the audit as limited as possible. Even with a correspondence audit, your best solution may be to engage a tax lawyer to respond on your behalf or, at the very least, guide your response. Professional counsel can make a significant difference in the outcome, so leave the DIY to other areas.
February 9, 2026
Business
SBA Loan Performance in 2025: What the Data Says—and Why it Matters for Buyers and Investors
Recent SBA loan performance data offers an important reality check for buyers, lenders, and investors operating in the lower middle market. A 2025 analysis highlighted by Monitor Daily examines which industries are experiencing the lowest default rates across SBA-backed loans. These findings carry meaningful implications for search funders, independent sponsors, family offices, and anyone allocating capital to small businesses. This edition of Search Fund Operate takes a deeper look at what the data actually shows, why certain industries consistently outperform others from a credit-risk perspective, and how that information should inform acquisition strategy, diligence priorities, financing decisions, and legal structuring. For buyers using SBA leverage, this is forward-looking signal about operational durability and transition risk. What the SBA Loan Performance Data Reveals The SBA loan performance report identifies several industries with notably lower default rates in 2025. These sectors tend to share common structural characteristics: Predictable, recurring demand Essential or non-discretionary services Lower customer concentration risk Operational simplicity relative to revenue stability Limited exposure to volatile input costs Industries such as healthcare services, professional services, recurring service-based businesses, and essential retail continue to perform well compared to more cyclical or capital-intensive sectors. These businesses benefit from steady cash flow, contractual or repeat customer relationships, and pricing models that adjust more easily to inflation or labor pressure. By contrast, businesses tied to discretionary consumer spending, commodity-sensitive pricing, or seasonal revenue cycles show higher stress levels. Margin compression, labor shortages, and supply-chain disruptions continue to test these models—especially when layered with SBA leverage. This is unlikely to come as a surprise for anyone investing in this space. Why Default Rates Matter for Buyers (not Just Lenders) While SBA default data is often viewed through a lender’s lens, buyers should treat it as a proxy for operational resilience. Lower default rates typically correlate with: Stronger and more consistent debt service coverage More durable margins across economic cycles Better pricing power with customers Reduced reliance on a single owner, customer, or vendor For search fund entrepreneurs and first-time buyers, these factors materially affect day-to-day operating stress (and should translate to lower risk). The first 12–24 months post-close are often the most fragile period of ownership. A business that historically services SBA debt is more likely to support a new owner during the transition stage when they are still trying to absorb institutional knowledge from exiting leadership while simultaneously trying to establish their own credibility. From a legal perspective, default risk also ties directly into representations, indemnities, earn-outs, and seller financing terms. Businesses operating in higher-risk industries often require more robust contractual protections to balance uncertainty. Industry Selection Is a Risk Management Tool The data reinforces a point often overlooked in acquisition discussions: industry selection itself is a form of risk management. Buyers often focus on valuation multiples, seller notes, or headline EBITDA figures, but industry dynamics may matter more than price precision. A slightly more expensive business in a low-default, stable industry can be materially safer than a discounted deal in a volatile sector. For independent sponsors and family offices deploying patient capital, lower-default industries align well with: Moderate leverage strategies Longer hold periods Incremental operational improvements Leadership transition planning These industries tend to support governance frameworks, professionalization, and repeatable growth rather than aggressive financial engineering. SBA Financing Magnifies Both Strengths and Weaknesses SBA-backed transactions impose discipline both structurally and procedurally. While SBA loans remain attractive due to leverage and pricing, they magnify diligence failures when buyers underestimate operational weaknesses. Key diligence considerations include: Cashflow Quality: Are earnings repeatable, or dependent on one-time contracts, owner relationships, or favorable timing? Owner Reliance: Does the business function independently, or is the seller the operational bottleneck? Customer Concentration: Is revenue diversified or dependent on a small number of counterparties? Operational Controls: Are accounting systems, reporting cadence, and internal controls sufficient to support debt compliance? Legal Infrastructure: Are contracts assignable, enforceable, and properly documented for a post-close environment? Industries with lower default rates tend to score better across these dimensions—not by coincidence, but because their business models demand consistency and discipline. Legal Structuring Considerations in Lower-Default Industries From a legal standpoint, industry risk should influence deal structure. In more stable industries, buyers may have greater flexibility to: Negotiate cleaner transitions with shorter seller involvement Rely less on contingent consideration or earn-outs Use standardized employment and non-compete arrangements Implement governance documents that support scalability In higher-risk industries, buyers often need enhanced protections, including longer transition services agreements, expanded indemnities, escrow holdbacks, and tighter covenants tied to customer retention or financial performance. Understanding industry default trends helps buyers align legal risk allocation with operational reality. Implications for Investors and Family Offices For family offices allocating capital to search funds, independent sponsors, or direct acquisitions, SBA performance data offers an additional underwriting lens. It helps evaluate not just sponsor capability, but business durability. Investors increasingly expect sponsors to articulate why a target industry supports sustainable leverage, predictable operations, and long-term value creation. Default-rate data provides objective context for investment committee discussions and portfolio construction decisions. It also supports diversification across industries with varying risk profiles, rather than concentration in sectors vulnerable to economic or regulatory shifts. Final Thoughts The 2025 SBA loan performance analysis reinforces a simple but critical point: not all small businesses carry the same risk, even at similar price points. Industries with lower default rates tend to reward discipline, operational focus, and patience—traits that align closely with successful ETA and private capital strategies. For buyers, this is a reminder to look beyond the deal structure and focus on the durability of the underlying business. For investors, it reinforces the importance of industry selection as a cornerstone of long-term capital preservation and growth.
February 2, 2026
Business
Rethinking the Early Exit: How Gen X and Millennial Owners Are Selling Smarter in 2026
While much of the exit-planning conversation has centered on Baby Boomers approaching retirement, Millennial and Gen X founders are also a growing segment of today’s middle-market sellers. These generations collectively own a large portion of small and middle-market businesses, and they often do not hold on to their businesses as long as previous generations, prioritizing exits at a stage when they can still pivot to new ventures. This means that earlier-in-career exits are becoming increasingly common, and they present a distinct set of considerations for these younger generations, particularly for those looking to make a move in 2026. Market Conditions in 2026 Starting in 2025, we began to see a much more active merger & acquisition (M&A) market than we have the past few years, and that is expected to continue as we move through 2026. Strategic buyers remain active, private equity firms continue to deploy record levels of dry powder, and financing conditions (particularly in private credit) have improved. At the same time, buyers remain disciplined, and valuations favor businesses with predictable cash flow, strong management teams, and scalable operations, even where growth remains the primary story. For younger founders, this kind of dynamic can cut both ways. Many younger companies are still scaling, reinvesting, or professionalizing operations, which can limit valuation if pursued too early. Therefore, one of the most critical drivers of outcome this year is timing the market, while also allowing the business to mature operationally. The Impact of Boomer Sales on Timing and Valuation It is important for Gen X and Millennial business owners to note that right now, there are many Boomer-owned businesses that are coming to market. While this wave of Boomer business sales is fueling buyer interest, it does present another layer of complexity for younger sellers. Unlike legacy businesses with decades of operating history, companies owned by Gen X or Millennials may lack the same kinds of long-term financial track records. While buyers in 2026 are still willing to underwrite growth, they are going to expect clean financials, recurring revenue, and evidence that performance is durable, not founder dependent. This is why strategic exit planning, often beginning 12 to 24 months before a sale, can materially improve valuation by allowing time to normalize earnings, strengthen leadership, and reduce execution risk. Market cycles and competitive sale dynamics also matter, particularly as so many Boomers will be selling over the next few years. Choosing the Right Deal Structure for Long-Term Wealth Younger sellers typically have decades of professional life ahead of them, making deal structure equally as important as price. Partial liquidity events, rollover equity, earn-outs, and minority recapitalizations remain common in 2026, particularly in private equity transactions. Remember that the structure you choose will have significant tax, risk, and governance implications and should be addressed early with experienced legal and financial advisors. This will all impact your long-term wealth, so choosing wisely here is critical. Gen X and Millennials are certainly taking a different approach to business ownership and exit timing than earlier generations, opting for exits earlier in life that afford them flexibility and opportunity. While there can be incredible benefits to these early exits, in today’s competitive and disciplined M&A environment, younger owners must think beyond valuation alone, considering timing, structure, and how each decision will impact their long-term wealth. Ultimately, a successful exit for today’s younger business owners is not defined by the sale itself, but by how deliberately it positions them for sustained financial security, future ventures, and the next chapter of their professional lives.
January 30, 2026
Business
New York’s LLC Transparency Act Now in Effect
New York Governor Kathy Hochul signed the New York Limited Liability Company Transparency Act (“NY LLCTA”) into law in December 2023. Under the NY LLCTA, covered companies became subject to certain new reporting requirements that became effective January 1, 2026. But the NY LLCTA today is far narrower than the drafters originally intended. The NY LLCTA was originally designed as a state-level version of the federal Corporate Transparency Act (“CTA”). Both laws require certain companies to disclose to government agencies the identity of the individuals who own or control those companies. While the CTA requires federal filings, the NY LLCTA requires filings with the NY Department of State (“NY DOS”). The CTA is part of the Anti-Money Laundering Act of 2020, which became effective January 1, 2021, as a part of the National Defense Authorization Act. The CTA was enacted to combat money laundering, terrorism financing, human and drug trafficking, sanctions evasion, tax fraud, and other financial crimes. The CTA established beneficial owner information (“BOI”) reporting requirements for a wide range of legal entities nationwide. The NY LLCTA incorporates, by explicit reference, several provisions of the CTA. However, it applies only to limited liability companies formed in New York or qualified to do business in New York unless they fall within a range of specified exemptions (“Reporting LLCs”). The U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) in December 2024 dramatically narrowed the CTA’s requirements, excluding all companies formed in the U.S. FinCEN confirmed these changes in its Interim Final Rule on March 26, 2025. In response to the Interim Final Rule, NY’s legislature amended the NY LLCTA in 2025 to de-link the NY LLCTA to some extent from the CTA by broadening the coverage of the NY LLCTA to encompass nearly all LLCs formed or registered to do business in New York, whether domestic or foreign, unless exempt (S8432/A8662). However, NY Governor Kathy Hochul vetoed this bill on December 19, 2025. As a result, LLCs formed in New York or LLCs formed elsewhere in the U.S. and registered to do business in New York are currently not required to file BOI reports with the NY DOS. Unless the New York legislature overrides the Governor’s veto, only LLCs formed outside the U.S. and registered to do business in New York State now fall within the definition of Reporting LLCs. Under the NY LLCTA, (foreign) Reporting LLCs formed before January 1, 2026, are required to file initial reports (“BOI reports”) by no later than December 31, 2026. Reporting LLCs formed or qualified in New York State in 2026 or later are required to file initial BOI reports within 30 days after formation or qualification. All Reporting LLCs must file annual reports with the NY DOS disclosing their beneficial owners. The reports must disclose certain identifying information about each individual who exercises substantial control over or owns 25% or more of a Reporting LLC. Even exempt LLCs must file initial and annual attestations of exemption. This information will be available to government enforcement agencies but will not be publicly disclosed. The NY DOS has posted on its website beneficial ownership disclosure FAQs and beneficial owner disclosure exemptions. Offit Kurman will continue to monitor for any updates to the status of the NY LLCTA and the BOI reporting obligations.
January 23, 2026
M&A Nuggets
M&A Nugget: Qualified Small Business Stock Update
In 1993, Congress passed a tax law intended to incentivize entrepreneurs to invest in early-stage companies. This tax law, often referred to as QSBS (Qualified Small Business Stock) allows stockholders to exclude from tax a substantial portion of the gain on certain business sales structured as stock sales. Last year, the law was amended to expand tax savings. Here is how the QSBS tax exemption works: If a stockholder holds shares of stock issued initially and currently held in a C corporation, and The shares of stock have been owned for at least three years, and The corporation has assets of less than $50M or $75M (depending on the year the stock was acquired), and At least 80% in value of the corporation’s assets are used in the active conduct of a “qualified trade or business”, then When stock is sold in a business sale, between 50% and 100% of the gain can be excluded from tax. A “qualified trade or business” means any trade or business, except certain service businesses (usually involving the rendering of professional services), banking and insurance businesses, and certain real estate-related businesses. The most significant change in 2025’s QSBS amendment was to increase the amount of gain that can be excluded from tax. For stock issued before July 4, 2025, the maximum exclusion is $10M. For stock issued on or after July 4, 2025, the maximum exclusion increases to $15M. The tax savings can be substantial. For example, on the sale of a business in a stock transaction for $20M, if the original ownership was acquired before July 4, 2025, $10M can be excluded from federal tax (as long as the stock was held for at least five years), resulting in tax savings in excess of $2M. Planning Opportunity A stockholder that is not a corporation is eligible for the QSBS. This includes individuals and trusts and presents an extraordinary planning opportunity for an individual to create a trust to hold a portion of the company’s ownership. If the trust is structured as a separate taxpayer, the individual and the trust can each take advantage of the QSBS tax exemption. Many strict requirements must be satisfied to qualify for the QSBS, and anyone considering use of this tax law should engage a professional advisor who has experience with those requirements.
January 22, 2026
M&A Nuggets
M&A Nugget: A Failed Transaction is Not the End — It is the Beginning of M&A Success
Many business owners have experienced a failed transaction. After devoting months, if not years, and extraordinary amounts of time, resources, and money to complete a business sale, the acquirer backs out. The reasons vary from external forces (general market or industry conditions) to seller’s internal issues (usually operational or financial challenges) to substantial due diligence items that raise the risk level for the acquirer (such as a large unanticipated liability, tax debt, or technology debt) to a change in the acquirer’s business direction. Although a termination of a transaction by an acquirer is disappointing, it can also present an opportunity to the business owner. The failure of a transaction should lead the business owner to examine the reasons for the acquirer backout and address them diligently and continuously. For example, one common internal factor leading to a buyer backout is an inadequate sales team, resulting in lower than expected revenues, or an insufficient EBITDA. Like a major league baseball team that makes a sizeable investment by signing a free agent, investing in an upgrade in the sales team can provide an ultimate payoff multiple times the investment. If an acquirer backout is a result of risky due diligence items that arose, steps should be taken to address them, for instance, by implementing more robust risk management policies and procedures. The fact is that many sellers left standing at the altar by their purchaser ultimately engage in a very successful transaction. Two specific experiences I have had in this regard are (1) a seller whose purchaser backed out in early 2020 because of lower than hoped for EBITDA projections, the seller then doubling down its efforts to increase sales and EBITDA with a resulting transaction three years later with the same purchaser for a purchase price 40% higher than the proposed 2020 purchase price; and (2) a seller’s potential acquirer backed out of a $100,000,000 purchase in 2022, leading to the seller redoubling its efforts to increase sales and EBITDA, with an ultimate sale only one year later for an enterprise value of $160,000,000. The lesson here is that in the M&A world, as in life, a failure can lead to great success.
January 6, 2026
Mergers and Acquisitions
Preparing for a Sale in 2026: What Retiring Business Owners Need to Know
As we begin 2026, we find ourselves right in the middle of “Peak 65,” the period of time between 2024 and 2027 when approximately 4.1 million Americans will turn 65 each year. Also known as the “gray tsunami,” this powerful demographic shift has profound implications for closely held and family-owned businesses. For many of these business owners finding themselves at retirement age, 2026 will be a pivotal year, particularly for those who want to exit on their own terms through a sale. We previously examined this issue in 2025, but as the next round of business owners look at a potential sale in 2026, it’s time to revisit the issue and some of the specific considerations for sellers this year. Market Timing and Buyer Behavior In 2026, buyers are still disciplined. They will pay for quality, predictability, and growth, but they will penalize uncertainty. This means it is important to position the business as “recession-resilient,” showing recurring revenue, diversified customers, and stable margins. Sellers should also avoid sending a signal of urgency. Many buyers view a retirement-driven sale as a “must sell.” This can weaken the leverage on the seller’s side. In 2026, sellers should also anticipate longer diligence and tougher deal terms, especially if your house is not in order. Financial Readiness Having strong, clean financials is the single biggest value driver. 2026 buyers are going to heavily scrutinize everything from the last 24-36 months of financials to working capital trends to cash flow vs. EBITDA. This means it is important that your financials tell a clean story. Look carefully at issues such as owner compensation, what family is on the payroll, personal expenses, and one-time expenses. Remember that buyers will discount anything that is unclear or that you must overly explain. If it takes more than 30 seconds to explain an adjustment, you can likely expect pushback. Owner Dependence and Transition It is important to understand that buyers are not buying you. They want to buy a business that works without you. They will be looking for red flags such as too much control over key customer relationships or pricing, hiring or spending. If the owner is the only one who really “knows how things work,” it doesn’t instill confidence in the future of the business. Make sure you are delegating customer relationships, creating formal processes for pricing, approvals, and reporting, and identifying or elevating a second in charge or leadership team that can carry the torch moving forward. You should also document key processes and procedures so that there is a clear roadmap once you exit. Deal Terms In 2026, deal terms are going to be just as important as the headline price. Many sellers are focused just on the price, but they will regret the deal terms down the road. This year, buyers will be focused on terms such as earnouts tied to performance, seller notes, escrows and indemnity exposure, and post-closure employment or consulting obligations. Before you decide to sell, you must determine how long you are willing to stay involved, as well as what level of risk you’re willing to tolerate after the close. Are you looking for certainty or are you looking for upside? The more clarity you have on these issues going into negotiations, the less likely you are to make an emotional decision you will regret later. Family Dynamics One often overlooked issue that sellers do not consider is the dynamics of the family within the business. Emotional risk is viewed as financial risk, and this can be tricky when a family business comes up for sale. Do you intend for any children or relatives to stay on with the business? Is everyone aligned on value and timing? And what kind of family perks are embedded in the business? All of these are vital questions to answer well ahead of a sale. 2026 buyers will move away from uncertainty around family involvement or adjust the price accordingly. Looking Ahead For retiring business owners, selling a company is one of the most consequential transactions of their lives. In the context of the gray tsunami and an increasingly active middle-market M&A environment, 2026 is filled with opportunities as well as risks. With thoughtful preparation, it is possible not only to maximize value, but also to protect the legacy built over decades and transition into the next chapter on favorable terms.
January 6, 2026
