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Episode Summary
You agree on a price. You shake hands. Then the working capital target lands on the table and a million bucks of what you thought was yours quietly walks out the door. The headline number is not the deal. The deal is the four numbers underneath it (normalized EBITDA, the multiple, keep-your-cash-pay-off-your-debt, and normalized working capital) plus how the proceeds get sliced across cash, escrow, earnouts, seller notes, and rolled equity. I brought Dave Diehl from Prairie Capital Advisors back on because nobody I know walks owners through this with less agenda. Dave doesn’t care if you sell to a strategic, a PE firm, or your employees through an ESOP. He cares that the structure matches what you actually want out of your time, your income, and your legacy. We got into why your “conservative” balance sheet is costing you both today and at closing, how earnouts get manipulated when the KPIs aren’t ringfenced, why rolled equity in a debt-saddled PE deal can sit dead in the water, and how a 100% S-corp ESOP can pay you double-digit returns on pre-tax dollars through a seller note. Real examples, real numbers, and the honest version of how each buyer changes your job.
Top 10 Takeaways
- The headline price isn’t the deal. Net proceeds are the deal, and working capital is where most of the slippage happens.
- Your “conservative” balance sheet (stale inventory, slow receivables, fast payables) costs you cash today and screws you at closing.
- Run your working capital as a percentage of revenue, not as a gut number you’ve memorized from when the business was smaller.
- Separate ownership from operations in your own head before you sit across from any buyer. They’re two different decisions.
- If you want out fast, expect price degradation. The buyer is pricing in the risk of replacing you.
- Earnouts only work when the KPIs are ringfenced and non-manipulable. Otherwise you’re funding the buyer’s next acquisition.
- Rolled equity in a debt-saddled deal can sit dead in the water because there’s no free cash flow left to grow the business.
- A 100% S-corp ESOP doesn’t pay tax, so the company can service debt with money that used to go to the government.
- A 10-year ESOP seller note earning 11% on pre-tax dollars is effectively a 14% return you can’t replicate in public markets.
- The risk you perceive is the same risk every buyer perceives. Fix it before the deal table, not at it.
Sound Bites
“100% of the companies on the planet that I’ve ever met are underpriced. Meaning in some corner of the business, there’s something you could charge more for.” (@TBD) — Dave Diehl
“The problem is that working capital tends to be an afterthought in a lot of respects. Somebody agrees to a price based on normal levels of working capital, and then they realize there’s a rather large disparity between their vision of working capital and the buyer’s vision of working capital.” (@TBD) — Dave Diehl
“A lot of people view everything as one. The reality is there’s ownership and there’s operations, and they don’t need to be married.” (@TBD) — Dave Diehl
“If they run this thing and the company has no ability to grow and expand because of how they’ve structured the deal, your rolled equity is just going to sit and tread water at best.” (@TBD) — Dave Diehl
“Half of our job is corporate finance. The other half we view as corporate psychology. The goal is to limit remorse.” (@TBD) — Dave Diehl
About This Episode
Dave Diehl is the CEO of Prairie Capital Advisors, one of the most respected middle-market investment banks in the country, with a particular depth in ESOPs alongside third-party M&A. Dave has been a recurring guest because he doesn’t sell a single product. He sits with owners and walks them through the trade-offs across every monetization path: strategic sale, private equity recap, management buyout, ESOP. This is the deal-structure episode in the Prairie series, and it pairs directly with the earlier ESOP miniseries and the cash valuation vs. strategic buyer conversations. Sized for owners between $2M and $30M+ of EBITDA who are starting to think about what comes next.
Resources Mentioned
- Prairie Capital Advisors — Dave’s firm. Middle-market investment banking with deep ESOP expertise. — prairiecap.com
- Prior Dave Diehl episodes on the iBD podcast — ESOP miniseries, cash valuation vs. strategic buyers
- Section 1042 rollover — Capital gains deferral mechanism available on qualifying ESOP transactions
Connections
Phase + Module:
- Module 2 — Expand Knowledge — Buyer types, deal structures, and the trade-offs across monetization paths
- Module 4 — Sustainable Financials — Working capital discipline as the operating system that protects the deal
Milestones:
- Milestone 6 — Transaction Value — Cash at close, escrow, earnouts, seller notes, rolled equity
- Milestone 4 — Owner’s Value (DCF) — The internal value the deal structure gets compared against
- Milestone 5 — Market Value — The strategic and PE multiples the ESOP path gets benchmarked to
- Milestone 23 — Short-Term Incentive Plan — Comping the CEO on working capital, not just EBITDA
Concepts referenced:
- Cash Conversion Cycle — Where the real working capital cash is buried
- Normalized EBITDA — The number both sides have to agree on first
- The Multiple & WACC — How buyers price risk and how leverage changes the math
- Enterprise Value vs. Equity Value — Why headline price isn’t net proceeds
- Net Debt and Working Capital — The two adjustments that move millions at the closing table
- The Four Value Levers — Levers the seller controls before the buyer sees the company
- Value Gap — Distance between owner expectation and market reality
- The Owner-Operator Trap™ — Why “I want time back” and “I want max value” usually conflict
Related episodes:
- Prior Prairie Capital Advisors ESOP miniseries episodes — Deep dives on warrants, seller notes, and 1042
- Prior Dave Diehl appearances — Cash valuation vs. strategic buyers