Paid in paper

Sometime in the early 2000s, a large consolidator came through Texas and started buying construction companies.

I'm going to leave the names out. Anyone who was operating in this market at the time knows the story, and the people who lived it don't need me putting their deals back in print.

They weren't buying marginal companies. They were buying the good ones — the well-run, profitable, established shops that everybody in the trade respected. That's how a roll-up works. You don't build a national platform out of struggling businesses.

They came to me too. I wasn't interested.

I want to be honest about that, because it would be easy to let it sound like foresight. It wasn't. I wasn't looking to sell, so I didn't sell. I got the benefit of a good outcome from a decision I made for unrelated reasons, which is a thing that happens more often than any of us like to admit.

But I paid attention. I knew who was selling and I had a general sense of what was being offered.

The mix started to change

Early on, the offers involved real money. As the buying spree went on, the consideration shifted. Sellers were being offered a significant portion of their purchase price in the acquirer's stock rather than cash.

My read at the time — and this is my inference, not something I can document — was that the buyer's cash had gotten thin. Looking at the public history now, the more precise version is that these platforms were carrying enormous debt, and paying with their own paper was cheaper than paying with money they'd have had to borrow.

Either way, if you were selling into it, you were increasingly being handed stock.

Stock isn't automatically a bad deal

I want to be fair about this. Getting paid partly in equity is not inherently a problem. If Microsoft offered you a pile of stock for your company, that's probably a reasonable bet.

The question is never "is stock bad." The question is whose stock, on what terms, and what you're allowed to do with it.

Here, the terms included a lockup. The shares couldn't be sold for a period of years after closing.

What a lockup actually does to you

Sit with the position that puts a seller in.

You have spent twenty or thirty years building an operating business. You know that business completely. You can read its risks, and if something goes wrong you can do something about it — change pricing, cut cost, chase different work, call a customer.

You trade that for shares in someone else's company. You have no control over how it's run. You can't see the risks the way you could see your own. And for several years, you can't sell.

You now hold concentrated exposure to a single company, with no information advantage and no exit. That's not a diversified retirement. That's one bet, made once, that you're not allowed to unwind.

The part that makes it worse

Here's a detail from the public record that I think about a lot.

In many of these transactions, sellers were advised to weight their consideration toward stock rather than cash — because taking stock could defer the tax hit that cash would trigger immediately.

That advice wasn't wrong on its own terms. On the tax question, it was correct.

It just wasn't answering the question that turned out to matter. Nobody in that conversation was pricing the possibility that the buyer might not survive the lockup period. The tax advisor was doing tax. The question of counterparty risk belonged to somebody, and in a lot of those deals it doesn't appear to have belonged to anybody.

I've written before about how each of your advisors sees one face of the transaction. This is the most expensive example of it I know.

And then the buyer filed

By the time the lockup expired for many of these sellers, the consolidator was in bankruptcy.

Common equity sits at the back of the line in a bankruptcy. Secured lenders, then bondholders, then unsecured creditors, and then, if anything remains, shareholders. Usually nothing remains.

So a group of Texas owners sold genuinely excellent companies — companies they could have kept running, or sold later to someone else — and ended up with paper worth a fraction of what they'd been promised. Some ended up with nothing.

They didn't get the business back either. It had been absorbed, renamed, restructured, and pledged as collateral somewhere along the way.

The landscape it left behind

The aftermath reshaped this market permanently.

Businesses got bought back out of bankruptcy — sometimes by former managers, sometimes by new owners entirely — under new names. A meaningful part of the Texas MEP landscape today traces back to that unwind. If you've ever wondered why a company with a fifteen-year-old name has a forty-year-old reputation, this is often the answer.

What I'd take from it

I'm not telling you never to accept equity. Rollover equity is standard in private equity transactions, and there are deals where taking paper is the right call. That's a decision for you and your own financial and tax advisors, with your full picture in front of them.

What I'd say is this: the moment any part of your price is the buyer's paper rather than cash, you have stopped being purely a seller. You are now an investor in the buyer's business, whether you thought about it that way or not.

Which means the diligence has to run in both directions. You've spent months letting them examine your company. What do you actually know about theirs? How much debt are they carrying? How much of that debt came from buying companies like yours? What happens to your shares if they miss a covenant?

And the one that would have mattered most to the sellers in this story: how long am I locked up, and what am I assuming will still be true when the lockup ends?

The cash is the part of the price you have. Everything else is a forecast.