Episode 1 | M&A in 2026: Navigating a Complex World

Dean Peterson:
Thanks very much, Ted. Kanwar, let's hear from you.

Kanwar Singh:
Well, good afternoon, everybody. Thank you for joining us. My name is Kanwar Singh. As Dean mentioned, I am a managing director here at the Rockefellers Family Global Office. I lead and head an advisory practice that designs, builds, and operates family offices and investment offices for multi-generational families that extends beyond liquid investments, but into private advisory as well as into other aspects of administrating the office. Just to make sure I don't leave Ted out, I am a recovering lawyer. I spent the first half of my career most recently as a partner at Baker McKenzie in private equity and M&A before that at Kirkland and Ellis. And it is a pleasure to be with you all. Jon.

Dean Peterson:
Thanks very much, Kanwar. Go ahead, Jon. Let's hear you introduce yourself.

Jon Zefi:
Dean, thanks for the intro. Kanwar, thanks for your background as well. Jon Zeffi, partner here at EisnerAdvisory Group. I am part of the national tax office and as part of that role, we conduct a number of both buy-side and sell-side M&A due diligence transactions on behalf of our clients, which include large family offices, private equity funds, et cetera. Dean, thanks so much.

Dean Peterson:
Thanks very much, Jon, and thanks to the three of you. It sounds like we have four lawyers at one stage or another of their careers or their lawyering. Jon, let's stick with you. Let's kick off the conversation with a discussion of where we are in 2026. So if you could set the stage for us, I'd appreciate

Jon Zefi:
So I think a little bit of the 2026 backdrop, we have to look to 2025 first. When we look at global PE, dry powder remains near $1.3 trillion as we entered into 2026. USPE dry powder, depending on who's calibrating those numbers, is between 880 billion to $1.1 trillion, depending on the various sources that reflect that information. In 2025, we closed the year incredibly strong over 9,000 private equity transactions, 1.2 trillion in deal value. That's a tremendous amount of deal value. Second ever trillion dollar year that we've seen. 75% of deal makers expect higher M&A value and volumes as we go into 2026. One of the biggest incentives that is driving transactional activity are the tax incentives generated from the one big beautiful bill. We also see a tremendous amount of sponsor led take private transactions, which were up 60% year over year in 2025.

Sovereign wealth funds have been significant players emerging as co-investors at scale across various transactions globally. And we see valuation gaps narrowing in the marketplace tremendously, but the most important force is the one big, beautiful bill that's changed the landscape and helped drive transactional activity. And three forces related to that are reshaping deal economics. And they're all on the tax side. First, the one big, beautiful bill fundamentally rewrote the after tax math on leverage transactions. Dean, we talked about this on the number of deals that we're working on together. The 100% bonus depreciation is back and the 163J interest cap is materially looser. Second, the qualified small business expansion in the one big, beautiful bill has been a tremendous driver of value as well as the 163J overlaid on top of that has driven tremendous amount of deal related activity. And the third area that you're going to talk about that we can't avoid are the tariff situation and the evolving litigation that's surrounding all the tariffs.

And I think that's been treated as a tax and name only and they're embedded in a lot of our analyses. Ted is going to discuss how deal transactions sort of account for the tariff situation and how that's negotiated as part of the process. Kanwar, I'm sure you're seeing that as part of your day-to-day life at Rockefeller. What I'd like to do is turn it over to Kenworth first to talk about what he sees in 2026 and then Ted, we'd love your thoughts as well.

Kanwar Singh:
Well, 2026 sort of is turning out to be the tale of two cities. You started February and January off with quite a bang. There was a lot of positivity and excitement about the deal flow that was coming through 1.6 trillion in announce and expected transactions in the M&A world. We were very bullish and then end of February, we obviously had Epic Fury. The Iran conflict arise and that did put things into a bit of a tailspin. The tension that we're seeing right now is really one between what's happening with Epic Fury, the Iran conflict, and then what's happening with the AI CapEx boom. The AI CapEx boom cannot be understated. Just the top four hyperscalers alone, Microsoft, Amazon, Meta, and Alphabet are accounting for over $710 billion in AI CapEx spend in 2026 alone. Just wrap your head around that number. That's an astonishingly high number.

The follow on effects from that are significant on the energy complex and otherwise the needs for power, the needs for data centers, et cetera. It's all filtering through. So right now the story that's winning, if you look at the markets and what we've seen in the last several weeks is the story as it relates to the AI CapEx boom. You've seen earnings revisions move upward. In fact, in the semiconductor space, this is not a made up fact. There's an average 61% above the 200 day moving average for semiconductor companies. We haven't seen that level of extreme performance, that sort of vertical movement since 1999, 2000. And I'm not suggesting that means that there is a correction coming. What I'm saying is that there's a lot of excitement. So far that has overweighed and outweighed what we're seeing as the tensions that are coming from what's happening with Iran.

Oil sits at 100, whether it's Brent or crude, you're somewhere at a hundred, right? You're still seeing a disruption to flow. We have not seen because it's still so recent the follow on filtered effects of what that disruption supply may be doing to the economy. I think it remains to be seen where that goes. Interest rates are staying high as well. I mean, as we all know, 30 year treasury crossed 5%, the 10 year treasury is right at four. It's more expensive, looks like rates will stay higher for longer. And so those two tensions and those two forces are setting up for a question mark of an outcome. I will tell you that it looks like if I were a betting person that we might see the markets continue to stay robust, not only in the private sector, but the public sector with what's happening with the AI situation in part because there's a lot of incentive to get through the Iran conflict smoothly.

Jon Zefi:
One quick point on that, Dean, if I may. Kanwar, everything you said is absolutely true, but we saw a global PE deal value fall to a little bit less than 25 billion in April, down roughly 26% year over year with deal volume also declining significantly. However, year to date, totals are still running ahead of 2025, pointing to a market defined by fewer, but I think larger transactions. And as you well put, energy infrastructure, healthcare drove the biggest deals of the month in April while application software activity dropped sharply despite TMT remaining the most active sector overall. So we're entering into May. May still has a few weeks to be played out here, but I think it'll be interesting to see what happens in May. Sorry, Dean.

Dean Peterson:
Okay. Thanks,

Ted Rosen:
Jon. Can I give you a slightly different perspective? So in the lower and middle market, the market's shifted from a seller market to a buyer market. And what that means is that multiples are down a little bit. The bid ask on what sellers are seeking and what buyers are willing to pay, there's more of a gap. So the deals are taking longer because they're more complex. The private equity firms properly are concerned about greater levels of due diligence and complexity in the process. But from my perspective, in my firm's perspective, we're super busy in our world, in this lower middle market, which in many ways isn't as affected by oil prices and wars. It's not to say it doesn't impact certain industries, but in general, we are very, very busy. So the question becomes how do you position companies properly from a sell perspective and how do you diligent from a buyer perspective?

That's what's harder now.

Dean Peterson:
Thanks, gentlemen. A great kickoff to our conversation today. Well, let's get down to some more details. In M&A, there's always opportunities and there's always risks and those shift from year to year. So this year, let's talk a little bit about tax. Let's start there. Jon, from a tax structuring perspective, what is actually different about M&A in 2026 versus maybe the last couple of years?

Jon Zefi:
I think the large driver is the July 2025 tax law. It's not just a tweak. It's a regime shift in how we approach things. 100% bonus depreciation is restored. The 163J interest deduction loosened from 30% of EBIT to 30% of EBITDA and the qualified small business stock expanded materially. What that does is on a $200 million LBO deal that's at 5X leverage the one big beautiful bill changes alone are worth roughly based on some calculations we did on a transaction between eight and $12 million in present value tax savings versus the pre one big beautiful bill baseline. That changes the IRR math, which changes what sponsors and buyers are willing to pay. And that's a strategic shift that's going on right now. Tariffs are a wild card. They're now functionally viewed as a tax effectively. We're seeing them flow through cost of goods sold working capital pegs, which Ted will address later, rep and warranty insurance in ways that didn't exist pre 2025.

So the deals that close are being structured with due consideration given to the changes from the one big beautiful bill.

Dean Peterson:
Well, thanks very much for that, Jon. Let's drill down on the QSBS piece again. If you wouldn't mind, why don't you walk us through what it's actually doing to seller behavior when it comes to the QSBS conversation.

Jon Zefi:
So let's level set qualified small business stock is covered under a section of the call 1202. 1202, let's say non-corporate holder of qualified small business stock exclude federal capital gains on sales up to the greater of either the $15 million or 10 times their outside basis under the one big beautiful bill. In addition to that, tiered exclusions were driven through the bill at three, four, and five years. So at a three-year cliff, you get 50% of the benefit at four years, 75%. If you hold it for the whole five-year period, you'll get the full $15 million exclusion. That's for equity issued after July 4th, 2025. So behaviorally, founders are bringing companies to market earlier. The three-year tier in the One Big Beautiful Bill creates a new exit window for our founders and entrepreneurs. We're seeing letters of intent on companies that two years ago would've waited.

What changed structurally? We see a number of our clients utilizing the benefits under the qualified small business stock exclusion and entering into trust stacking prior to a transaction. So they're utilizing non-grantor trust each to get their own 1202 exclusion for each of the trusts that are set up to hold the founder's equity interest in a startup and on a hundred million dollar founder exit, sophisticated estate planning can legitimately move the after tax outcome by 20 to $30 million. This is now table stakes for founder-led targets. The sponsors buyers are increasingly willing to structure rollover, preserving the benefits of 1202, which means every organizations are par for the course in almost every S Corp transaction that we see on a regular basis. Careful share acquisition mechanics are given consideration. Ted can talk to those and avoiding anything that breaks the original issuance status on rolled equity is a key consideration on any rollover transaction.

So QSBS in 2026 is no longer a tax footnote in the memos that we put together as part of a deal. It's a strategic input that happens to be considered and has to be considered prior to the LOI because if we're going to entertain any pre-transaction structuring using trust, we have to consider that before going deeply down the road of any transaction.

Dean Peterson:
Thanks very much, Jon. Yeah, QSBS is going to be very important as a strategic tool to be used by M&A practitioners. But I heard you mention trust stacking and that made me think of family office practice. So Conrad, let's turn to you and go back to something that was mentioned earlier in the 2026 outlook of setting the table for where we are now. From a family office perspective, let's talk about the middle market. Is the middle market broken for M&A activity or are you viewing it as an opportunity?

Kanwar Singh:
It's interesting. Jon mentioned that the large cap market is off to a hot tear. And I think if you look at some of the large deals, they have skewed the data. You have seen the middle market under a little bit of pressure, but Ted also noted that for the transactions that he's looking at, you're seeing a lot of velocity. I would say that from our perspective, the middle market isn't broken. It's probably frozen or slower than it was. And if you get beneath the headline, what's really happening and I think it's a function of a valuation is that you're seeing folks wondering given what's happening with the Iran conflict, at least at least some of our transactions, not knowing what the implications are going to be, coupled with the fact that rates are staying higher and therefore availability of credit, the cost of capital has changed.

But then lastly, some of the headlines around private credit that have been happening and so the gating and the default rates picking up, I think you're seeing a little bit more of a cautious attitude. Now that said, if you look at our world, the family office world when we're playing ball here, I think it's a differentiated situation. We don't have an IRR clock, right? We don't have limited partners demanding quicker paths to DPI, right? Distributions to paid in capital to get my capital back in three, five years and it has to happen. I don't need to worry about raising new funds. And so the buyers that we work with, our families, have a lot more flexibility to move where sort of the traditional financial sponsors, the private equity shops may or may not be able to.

You may have seen the stat about 82, 83% of deals are going to strategic buyers right now. That's not an accident. I think there is that patient capital. There's the ability not to have to worry about the financing costs, et cetera, but that means also less competition for the deals that family office doesn't want to get into. All right, from that perspective, we think that some of what's probably coming as the force selling pipeline out of the traditional private equity players is going to help. That pipeline is going to build to the benefit of families that can be a liquidity provider because families are sitting on substantial amounts of capital there. Bottom line is we expect that roughly 40 to 45% of family office allocations will be going toward private deals versus the sponsors where they were just a little while ago.

Dean Peterson:
Thanks for that insight, Kanwar. And let's talk a little bit about deal mechanics. And so Ted, I'm going to turn to you. When your clients see an opportunity on the sell side, what are you telling them? And you alluded to this a little bit earlier in the conversation about timing and preparation in light of the global economic and geopolitical climate right now.

Ted Rosen:
Yeah. I mean, I think when you start the process, it's going to take at least six to nine months. Obviously, get an investment banker on your team as soon as you can. I work with EisnerAmper on almost every transaction to get a QOV or QA light. You have to know your adjusted EBITDA before you go to market. You need to speak to the investment bankers to understand what the multiples are in your industry, but not just in your industry, but in your EBITDA category, because it changes. So five to 10 million is one EBITDA, 10 to 20 is another, and I'm selling a company for 25 million in EBITDA and the buyers are lining up. So EBITDA, adjusted EBITDA solves all problems and obviously you have to have your house in order, your legal and your financial in order. But I think the thing that I'm spending the most time on is because it is a buyer market right now, sellers need to understand how the deal is going to be structured differently than their friend's deal a year or two or three ago.

So the buyers are saying, "We'll pay X, but I'm selling a software company and we have a 25% percentage of the deals in an earn out. " And the buyer's saying, "Look, if you deliver, you're going to be treated handsomely. And if you don't, then we're sharing in that risk." So they're paying a pretty high multiple, but they're also asking the sellers to bear a portion of the risk. The other way that buyers try to mitigate say, "Okay, we're going to take a ... " The norm is about 20%, but I'm seeing 25, 30% in the market where the seller is going to take a portion of the proceeds and roll it into the Holtko that's above the buyer entity. So they're effectively co-investing with the private equity firm in the future of their company, which has its own advantages and disadvantages and I have to explain that to the seller so they understand what they're doing.

So I think there's a really long and difficult learning process in this economy, but none of it's undoable. And Jon knows this and I've said this for my entire career. On sell side M&A, I have two rules. Rule number one, take the money and rule number two, take the money.

I don't want to say how many years I've been practicing, but I've never had a client say to me, "You know, Ted, I'm really sorry you made me really rich." So the best time to sell is always today in my opinion. Because we don't know what'll happen tomorrow. Yeah. The problem is you don't know what's going to happen tomorrow. I had just one last story. I had one client with 10 million in EBITDA and he lost a key distributor and next year he had zero. So I never forgot that story when I'm talking to clients.

Dean Peterson:
Right. Jon, you want to make a comment?

Jon Zefi:
That's on the private credit side. As we know, private credit and private equity have been structurally intertwined with roughly, I think it's 80% of PE leverage buyouts now funded by direct lenders. So as that three trillion private credit market shows some strain that Kenworth just mentioned, the fallout is squeezing PE from both sides. Tied our underwriting is making new deals more expensive while rising interest of burdens and refinancing pressures are weighing on portfolio companies carrying aggressive leverage from the low rate era. So I think we have the potential here of creating a negative feedback loop across valuations exits and fundraising, which is a little disconcerting to all of us that are in the marketplace and hoping to see more transactional activity get conducted here. I don't know. Kenworth, do you have any thoughts with respect to that? Just

Kanwar Singh:
Off my mute. Absolutely. The private credit fallout is having an impact sponsors, it's interesting because we work with families and we work with PE shops that are more in the middle market and I think if you were to talk to them, they would say they see nothing but green shoots right now. But for a lot of the big providers, especially with the significant capital needed in the deals, first of all, reducing the number of turns of leverage in deals and then also having to figure out where do you go with it. I think structurally you've also seen this movement toward these evergreen perpetual structures in both private equity and private credit.

Jon Zefi:
Agreed.

Kanwar Singh:
Which gives a big pot of dry powder. What 50% of capital for funds that are two to five years old is dry right now. They have not deployed it. So they're looking to put it to work. I think the competition for deals is getting higher, but they're recognizing their ability to use the leverage terms is going down, which does affect deal economics, which means that for a lot of our clients, it's setting expectations. Remember those days you used to get 30% IRRs and two times plus multiples on your capital after seven years? Well, now it's, well, hopefully we get a 14 to 15% IRR of 1.4, 1.5 times multiple, and it might take you 10, 12 years, which is also why people, I think, are looking at some of these evergreen structures with greater interest. I mean, there are pros and cons to both, but I do think that we're still feeling the reverberations of that effect.

Jon Zefi:
So let me snatch the world's greatest moderator role away from Dean for a second and maybe flip the script on him and ask him

Jon Zefi:
Question. We talked about tariffs aren't a macro variable in deals anymore, right? There are clause in the purchase agreement and Ted can address that, but tell us what your insights are on the tariff environment as we sit here today on May 12th, 2026. And we have a number of clients facing an ever-changing environment in which they play in.

Dean Peterson:
Yeah. Thanks very much, Jon, for giving me a chance to speak as well. Tariffs are on the tips of everyone's tongues right now and the landscape is evolving constantly. If you're paying attention to the news last week, you notice that there was a case in one of the courts that reversed the Section 122 tariffs and deemed them to be illegal. So the issue there was it was only three plaintiffs that are going to be allowed to get a refund for those tariffs. We're expecting perhaps an avalanche of litigation related to this because there was no national rule passed related to section 122 tariffs. So those 10% tariffs that were passed in February of 2026, when the IEP tariffs, right after the IEP tariffs were reversed, those tariffs may also be the victims of litigation and be reversed, but let's take a step back and talk about tariffs.

A tariff is really an excise tax on imports. It's not technically a tax administered by the IRS, it's customs and border patrol, but the financial behavior is virtual identical. Once you see it that way, it slots into the deal model as a tax line item, not just a big headline. Where are you seeing tariffs in diligence? Costs of goods sold volatility, supplier concentration risk, customs compliance posture, transfer pricing exposure, that's a big one. That's one everybody should be thinking about is a transfer pricing exposure when it comes to tariffs. There are some opportunities there. Working capital adjustments are affected, tariff driven inventory, cost changes are creating real disputes and deal closings, so that's going to be a big factor. But the takeaway I think for deals is don't model around a single tariff regime. You don't know when that's going to change. Purchase agreements need flexibility mechanisms, define tariff costs methodologies and maybe some other more careful negotiations along the way.

People are going to have to be, and buyers and sellers are going to have to be very careful and conscious of tariffs and how they're going to play out in the long run. So to that end, Ted, what have you seen on the tariff front?

Ted Rosen:
Yeah. So every purchase agreement has a tax sharing provision, tax responsibilities. So for the avoidance of doubt, as we say, we want to clearly delineate what happens to tariffs. So sellers take the position that it's similar to a pre-closing tax and if you would get a tax rebate pre-closing, why shouldn't I get the tariff back? Buyers are saying, "Well, wait a second. I'm running the company. I have risks So if you guys are pursuing tariffs back, I may be under increased scrutiny. So I think there's going to be a push pull on who gets the tariff and maybe there may be some sharing of the benefit. I think the more difficult issue is unlike 2020, when the PPP money created the greatest boom in M&A ever, I don't think tariffs are going to do that because I'm not sure when it's coming. So I just got off a call with a business owner and I said, "How much are you going to get in tariffs?" He goes, "I think a few hundred thousand dollars." He goes, "But I have no idea when I'm getting it.

I don't know if I'm getting in 26 or 27 and I don't even know how to move forward on it. " So how do you plan a business when you're expending all this money for taxes? And then

From what I'm reading, President Trump isn't going to stop. There's national security reasons he can use. So it's going to continue to be a problem for years to come.

Jon Zefi:
Hey, Dean. Thanks

Dean Peterson:
For that, Ted. Yeah. The landscape is ever changing, but yeah, Jon, go ahead.

Jon Zefi:
Dean, one quick follow up to you on the structural play. So this falls into the sort of pre-transaction structuring opportunities using foreign trade zone elections, bonded warehouses and country of origin re-engineering. Can you give the audience just a little sample about what that entails as they approach a potential M&A transaction and want to do some pre-transaction restructuring to optimize their tariff situation?

Dean Peterson:
Absolutely. If you're a seller or a buyer who is bringing goods into the US, you should make sure that you're learning where these goods are coming. Are they coming into a foreign trade zone where the tariffs will be reduced or eliminated? Are the goods that are being brought into the US the types that are subject to various exclusions or exceptions? You want to be careful and do your diligence on the actual products that are coming into the US. Are they related to the military? Are they rare earth materials? These are some of the items that buyers are asking right now and they want to know if they're going to be able to reduce their tariffs. They're going to want to share the burden with the buyer or with the seller, with the counterparty. Is there a bonded warehouse available that can ... Bonded warehouses are few and far between right now.

They're selling out because there's just no room left because sellers and buyers are onto this strategy. So if you're able to find space in a bonded warehouse, definitely recommend taking that. Occasionally, there are some opportunities to re-engineer the country of origin and you can do that through negotiating with your suppliers, doing transfer pricing agreements, or negotiating or making the goods flow differently within your own structure. So there are plenty of opportunities out there, but there really is, as Ted noted earlier, there's no escape from this tariff title wave. President Trump is going to keep pushing and that's why the environment is always going to be changing. So I do think that there could be some opportunities there, but we have to wait and see what the government says as far as tariffs go. Jon, thanks very much for that. Now I want to take it back to tax and away from tariffs.

We've talked about the one big beautiful Bill Act a number of times. Let's get a little more specific. Can you drill down on two provisions that matter the most for sponsors right now?

Jon Zefi:
Yeah. And Ted and I see this in every transaction we're involved in, particularly when we're doing buy-side representation. The first driver is the 100% bonus depreciation, which was restored permanently. So for qualified property place and service after January 19th, 2025, step up basis on asset deals, including 33810 transactions, 336 elections, they now generate immediate full deductions on the depreciable portion of the purchase price allocated to those fixed assets. So what this means from a tactical perspective is that asset deals are back on the table for sponsors who previously defaulted to stock deals for simplicity. The cash tax savings on a $300 million asset purchase with $80 million of allocable equipment can exceed $20 million in year one. That's a self-financing mechanism on all deals. The second component that we see a lot in the middle market because there's a debt overlay on most buy-side transactions is the 163J interest deduction.

The cap returned to 30% of EBITDA. It was 30% of EBIT post 2022. On a leveraged buyout, this often restores 15 to 25% of previously disallowed interest. Combined with the bonus depreciation change and potential R&D expensing currently, the after tax cost of debt drops materially. So sponsors who haven't updated their LBO templates for the on big beautiful bill, which I can't believe occurs, but you'll be surprised it has happened during the early part of the year are underestimating cashflow by five to 8% on a typical middle market deal. The gap is the difference between winning and losing a competitive bid in any transaction. So we're spending more time on cost segregation studies right now, fixed asset basis substantiation on all deals, looking at historical 163J limitation carry forwards based on the work that we've done 18 months ago. Buy side due diligence has gotten more granular on all transactions.

That's what it entails.

Dean Peterson:
Thanks very much, Jon. There's a lot on the tax side to consider, especially with the one big, beautiful bill that coming into play last year. Let's change course a little bit and go back to Kanwar. Kanwar, we're seeing family offices increasingly going directly into deals rather than through PE funds. So what's driving that shift and is that the right move in this environment?

Kanwar Singh:
So Dean, first, probably worthwhile to underscore that it's not just anecdotal. I mean, the data is supporting that. Right now, if you look at it direct deals as a percentage of an AI allocation, I mentioned this before, 42% of family office alternative allocations. That's up from 27% just five years ago. So you're seeing a big push. The incentives are aligned and we'll talk a little bit about why that is and why that's happening going forward. There are a couple of different reasons why it's happening. When we look at it, what we typically see, what most people would talk about is fee avoidance. So if I can go direct as a family, I avoid the two and 20, which by the way, it can be 25 to 35% of gross returns depending on just how big the deal is and what the returns are. So yes, that exists, but I don't really believe that for our families, that's what we're seeing.

I think it's three other things. First, control and flexibility, that's not a small thing. Instead of tying up your capital for 10 to 12 years, you're sort of a passive participant, you're waiting to hear what happens. You don't really have visibility in the transaction and you're hoping for a good return, you have a seat at the table, a little bit more agency for our clients that are founders themselves, that have tended to create the family office or the investment office for themselves. There's also a desire to have a little bit more agency and more direct participation and control and involvement in a transaction. So direct deals can be exciting that way. I think the second thing is that generally speaking, the PE fund sponsor model is under a little bit of pressure right now.

You can't open a financial newspaper or not hear articles about the length and the timelines of getting the liquidity for PE funds, right? Continuation funds, extensions, they're going on 12, 14, sometimes even 20 years. I think that that's a lot of pressure. I think also with where interest rates are and otherwise the expectations for where returns are going to be, as I mentioned before, ours the internal rates of return aren't as exciting as they used to be. And I think a lot of families are saying, "Hey, I can go direct, find the right deal and get that return for myself." I think the caveat to this is that the desire and the ambition for families to pursue this is a little bit ahead of their infrastructure and capability and doing the same. So the cautionary tale is, and I've seen this with families, where you get into a situation where you're thinking you can set up effectively a family investment office that will pursue direct private transactions, but unless you're willing to bring in either external consulting resources or internal resources, you're not going to be able to properly and capably execute on a transaction despite the capable team that you might have with Jon Zafi and Ted Rosen on supporting your transaction, right?

So that's going to be the thing. I think from our perspective, what we are suggesting to clients is probably some kind of a hybrid. I think both the direct deals and the sponsor deals have a role. I would say pick very carefully on a selected basis, private fund deals that have a quicker path to DPI, maybe a seven, eight year term without extensions or at least a higher proposition for a multiple based upon something they're doing or a space they're playing in that's not just the generic space and then negotiate co-invests or find other opportunities to participate going forward in some of these direct transactions. I think that's kind of how I would see it playing out. I don't think it's a binary outcome. I don't think it's mutually exclusive. I think there has to be a balance and I think every family has to be very careful in understanding what is there in fact individual capability in not only completing the deal but staying engaged going forward.

And Dean and Ted, I'd be curious from your perspective, when you see families going direct, what are the structures you're negotiating differently? What are the caveats that you're experiencing?

Dean Peterson:
Kanwar, you're leading into my next question because caution remains the watchword when it comes to investing in this environment. And so with that, I'm going to turn to Ted because I have a question for him. In the current environment, Ted, buyers and sellers are even more cautious than usual in M&A negotiations, but let's take a look at the buyers. What do you see as the front and center concerns for PE buyers on handling their negotiations with sellers? What do you see out there?

Ted Rosen:
Yeah, I mean, I think they're first looking at the quality and durability of earnings. They're really analyzing the business and can it continue to grow? Are there headwinds because of all the changes that are happening out there? How is AI helping or how is AI hurting that business? This AI boom is, in my opinion, it's only two years old really. So it really is rapidly, rapidly changing the M&A landscape. The management team depth continues to be a big issue for every, especially in the lower and middle market. It's interesting. I thought Camar's answer was spot on for family offices as investors. So from a seller perspective, the biggest problem that I see is the integration and continuity of management or lack thereof.

Jon and I worked on a very large transaction and our client was a superstar and had taken a company, a family-owned business that was bankrupt and brought it up to 25 million EBITDA. And the private equity buyer said, "The CEO of the combined entities is going to be our guy from California." And I'm like, "Who is that guy?" Well, he used to run a $4 billion company. And I'm like, and our client said, "This guy's not the right guy. He doesn't know how to run this business." So I frequently see buyers misstep in A, not relying more on continuity of management and the skills that brought these companies to success. I think they do spend a lot of time analyzing can the current management team handle it? What do they need to build it out to make it better? But I think they could do better.

The other customer concentrations like cyclicity and whether operational value can be increased, right? That’s the name of the game. And again, AI, tariffs, all those things are factors.

Dean Peterson:
Thanks, Ted. Sage advice. Dean,

Kanwar Singh:
Can I add one thing here? I think that what we're also seeing is that because you cannot use, or it's maybe more costly or difficult to use more leverage in the transactions, there is an even heightened emphasis on the ability of the management team to actually grow the earnings to generate the real upside later on. And so Ted, that last point, I think at least from our perspective is critical. You've got to be getting in these transactions with a true belief that you can add significant value to grow that top and bottom line and significantly enhance the business because you can't just rely on the financial engineering leverage gain anymore. It's not in place right now.

Ted Rosen:
Totally agree.

Dean Peterson:
So you've got to be thorough at every angle of a deal to say the least. Jon, let's go back to something we were talking about a little earlier. Rollover equity is increasingly common in lower middle market deals. What are sellers and buyers getting wrong on the tax side with rollover equity?

Jon Zefi:
So let's just reiterate a point that Ted made earlier. We're seeing rollover equity anywhere between 20% and 35% of deal value. So that's been common in almost every transaction that Ted and I have done over the last 12 months together. The default trap is that sellers assume rollover is automatically tax deferred. It isn't. Without the proper structure, typically we utilize an F reorganization structure or a non-taxable 351 contribution. The rollover can trigger a media gain on the cash portion and contaminate the rolled equities, qualified small business stock character and eligibility. So in virtually every S Corp transaction that we've entered into in the last 36 months, S corps all get reorganized as a Q sub of a newly formed holding company in an F reorg. That holding company issues new stock to the buyer and retains the rolled stock with the seller. Done correctly, this preserves the S Corp tax history.

It avoids a buyer assuming any of the legacy potential tain on blowing an S Corp election and it creates a clean buyer friendly structure that allows them to get a step up in basis in the underlying assets. So it satisfies everyone's views on this from both a seller and buyer perspective. QSBS preservation is key in rollover. So original issuance of equity in the five-year holding period requirements survive only if the structure is done right. We've seen rollovers that inadvertently destroyed five to eight million of qualified small business exclusion because the seller's lawyers didn't loop in tax advisors until it was too late. As we mentioned, buyers increasingly want higher rollover percentages. It's not uncommon in the last three deals. I think we've seen 35% of post-close equity. That creates material tax planning opportunity for sellers and material exposure if it's mishandled. The one thing I wanted to loop in on was on the family office side, we're seeing many family offices come direct into transactions, not for the $15 million exclusion, but for the 10 times your outside basis multiplier that they can generate.

So in a couple of transactions, we've had family offices invest 18 to 20 million. That gives you 188 to $200 million of exclusion. If you plant appropriately with trust structures that invest into the deal, you can get a tremendous amount of benefit associated with a transaction and it behooves everyone to reconsider it.

Dean Peterson:
Great. Thanks for that background. Ted, anything to add on rule over equity?

Ted Rosen:
One other wonderful twist that I'm seeing is buyers are saying we want indemnification and we want the right to look at the rollover equity as a recourse. And I just negotiated provision where the buyer put in a provision that said that the arbitrator of the valuation could use a minority discount or look at the preference that the buyer was getting in preferred returns to further dilute my client. So that's going to be a lot of fun to negotiate.

Dean Peterson:
Yeah, absolutely. Guys, we're in the home stretch now, so I only have a couple more questions, but I'm going to start with something that's very important. I want to talk to you about how state tax considerations factor in for sellers and family offices in 2026. What do you think, Kanwar?

Kanwar Singh:
Take myself on B. Look, it is very much critical for a lot of our families to determine the right state in terms of the implications, not only for income taxes, but also if you think about the wealth creation, what the estate tax implications might be on a state basis. We have had several clients that have sought to change residency prior to the closing of a transaction to make sure that they were now domiciled in a more tax-friendly state. And so you can't pick up the papers and not read about another large family that's moving out of a high tax state into a more tax-friendly state.

It's a complicated question because oftentimes you have to be careful not letting the tax till wag the dog. I would always defer to you and Jon and even Tedra on these issues, but there's no doubt that when you think about that and overlaying upon that, the trust structures that exists, what are the domiciles of the trust? We know trust taxation is very different than individual taxation. It's making sure that you have the right amalgamation of those in place. And we consult very regularly with our internal teams, our internal CPA and trust and estate lawyers, but the reality is we defer to the two gentlemen on this screen quite a bit as we coordinate these items going forward.

Dean Peterson:
Great. Thanks, Kanwar. Jon, what do you think about state taxes? When you're talking to your clients about state taxes, how does it come into play?

Jon Zefi:
I'll address it directly. Ted, I'd like you to share one of the transactions that we entered into two years ago, but California, New York, New Jersey, Connecticut, mass, and Illinois based sellers are increasingly relocating before liquidity events. The savings on a $50 million exit can be between nine and 13% of pre-tax gain. That's a real increment of value to be had as part of this, but the residency change has to be substantive. It can't be just on paper. And there are a number of promoters out there that will speak to sellers about doing things on paper only. We've migrated people to no tax jurisdictions within the United States as well as to Puerto Rico. The one thing I want everyone to be aware of is you have to watch out for state and local sourcing rules. So even with a state domicile change, source-based taxation can pull income back to the original sale if the underlying business has nexus in a number of jurisdictions.

Texas and Florida doesn't cure New York source compensation or California source services income. So, you have to be extraordinarily mindful of the deal transaction and most FRE organization structures that we enter into for S-Corp acquisitions. We see that becoming a prevalent issue. Overlaid onto that is the salt cap and the pass-through entity tax. So the pass-through entity tax workarounds remains a valuable tool for us. The one big beautiful bill preserve the salt cap structure but tighten some of the PTET mechanics. So state and local taxes and the utilization of the pass-through entity tax to lower your effective rate is critical. Kanwar raised the trust status issue. So for multi-generational planning, Situs in South Dakota, Nevada, Delaware, or Wyoming can save six to 10% on trust income annually. I would heighten another goal is privacy and some of the states that we just talked about have very strong privacy provisions, but you have to be aware of home state throwback rules.

California's particularly aggressive. Family offices are all over this right now and we see coordinated functions across all family entities, not deal by deal. But I would love for Ted to give some input on the deal that we handled where we had a New Jersey based who sold their company, Ted.

Ted Rosen:
Yeah. So we had an Amazon only seller with two young children. She moved to Florida. She bought a mansion and built a mansion on her savings from state income tax. So the only people who generally don't move are people who have kids and they don't want to take them out of their schools. But as a general rule, there's such an enormous difference in state taxation and M&A that Jon, you and I have another joint client who's going to sell this company probably in three, four years and he already moved to Florida. So it's something to think about, right? It's not immaterial.

Dean Peterson:
So your state domicile is an important factor when you're thinking about M&A transactions. I knew that, but there are a lot of competing factors that determine where people move, like you just mentioned, Ted. Well, it looks like we're in the home stretch right now. We're kind of at the end. So I want to ask each of our three panelists if you had to give the audience one piece of actionable intelligence as they think about 2026 deals, what would it be? Let's start with you, Ted.

Ted Rosen:
That's a good question. Get your EBITDA as high as possible. I mean, earning solve all problems and it's really much better to sell on an upswing than a downswing. Don't wait. If your business is doing really well, go to market. You know what I mean? Sometimes everyone, if you listen to the news, everything sounds so negative. There's a ton of dry powder out there. If you have a good company, we'll find you a buyer. There's a private equity buyer, there's a strategic, there's a family office, there's a sovereign wealth fund. EBITDA will get you where you want to be in life. So focus on your business, but also keep your eye on how are you going to get there. So just one last example. So Jon and I have a very large client going to market and we help them build a very strong management team, incentive equity in the company.

So they're all incentivized to help it grow and succeed and change up control bonuses. So there's lots you can do to build out the team to make your platform more attractive to the buyers so it becomes scalable.

Dean Peterson:
Great. Some sage advice again from you, Ted. I appreciate that. Kanwar, how about some advice from you?

Kanwar Singh:
I was going to make a joke and say plastics, but that's already been done. You have to be old. I understand that joke. Look, I would honestly say that don't consider from the investing side, the family office investing side, when you're looking for transactions and opportunities, consider looking away from just the hype. If you think about what's happening with infrastructure associated with AI, and I'm not even just saying data centers, but even power and other things related to that. There are a lot of opportunities in those companies where I think valuations can make more sense and you can pencil out some pretty nice returns potentially. Obviously, I'm going to throw all the caveats that, but I think that there's a lot of hype chasing some of the obvious stuff. Just look at what's happening in semiconductors. I wouldn't necessarily chase the hot item at this point.

Dean Peterson:
Got it. No, that's always smart advice. Jon, let's go to you and you can take us home.

Jon Zefi:
Sure. So what we've found in many situations where we have entrepreneurs selling their businesses is that they were focused on getting their business growth in line, EBITDA generated to appropriate market levels. All the things that Ted had mentioned, getting their C-suite in order, incentivizing the C-suite as part of the deal. All of those things are worthwhile endeavors and should be done where we think a lot of value exists is the fact that they've ignored taxes both federal, international, state and local taxes across the board. And what we found, and Ted can attest to this because we've done at least 50 deals with one another over the course of the last four or five years, what we found is that if you did pre-transaction scrubbing of your tax exposure on behalf of sellers, that leads to a smooth transaction process. It leads to identifying any potential landmines early in the process, either mitigating those landmines, putting a plan to mitigate those landmines, and being able to explain those landmines to potential buyers to show them and demonstrate to them that you have your arms around the issue so that there are no surprises as part of the due diligence because once there's surprises in due diligence, it just encourages buyers to scrutinize the transaction even more thoroughly, find more problems with the transaction and find more reasons to say no.

So we find smoothing the road out and having a plan to move forward leads to a lot smoother transactional experience.

Dean Peterson:
Well, thanks very much, Jon Kanwar, Ted. I'm going to throw in a couple of bits of advice as well before we part. As an international tax practitioner, I want to caution everybody doing a deal. Make sure you're aware if your sellers or your buyers are participating in any cross-border transactions, have businesses or employees overseas that can always get a little bit sticky if you find out late in the game that there are some overseas concerns. Pay attention to the transfer pricing and pay attention to tariffs, all important things on the international tax front and M&A right now. Well, with that, I'd like to thank everybody for joining us and I'd like to encourage you to join us again next week for episode two. We'll be talking about some uncertainty, technology, global dynamics, and the private capital outlook. So with that, once again, I'd like to thank our three panelists, Jon Zefi, Kanwar Singh, and Ted Rosen, and I'm going to toss it back now to Savanah for some closing remarks.

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