Texas owners weighing a majority recap ask the same first questions as owners anywhere: how much cash at close, how much stays in, and who runs the company afterward. Two Texas specifics are worth knowing before the first meeting: how the state treats the advisors who work on these deals, and how state income tax does, and does not, apply.
Texas has its own M&A rule, and it reads like a recap
The Texas rule known as the "Mergers and Acquisitions Dealer Exemption" sets the conditions under which someone can work on the sale of a private company without registering as a securities dealer (7 Tex. Admin. Code 139.27 (opens a new tab)). Its conditions describe a control deal:
- The buyer must end up with control. Control is presumed at 25% or more of a voting class.
- The buyer must actively operate the company: elect executive officers and approve the annual budget, or serve as an executive or manager.
- The deal cannot transfer securities to a passive buyer.
- The advisor cannot bind any party, provide financing, or hold the funds or securities involved.
- The advisor must keep records of its compensation and its dealings with buyers and sellers for three years.
Why this matters to you: the line the rule draws between control and passive investment is the same line between a majority recap and a minority investment. We work on control transactions only, and we never hold client funds or provide financing.
No state income tax on individuals, but taxes still apply
The Texas Constitution bars a tax on the net incomes of individuals, including an individual's share of partnership income (Article 8, section 24-a (opens a new tab)). That does not make a sale tax-free. Federal tax applies, and Texas taxes businesses through its franchise tax, administered by the Texas Comptroller (opens a new tab). Which taxes reach your sale, your rolled stake and any earnout, and when, depends on how the deal is built. Your CPA decides.
Before the first conversation
You do not need a valuation to start. It helps to know who owns what today, what role you want after closing (stay as CEO, move to the board, or step back), and whether a buyer has already sent you a letter or a number. If one has, our articles on what happens to the stake you roll and earnouts and holdbacks cover the terms most worth reading twice.
The federal rule underneath
Federal law lets an M&A advisor work without registering as a broker-dealer only in deals where the buyer ends up controlling the company (presumed at 25% or more of a voting class) and is active in managing it, and the company is under $25 million in EBITDA or $250 million in revenue (15 U.S.C. 78o(b)(13) (opens a new tab)). States add their own rules on top.
Caution
Retained ownership and future upside are possibilities, not promised second paydays. Rolled or retained equity is usually illiquid, often a minority position behind acquisition debt, and can lose some or all of its value.
Sources for this guide
Own a service company in Texas? Tell us about it and we will explain how a recap would work for you, or say plainly if it would not. We work on control transactions: a full sale, or a majority recap in which a buyer acquires a controlling interest and takes an active role in running the business. We introduce qualified buyers, including private equity groups, family offices and strategic acquirers. We do not arrange minority investments or growth-capital raises; if one may fit, we can refer you to a registered broker-dealer.