Advice for structuring an equity partnership deal (self-funded)
December 14, 2021
by a searcher from Cornell University in New York, NY, USA
I am looking to acquire a partnership stake in a small business. The seller and I have signed an LOI and I am conducting ongoing due diligence. The seller wants to continue on as majority partner, with the option to reduce his stake and increase mine over time.
For context, I am self-funded, am roughly following the 2016 GSB Search Fund Primer, and am in business school. This is my first time putting a deal together.
I'm looking for advice on how to structure this agreement and would appreciate advice from someone who has completed a small business transaction like this before. Thank you all!
in New York, NY, USA
• You can receive restricted equity that vests over a predetermined timetable established at closing
• You can receive call options on portions of the counterparty’s stake at various strike prices and times at closing exercisable over a schedule determined at close
• You can create a mandatorily redeemable equity for the counterparty whereby their equity effectively “matures” and is paid out by the company over time
• Assuming either one of you will be working in a management role, you can pay yourself in equity and pay the counterparty in cash (in a manner agreed at closing)
• You can write what is effectively an earn-out for you, whereby you receive equity grants upon the completion of previously determined milestones (revenue, EBITDA, number of locations, etc)
• If the company does not need to retain its earnings, you can elect to have it pay a dividend in cash to the counterparty and in equity to you
There are many creative ways of addressing circumstances like this but the specific goals of you and your counterparty will determine whether they make sense or not. For example, would you want a specific dollar amount of equity (which requires updated valuation) or a specific number of ownership units/shares? These are things best discussed with a lawyer, a tax specialist, and your counterparty, probably in that order.
from The University of Chicago in Chicago, IL, USA
Trying to get seller to agree on value is difficult in general, let alone determine equity value. If company has debt, you may have to be a party to signing that. Buying remaining stake, gradually or otherwise, has its own complexity. There are many other issues; they all can be worked if seller is truly interested.