Advice regarding a minority stake acquisition
June 10, 2020
by a searcher from University of Arkansas at Fayetteville in Memphis, TN, USA
Hi,
I would appreciate lenders and deal makers alike chiming in on this. We have an opportunity to buy 45% of a company (LLC corporate structure) which is intended to buy out one partner. That partner is wanting to maintain a small piece of equity (~3%). We are in initial talks so no LOI has been signed, but we have it on good authority that the EBITDA is at least over $2M (I've seen where this is a line in the sand for many larger and more diversified lenders).
Can anyone help me on what kind of loan we would be able to pursue here? I feel that the SBA 7(a) is out of the question because the previous owner will be staying on as a silent equity owner. Does SBA have a "partner buy out" type loan? The business has little physical assets, so we would need a cashflow loan in nature.
As far as the legal/corporate structure goes, will we need to form a new entity? Or can we just buy 45% of the current LLC?
from The University of Chicago in Chicago, IL, USA
As Jeff said, you would typically want minority stockholder protections to have approvals on various actions of the business, but it's important not to conflate economic interests with control. A shareholder with a minority economic interest (e.g., 42%) can still "control" the business. These are not mutually exclusive. So, regarding the first question, you need a basic understanding with the remaining business partner if s/he is going to control the business, if you are going to control or if you will share control. Don't take it as fait accompli that you are stuck as a minority investor for control purposes. If you are, though, then look for minority stockholder approvals as core to protecting your interest.
In terms of the second question, if you cannot fund the purchase yourself, and cannot use a seller note to fill the shortfall, then your third-party funder(s) are likely going to have hooks into you. Debt is far less accessible for a purchase of this sort given the collateral a lender will need is your personal collateral. That's because the lender will not have access to the business assets as collateral given the majority stake held by the remaining partner. This puts you in the unenviable (but common) position of negotiating your minority investor protections at the business level, and then negotiating investor protections for your own investors at the funding level. Plus, the rights of the seller who you are buying out.
Good luck!
from The University of Chicago in Chicago, IL, USA
Your options are:
1) Buy 45% of current LLC with all equity dollars. No one will finance purchase of 45%.
2) Current shareholder and you form a NewCo and buy Assets of current business from the LLC. This will allow financing (but not SBA). Such financing will be small relative to SBA. Essentially, all current owners are selling out, and the 55% owner (X) is buying 55% of NewCo. X will get cash along with the 45% owner. The NewCo will be leveraged, which X may not like, and both you and X will have provide PG. There will be tax issues to X.
3) Minority rights will have to be negotiated. But I would not waste a second on this subject until you get comfortable with #1 or #2.
I have been involved with many such situations. In summary, such opportunities are close to a non-starter.. Fell free to reach out.