Advice requested: Saving a deal by lowering %

November 18, 2024

by a searcher from Columbia University in New York, NY, USA

I have a deal under LOI where the seller is getting cold feet. The quick version is, they believe they can hold on for a year or two and sell for more. Seller is in their 60s and wants to retire soon, but perhaps not right now.

My current structure already had a fair chunk of rollover stock. I'm evaluating saving the deal by increasing the rollover portion of the structure - ie. buying a half or minority share. I would still retain the ability to block major decisions I disagree with, but perhaps lose the ability to have an overriding majority vote. I like this particular seller and think I can get comfortable with that.

I'm interested in thoughts from this group on the pros and cons of this. To me it looks like a nice way to keep the deal, and reduce overall basis (as I would buy the remaining shares later, rather than try again on a total buyout then).

If any in this group have done something similar - acquire a minority stake first, and then bought the rest out later, I am interested in any stories and/or pitfalls.

Reply by a professional
from Dartmouth College in Los Angeles, CA, USA

Pros are that you keep the deal and if you love the biz that's a big one. Also you get the opportunity to see if you like the business and the seller as much as you thought. The main issues here might be around valuation and governance. A minority stake is typically discounted from the value you would pay for a majority stake for obvious reasons (control etc.). Doesn't seem likely the seller would agree to reduce the per share valuation to allow you to buy a minority since he already thinks he can get more. With respect to governance you may be setting yourself up for headaches if you think the seller is maximizing the biz short term to sell out the remainder. Obviously lots of PE firms take growth equity stakes, but given that you started out with acquiring a majority stake and are working backwards, you may be in an awkward position with respect to these two issues. Happy to discuss.

Reply by a professional
from University of Michigan in Detroit, MI, USA

This could be a great option. But it also comes with risk. Your minority stake isn't very liquid. If things don't work out, it may be hard to engineer an exit. Also, for this to tempt the seller, you'll have to agree on how you will value the the seller's retained stake in the future. Otherwise, he'd better off holding 100% for a couple of more years before opening it up to the market for offers. Finally, how will you fund the minority purchase? You won't be able to use a loan very easily, as that will encumber the business and likely result in the seller taking a PG. Is the seller interested in financing it? Food for thought. There is a lot more that could be said on this subject. Let me know if you ever want to discuss. Reach out at redacted

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