Buy a company for free?

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July 15, 2024

by a searcher from Harvard University - Harvard Business School in Westchester County, NY, USA

Anybody ever buy a company for free? Any pitfalls associated with buying a company for zero or $1? Tax consequences?

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Reply by a professional
from University of Notre Dame in New York, NY, USA
Thanks for the tag ^redacted‌ - We actually just did a deal like this (zero dollars exchanged at closing), but the buyer was close with the seller. Seller wanted buyer as a business partner and we structured the transaction as a joint venture (with buyer controlling the business through a Management Services Agreement). We were able to skirt the tax liability by giving the Seller a liquidation preference for the current EV of the Company. The buyer would (i) get a monitoring fee through the MSA and (ii) participate in the upside at exit, subject to the liquidation preference.


This type of deal is very unusual and you need some kind of pre-existing relationship with the seller to make it work. No one is selling a stranger shares in a good company for zero dollars.


The other scenario mentioned here is to buy a distressed company. These deals don't really work though unless you're putting up some cash at closing. A company is typically in distress because they have debt payments upcoming that they can't pay - any sale scenario would require money to meet those upcoming payments (and the lenders would need to consent to a deal). If no money was exchanged, not only would the lenders not consent to the deal (because there is no benefit to them), but if a deal closed the lenders could accelerate the debt upon a change of control (now the principal in addition to the interest is due on the loan).


You could make a distressed deal work by providing a little capital upfront (and either buying the debt at a huge discount, then converting to equity in a chapter 11; or paying the seller just enough to get him out and service upcoming debt payments) - it wouldn't work with zero upfront dollars though.


Happy to chat offline on specifics - DM me or shoot me an email redacted
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Reply by a searcher
from Texas A&M University in Johnson City, TN, USA
Yes. But there's often other consideration, and probably best as an add on deal vs first purchase.

There are scenarios and industries for this. Unique combination of Seller debt, non financial goals (legacy, preserving employee jobs, etc), value of an exit vs a shut down and sale of assets, etc.

Perhaps they just want a paying tenant and they keep real estate. Perhaps you buy the real estate for a top dollar value, and get the business for free. Perhaps you kick the real payment to an earnout or royalty plan.

Know what you're doing and docs you're signing. Probably a DD light deal, you'll need trust in the other parties. And good legal docs.
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