Buy and hold investor payment terms?

December 20, 2020

by a searcher from University of Georgia in Los Angeles, CA, USA

I'm looking to acquire bolt-on companies for my existing company that I will hold indefinitely.

What have you seen for investor payment terms that allow the investor to get an exit, without me having to sell the company?

Do you have a successful PPM I can glance over?

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Reply by a searcher
from Harvard University in Colorado Springs, CO, USA

I think that both Thomas and Jonathan have good ideas. I would also consider the size of the transaction. If you're looking for only a few hundred thousand, you might consider not structuring it at all and just deferring the decision. From what I understand, negotiating a price to buy back the outstanding shares is usually pretty straightforward. That being said, if you're raising more than 2-3 million, you should definitely consider having a structure built in, even if it's just "we agree that after x, y, and z have been fulfilled, we'll let ABC Business Valuations set a price". I've also heard of the we each choose an appraiser and then the two appraisers choose a third who does the valuation. Best of luck!

Reply by a searcher
from University of Kansas in Dallas, TX, USA

Lots of ways to handle and no wrong answers but I tend to agree with Mike. Allow individual investors to seek liquidity at defined times in the future (maybe annually starting after 5-years). I’d personally be fine giving other shareholders either a ROFO or ROFR (harder given value degradation to the seller). Can consolidate ownership overtime or create a market but meet your desire for perpetual ownership. As for promote, maybe a hybrid structure where you can share in annual FCF yield above a certain benchmark (example you get 5% of FCF above 10% yield/share). Then on backend, I believe a pref return is most achievable but could always push for a pure MoM hurdle.

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