Buyer & Seller Alignment

May 25, 2021

by a searcher in Lake Mary, FL 32746, USA

I have a feeling that this might be a problem for others as well, so wanted to put it out there to see if any of you had some creative solutions.

The seller wants 100% equity buyout, and also a higher valuation. He's been in the business for 20=30 years, and is an expert in his field, but he's focused on retirement. He's willing to stay on for a year to transition, and he says he's just a phone call away if I ever have questions or advice. Also, there are staff members who are knowledgeable and can do much of the work.

I am willing increase the valuation, but I'd like the seller to carry/rollover 20-25% of the equity so that we're aligned in ensuring future operations. I even offered that he could retain a backbook of receivables, but he didn't want that.

The deal would be at the higher end of what I can handle, though I could pull in additional investors. My main thing would be that even through due diligence, I don't want to be left holding a dud, and having no recourse. (Nothing to date though points to this being a business that would fold overnight).

Am I asking too much, and is it just time to walk away?
Should I decrease my carry requirements?
Would it be better to spread the risk by bringing on additional investors?
Are there other incentives or structures that you'd suggest?

Reply by an investor
from University of Illinois at Urbana in Chicago, IL, USA

^redacted‌ - This sounds like a "business issue" less so than a structure / valuation issue. I'm sure you've addressed with the seller, but another run at just the two of you, explaining your concerns, might help you find a solution (if there is one, and you want it). I agree with ^redacted‌ that if you're at the high end of the range, almost any structural method (note, earn out, equity) won't really matter to him - he will likely view it as an option worth $0. That said, keeping him in also won't ensure you don't buy a dud. Perhaps a salary for###-###-#### months - and then the onus is on you to figure out a communication rhythm to keep him engaged enough to help you. He still may not, but if you own it and treat him with respect and tell him that's what you need, maybe there's a path there...

Reply by an intermediary
from The University of Chicago in Chicago, IL, USA

If valuation is at high-end and if leverage is high, rollover equity is not a good risk mitigating route. Depending on the size of the deal and if seller is not interested in second bite of the apple, seller's advisors will advise against rollover. Escrow does not reduce capital raise. Earn-out may be he way to go but that could be difficult to structure to seller satisfaction depending on the business and controls..
This may surprise you, but when I teach I emphasize that the risk of the business is independent of the multiple and the structure. Sustainability depends on the fundamentals of the business, market forces and the operator. Feel free to DM.

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