I'm having a deal under LOI and offered to the seller to continue with us with 20% stake. I understand that "SF standard" is that the seller will sell 100% and will buy a stake in SF based on the agreement.
Do any of you have an experience in keeping seller's stake out of the SF?, It seems to me a bit better option and would like to hear some pros and cons from real experience or when you thought about it and discussed with your investors.
Many thanks for your insight!, search on!
Deal structure - seller continues with her stake outside the SF or within?
by a searcher
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1) ABC has EV = $10 M and no debt. Therefore, Equity Value = $10 M. Now SPV buys 80 shares of ABC for $ 8 M. First, where does SPV get $8 M from? Now, assume, that the Buyer, the owner of SPV, is able to borrow $ 6 M from the banks (bank's collateral will be the 80 shares of ABC) and infuses $2 M equity into the SPV. Thus, SPV has $8 M to buy 80 shares of ABC.
2) Above scenario is possible, but I do not think (please clarify) Buyer or SPV can push down the $6 M debt into ABC.
3) Now SPV owns 80 shares of ABC which has no debt except the 80 shares have a lien on them.. Can the Buyer borrow funds inside ABC? If so, how can that debt be used to pay off the original lender of who gave $6 M to begin with? Would there be tax implication in taking ABC debt out to its shareholders? I hope you can see my point. It all looks good but not practical. I wish some one will clarify these points.
4) If the objective is for a seller to own equity into his own company but to do so tax free, then there is way to do this w/o going through the scenario described above (which I don't think works). There is something called (I am guessing F org, or contributory asset approach), where seller can contribute assets into NewCo in return for ownership into NewCo.
5) We did a transaction recently (new numbers). P=$1000. Buyer borrowed $600, Equity = $400. Seller contributed assets worth 100 tax free to NewCo in return for 25% of NewCo (=10/40). At the end Seller got 900 to take home and owns 25% of NewCo. I have done this few times.
6 So few points of clarity (at least in view):
a) The roll-over equity does not mean existing equity shares are being rolled-over..
b) if Seller retains current equity shares, I do no think buyer can leverage the balance sheet and push the debt into the OldCo.
c) There is away for a tax-free roll-over of, not equity, but of proceeds, into NewCo, and the % owned by seller into NewCo will be higher; depends on the capital structure of the NewCo.
One actual closing: Sold a company (XYZ) in Dallas for $8 M Equity Value. Buyer's SPV bought 51% of XYZ shares. XYZ debt did not change. Buyer's SPV had multiple investors and debt. But such SPV debt remained at the SPV level. It had no impact on the XYZ operation. How does SPV service its debt? XYZ paid "fees" to SPV to service the debt. .