Evaluating Transition Risk w/ a 3-Person Partnership

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by a searcher
in Troy, IL, USA

2mos ago

Evaluating Transition Risk w/ a 3-Person Partnership

I'm evaluating a niche consulting firm. I am highly experienced in the space, so business-buyer fit is strong. There are 3 current owners who have jointly run the firm for 20 years. Two of them wish to stay on post close. One for ~2 years, and one indefinitely. A few questions: 1. How does SBA view a minority owner staying on post close? I know typically they do not want an owner around beyond 1 year, but not sure if that applies here. 2. How would you diligence the transition risk in this scenario? I am primarily concerned with the question of how willing are they to actually give up control to a new owner after running the show for 20 years? 3. Any thoughts on deal structure? I am already thinking an equity carry is obvious and am curious to hear from others with more experience.

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reply by an intermediary 2mos ago
from The University of Chicago in Chicago, IL, USA

To ^redacted‌ and ^redacted‌ The subject is very complicated. But to simplify: Am I safe in saying that, in partial change of ownership, if any current shareholder (X) retains post-close ownership of Y%(Y may be same, more, or less than pre-close %; whether X gets paid or not any $), then X has to give guarantee for the full amount (2 yrs. if Y>20%, full 10 yrs if Y>=20%). I am requesting b/c it is getting harder to convince sellers and brokers and buyers who call. I am advising a broker on a $5 M deal with a 5% owner who will retain ownership. The broker is being advised by multiple lenders that the 5% owner does not have to give PG of any kind.

reply by a lender 2mos ago
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Mike, great question. I just re-read my previous post on this topic and realize I had a typo. If a seller retains equity in a business in a partial business acquisition and does not receive any loan proceeds from the sale, and that equity interest is less than 20% of the total equity interest, they are not required to sign a personal guarantee on the loan. However, if they get paid for any of their equity interest, even if their remaining equity interest is below 20%, they would be required to sign a personal guarantee on the loan that would be limited to two years. If they do not get paid for any equity but their remaining equity interest is 20% or greater, they would be required to sign a full personal guarantee on the loan. I hope this clarifies. So in the case where someone owns 5% and is not getting paid anything at closing, so long as the transaction is structured as a stock or membership interest purchase, that individual can retain their equity without any personal guarantee requirements.