Market terms for seller note and equity rollover/partial ownership

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by a searcher from Iowa State University - College of Business
in Denver, CO, USA

1yr ago

Market terms for seller note and equity rollover/partial ownership

Hello,

I'm looking at a deal for a subcontractor business for about $4.5MM (2-3x multiple depending on historical average used) that has about $1.5MM of cash and $2MM of NWC on the balance sheet. For simplicity, I am considering a stock purchase transaction which would allow me to step into the balance sheet (assuming some pre-close distribution of cash) and keep the seller with equity ownership which is viewed favorably by the bank.

Does anyone have any general thoughts on the following (or thoughts/advice on subcontractors):

Seller note terms o How frequent are things like 2 year full standby or forgivable seller note in deals of this size and industry o What rate are folks seeing today – I’m proposing 6% as a starting point o If there is some type of standby on the front end and a 10 year term is it standard to have a ballon payment at year 8 or does is it essentially a 12 year note?

Equity Rollover o What is the typical amount as a % of equity that the seller retains? I’ve proposed 15% thinking it ends at 10%, I don’t think 5% is meaningful enough and I don’t think I’d want to get close to 20% o How long does this typically stay in place? I have proposed an option to take out after year 3 and then required to take out by year 6 o Any standardization of how valuation is calculated for takeout (e.g. average of 2 or 3 appraisals)? o What rights, if any, does the seller have on a go forward basis?

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reply by an investor 1yr ago
from University of Illinois at Urbana in Chicago, IL, USA

Thanks Luke. This is hard to summarize as it's all negotiable, but there are market standards and terms, specific bank needs, much depends on you, your background, net worth, etc. Would start with your lawyer on what's "market" for this stuff. But put yourself in the shoes of the seller. A bullet or int only note is much less desirable, but the bank won't likely want you to amortize and let $$ out while they have exposure. Unless they have tons of collateral. On the % roll, again - for a seller, the diff between 5 and 15% prob won't impact their behavior. How you behave will impact their behavior. Whether they view the equity and the note as having any real value also will impact their behavior. They need a good lawyer too so you make sure they understand all this.

reply by a searcher 1yr ago
from Pennsylvania State University in Los Angeles, CA, USA

I don't think there are market terms tbh. At the end of the day, its a compromise between valuation and terms. Find out what the most important term is for the seller (usually up front cash) and structure around that is my 2 cents