minority equity with option to purchase

by a searcher

1 year ago

Rather than an outright sale of the company under a conventional SBA structure, an owner asked me if I'd be interested in taking a significant minority stake today, working through a 1-2 year transition where we share the cash flows, and then I would have the option to purchase his share at that point. Wondering if anyone has experience with this type of structure as an independent searcher? Seems like something that a PE fund would be open to. Also, any sense of how I would finance such a transaction and what types of rights I would want in place? The purchase price is around $5M on $1.5M EBITDA, so I would need to come up with up to $2.5M (including my equity contribution).

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professional from Dartmouth College

A PE fund would do make a minority equity investment, but they would receive a preference on their shares and a guaranteed return. They would also have a veto right over any meaningful company decision. Not sure there is much value in an option unless it was given for free, though you could also agree on an appraisal process for the remaining shares. You would want a right of first offer on the remainder of the shares for sure so you could match any future third party offers. I think you want to make sure that the minority investment itself would justify the deal, doing it solely to learn for a future purchase may be tricky.

1 year ago | like reply | 2 likes

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