Raising equity in a gradual share buy-back deal

March 16, 2022

by a searcher from EDHEC Business School, Lille and Nice in London, UK

Hi there,

We are working on a deal where we would gradually buy-back the shares of the seller over a 3 year period. This is a UK deal.
We will hold a 40% of the shares of the business from day 1, with veto rights at board level (for both buyers and seller). If for some reason we fall apart, then there is mechanism in place to buy-back our (buyer) shares.
This structure has been designed to ensure the seller (who is absolutely critical for the business today) stays involved in the business and get some upside looking forward.
A significant part of the equity can come from the buyer.
I am very comfortable with the deal from a financial standpoint. But:

Sanity check - am I crazy proposing this kind of structure in the first place? Would you do it as a searcher?
Second question - would this structure deter you from wanting to know more about the deal?

Thanks (as always) for you wisdom and insights!
Best,
Tom

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

I once had such structure in a transaction. Buyer was willing to pay out-of-pocket cash for equity shares purchased from seller. Future equity purchase was as you have described. Buyer's share of distributed profit will go to buy additional equity every year. We ran into problems 1) reps and warranty by seller, 2) future signatures to third parties w.r.t normal operations (insurance, tax returns, etc.), 3) investment decisions, 4) hiring. firing and reporting structure, etc. The financial models look good to both sides but could not agree on legal language even in the LOI. This was a $15 million transaction. Financials were not audited.
My response will be different if you are infusing cash into the company and company issues new shares for 40% ownership.

Reply by a searcher
from Oregon State University in San Francisco, CA, USA

Hi Tom,this is an excellent structure as long as you like working with the owner and understand his style of leadership.Have him do a basic personality test, or get some opinions from employees. Ryan Begelman did this type of structure on his first deal, he literally just kept showing up to the company and started working with the owners until trust was built up. Then he helped the owners on their expansion plans, eventually that led to a great partnership.https://www.ryanbegelman.com/.Lastly, No this would not deter me from looking at the deal for investing purposes.

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