Rolling equity

July 15, 2024

by a searcher in Northampton, UK

Have a potential deal where the Seller is happy to hold onto a 25% stake (he currently owns the hole thing through a Holdco) and has suggested that I just buy 75% of the trading entity rather than him rolling his equity into a newco.

Obviously this is quite lucrative for me so I am not particularly motivated to enlighten him but surely he will be advised against this later in the process so might as well inform him now?

Are deals done where the Seller retains the original equity rather than rolling into a Holdco?

Thanks

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Reply by a searcher
from Pennsylvania State University in Brookhaven, NY 11719, USA

I'm generally a fan of rolling into a new entity under an asset purchase. Stock purchases provide significant tax benefits to the seller, however diligence costs increase and additional risk is taken any time your purchase stack. You can always look at Rep and Warranty insurance, but for smaller deals the costs for it doesn't add up.

Ultimately you need to weigh the risk / reward of stock purchase on a deal to deal basis. It's faster, more advantageous to the seller, but you carry more risk and create more up front work on diligence. Deal size and sophistication of the seller should also guide your decision.

Reply by a professional
from University of Michigan in Detroit, MI, USA

To answer your question: Are deals done where the Seller retains the original equity rather than rolling into a Holdco? Yes, but usually only where the deal is SBA funded, where your options are limited (per accepted interpretation of current SBA SOPs). As for whether your seller will later be advised to pursue a different structure, that's unclear from what you've told us. Selling equity in the operating company may be tax advantageous for the seller. Happy to chat in greater depth. Feel free to DM me here or reach out directly at redacted

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