Rollover Equity Question (Need help!!)

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March 13, 2023

by a searcher in Cleveland, OH, USA

Looking to execute a deal with a 60/40 split, where we finance 60% of the purchase price, and have the seller retain 40% with an agreement to buy them out in, say, 5 years. Two questions about this structure:

1. The real estate is included in this deal. Should we be acquiring 60% of the real estate, or all of it + 60% of the business?
2. How does the future buyout work in an equity rollover? If we're acquiring 100% of the business for 5x EBITDA, and we're buying 60% today (i.e. 3x EBITDA), does that mean that at the end of the cycle we'll be buying the remaining 40% for 2x EBITDA (of the improved business)? Or am I missing something?

Help would be appreciated. Thank you!

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Reply by a searcher
from London School of Economics and Political Science, University of London in Los Angeles, CA, USA
Depending on what the seller note looks like, you might consider buying 100% of the real estate under a different LLC. You should be able to finance that at 70%+ LTV with your commercial lender.

You don't need to buy the remaining 40% back ever, unless you give the seller a put option. You can give yourself an option to buy back his shares at FMV or at a predetermined price in x years (e.g., "buyer retains the right to buy back seller equity at 2x the purchase price anytime after the 5th anniversary of closing".. or something like that. Can really be anything you want it to be)
commentor profile
Reply by a searcher
from Northwestern University in New York, NY, USA
You'll buy 40% at the end of five years. You can buy the remaining 40% based on a market based enterprise value at the time, fixed multiple of the TTM EBITDA at the time (if thats how you're valuing today), or a fixed price. Range of options...
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