Search fund deal with a founder who whishes to remain shareholder

August 11, 2022

by a searcher from Institut d'Etudes Politiques de Paris (Sciences Po) in Dakar, Sénégal

Hi all,

I am currently negotiating an acquisition. The company owner has expressed the desire to retain 30% of the equity post acquisition. Therfore instead of acquiring 100% (which was the goal initially, the transaction is about acquiring 70% of the company.

His motives are that he believes in the company and the project and he would like his children to inherit some shares of the company (his father founded the company). I should also specify that one of his child is a junior employee in the company.

What are the pro and cons of such a configuration where the owner doesn't want a full exit?

If i was to agree, should the owner become a shareholder in the search fund vehicle (through some swap actions or other mechanisms?) or is it better he stays a shareholder of the company?

Should he be at governing bodies (board) as his level of share would entitle him ?

Are there any subjects to keep in mind in this situation?

I am asking also because i am doing a self funded search and i don't have yet an investor base vested in the search fund (they could have helped) as in a traditionnal search (probably one of the negative side of self funded search).

Thanks in advance for your help,

Bests,

Sidy

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Also keep in mind this is going to impact the type of financing you can use. If you were thinking about using the SBA 7A loan product to minimize your down payment and get a 10 year fully amortizing term loan, you will not be able to do that if the seller roles equity. With the SBA loan product you have to take the seller 100% out of the transaction. You would then need to use conventional financing if you plan to finance any part of the purchase, and you are going to be looking at needing to have more equity into the transaction potentially as well as a shorter loan term. However, if the seller is rolling 30%, that will accomplish much of the equity requirement. The other issue you might run into is that conventional lender's typically require anyone with a 20% or 25% and greater ownership interest to guarantee the loan, so it is possible a lender would want the seller to guarantee the acquisition debt. You will need to be sure they are comfortable in doing so if you go that route or find a lender that will not require it.

If you are interested in discussing various financing options I would be more than happy to do so at any time. You can reach me at redacted

Reply by a searcher
from California State University, San Bernadino in Tustin, CA, USA

I'm told the banks like seeing an owner who has skin in the game toward long-term growth of the company - just look from their point of view: the guy who knows the most about what's wrong with the company wants to continue to grow the company instead of cashing everything out now,
Like others have recommended, I'd see if I could get him to agree to an option in the agreement on his shares 3 or so years out (option to pay him 6x in 3 yrs if you expect the biz to grow to 9x in 5 yrs) so he gets uplift but if you want to go public or sell to a strategic investor then you can just give him money if he decides to get cold feet about an exit.
And I'd make sure that the company is structured as a subsidiary to a holding company. If he wants in on the holding company (or you need to give him a piece to keep the deal afloat as things get complicated) then that'd be a separate negotiation and keep him well under 20% of the holding company so like Ruslan Pryadun said you don't have to involve him in all your other acquisitions assuming there are some.

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