Seller comp when they are retaining minority ownership

searcher profile

December 11, 2023

by a searcher from Colorado State University in Centennial, CO, USA

I am potentially structuring deal where the seller will retain a minority stake in the company. This is being done to bridge the gap between my valuation and theirs, keep their knowledge and experience involved etc. The seller won't have a comp plan but, instead, will get a portion of the distributions. Since we are creating some phantom equity for her (we will need to grow into the valuation) I am looking for creative ways to structure this as opposed to a pari passu agreement where she gets the same % of the distribution as her ownership %. Would love to hear your ideas.

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commentor profile
Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
One thing you will want to do is consult with your accountant about the structure you plan to use. Some structures, like I believe S-Corps, require distributions to match up based on percentage of ownership. So I do not think you could restrict distributions for one owner.

Secondly, if you are using financing, specifically SBA financing, if they have guaranteed compensation in the transaction, the lender will remove that from adjusted EBITDA. So if you are trying to be sure you hit a certain DSCR, be sure to count any salary or required payments against free cash flow. Good luck.
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Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
1) Structuring a transaction where seller retains equity stake is significantly more complicated than most buyers realize. It is almost impossible to do.
2) LLC structure allows uneven distribution; it is not toed to ownership.

Happy to talk.
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