Seller Equity Rollover Distribution Terms

by a searcher

2 weeks ago

Hi All,

Working on a partial buyout deal where the seller will retain 15% equity in the business. He'd like to agree on share distribution terms  pre-LOI.

For those with experience with rollover equity, how have you handled distributions? Do sellers typically have rights to 15% of FCF after debt service and Capex (i.e required annual distributions), only have rights to 15% of distributions when the buyer chooses to take distributions themselves, or some other qualifier (i.e. only gets distributions if revenue or profit hits X threshold)?

Thank you!

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professional from University at Albany, State University of New York - School of Business

Hi Ian - I've been involved in many transactions like this. Usually, simple is best. For example, you could agree to distribute XX% of the FCF and then it would be pro-rate based on percentage. Similar to how some public companies determine their dividend distribution strategy.

1 week ago | like reply | 0 likes

searcher from Concordia University

If you set a threshold in which they get cash no matter what that is outside any remaining profits of the business, you may run into forcing distributions that impact your growth. I would try to stay away from this unless the seller can make a compelling reason why this is so important to them.

2 weeks ago | like reply | 0 likes

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