Seller wanting to be part of the upside

searcher profile

November 08, 2021

by a searcher from Duke University - The Fuqua School of Business in Miami, FL, USA

Does anyone had experience with buying a company but leaving a minority equity stake to the seller? The owner wants to keep up to 49% of the equity and continue being part of the management for 2-3 years.

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commentor profile
Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
Two actual transactions. One mine, and the other I was involved indirectly.
1) $8 M Equity Value. Buyer's entity ABC bought 51% of XYZ. Buyers; SPV had multiple investors with equity and had debt. XYZ cap structure did not change.
2) A $20 M Enterprise Value transaction. Buyer cap structure $10 M equity and $10 M Debt. Seller received $20 M on one hand and then re-invested <$5 M with the other hand to acquire 49% of Buyer's equity.. Thus. seller had $15 M cash and 49% if Buyer's entity. It is possible for a Seller, in certain circumstances, to invest the $5 M w/o paying tax.
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Reply by an intermediary
from City University of New York (CUNY) System in Wesley Chapel, FL, USA
Over 80%+ of the businesses my company represents want to do a recap as they believe they can both offer more after close, want to take some money off the table, and see the second bite as a key factor based upon the financial resources / plans of the buyer. Further, the fact that owner will stay and roll some equity is a large positive sign on the diligence of the business, not only to the buyer, but to Sr. and Mezz lenders too. It is a way for seller to optimize their value for the business. Our average roll is between 10%-30%.
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