Looking at potentially providing rollover equity in an SBA loan where the seller will retain 10-15% of the target. How should I be thinking of this? It feels like there are a lot of moving pieces that might not be amenable but need to be solved in a new operating agreement.
Thinking of things I might include in an LOI to set expectations up front:
1. Voting/decision rights.
2. What operating expenses do they share in?
Presumably, all – but the SBA loan payment will be a sticky issue given taxes
3. Are they silent or will they work set hours?
4. Will they receive compensation? Who approves the work they can do and be paid for above a set threshold? How will reimbursements be handled? Will benefits be continued? Will officers be insured?
5. First rights of a sale? Valuation at sale?
6. Division of responsibility?
What else should be noted and should this only go in the PA or in the LOI? Feels like a dealbreaker I can get ahead of with the LOI but maybe not as detailed.
DM or comment your thoughts.
Structuring rollover equity with sellers – What's worked?
by a searcher from New York University - Leonard N. Stern School of Business
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If I'm representing the seller, I would want a put option to have the investor/acquirer taken out on a negotiated EBITDA multiple reflective of growth in the business that is time specific---the second bite of the apple has to be within 3-5 years in my estimation.
2. Rollover equity under SBA is different than rollover in larger deals that I have been involved. With SBA, the rollover equity is a stock purchase of current entity. As ^Searchfunder member has said, this is a tool for licensing, skill retention etc. I think doing it for capital reasons needs deep thinking.
3. Without going into detail, it is possible that, with SBA insisting on seller retaining x% of EXISTING ENTITY, your opening balance sheet may have a large negative net worth.