I'm looking at a deal where I suggested an earnout but the seller countered by offering to keep a minority percentage of the business (~14%). Still at the-pre LOI stage so nothing binding, but trying to figure out if there is a way I can make it work. Some terms I'm considering to protect myself:
1. Defining a clear buyout mechanism (mandatory buyout clause after 5 years, drag-along rights if I want to sell, right of first refusal if he wants to sell)
2. Ensuring he has no operational control (making his shares non-voting equity)
3. Ensuring salary / profit distribution control (I get to set my salary, no forced dividends)
Of course I'll be getting a lawyer involved if things move forward. Anyone been in this situation and have suggestions / advice?
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by a searcher
from INSEAD
in San Francisco, CA, USA
in San Francisco, CA, USA
1yr ago
The seller wants to keep minority stake - can I make it work?
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by a searcher
1yr ago
from The University of Chicago in Los Angeles, CA, USA
from The University of Chicago in Los Angeles, CA, USA
As you and others have mentioned, it will add financial, legal and perhaps operational complexity. I would avoid unless there are compelling strategic reasons.
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by a searcher
1yr ago
from University of Pennsylvania in Pittsburgh, PA, USA
from University of Pennsylvania in Pittsburgh, PA, USA
My structure for all the deals I proposed was W% cash, X% bank loan, Y% Seller Note, and Z% seller rollover equity. There are SBA hurdles here, but they are doable. I wanted buy-in of sellers over long-term (equity) and some recourse if the business didn't perform the way I expected it to (Seller Note). Based on the way you phrased your question, I think you are thinking about this the right way...especially if you bring in a good lawyer to help. Feel free to reach out if I can be helpful at all.
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