Thoughts on deal where seller keeps minority equity stake

March 04, 2020

by a searcher from Massachusetts Institute of Technology - MIT Sloan School of Management in Colorado Springs, CO, USA

I'm considering a deal where the seller is interested in keeping 20-30% equity stake in the company for a several years. Some questions and thoughts on this:

1. How do you structure a deal like this? Purchase X% of the stock/interest in the company, or sell the company completely with seller participating on both sides of the deal? What are the implications of each?

2. Deal success hinges on establishing a great working relationship with new business partner.

3. Pro: this shows confidence in seller's expectations of future growth.

4. Con: can't use SBA loan with such a deal structure.

5. Do you negotiate ahead of time the eventual sale of the remaining stock/interest?

Reply by a searcher
from University of Pennsylvania in Miami, FL, USA

in basic terms, he would roll equity into NEWCO. for example:

PP = $10M
Debt = $6M
Equity = $4M

Seller would invest $1M of the $4M needed and own 25% and walk with $9M. you can negotiate a call/put right after X years for their portion.

Depending on corp structure, you could also buy only 75% of the existing entity and seller would retain 25%. This decision comes down to structure, liability and taxes.

Investors and lenders generally like it because it shows confidence in the business. Buyers like it because they will only need to find 75% of the original equity amount needed to close the deal.

Reply by a searcher
from Massachusetts Institute of Technology in Colorado Springs, CO, USA

Thanks, that's helpful. It seems like there would be different risk allocations in the two structures. In the first case, NEWCO takes a loan and depending on if there is a personal guarantee, both owners can be on the hook.

In the second case, I would think that I alone would take a loan to purchase the stock and I would carry the risk of that loan.

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