Can a seller retain equity in an asset sale?

February 23, 2024

by a searcher from Trinity College Connecticut in Boston, MA, USA

My understanding is that in order for a seller to retain equity in a deal, it needs to be structured as a stock purchase per SBA guidelines. If the deal is an asset purchase, does a creative workaround exist where the seller somehow retains equity?

1 Like

8 Replies

239 Views

Replies

Reply by an intermediary
from Clemson University in Raleigh, NC, USA

The answer to your question is yes and it doesn't have to be complicated at all. The structure I devised is phantom stock. Phantom stock provides all the benefits of equity ownership without the negatives such as cash calls and litigation liability to the seller. In a recent transaction the buyer granted the buyer 10% phantom stock whereby they would receive 10% of the profits of the company calculated off 1.5% of gross sales. This was imputed by looking at historical net adjusted EBITDA margin of 15%. As importantly there was a 5 year buyout clause such that at buyers sole discretion seller would be required to repurchase the phantom stock at the same multiple as the initial acquisition - again based on gross sales ratio as adjusted EBITDA can be impacted by many things (capX in this instance) and manipulated by the buyer. Without a buyout clause the sellers position is essentially illiquid until a subsequent transaction which as we all know the seller does not control.

Reply by a professional
from University of Miami in New York, NY, USA

A subordinated seller note, structured properly, can be considered equity. The seller note should be unsecured, and subject to the subordination preferences of the acquisition financing lender. The seller note has to appear as a deeply subordinated, permanent part of the transaction structure relative to the acquisition financing lender. This type of seller note qualifies as equity in the eyes of the acquisition financing lender, and they will usually give the buyer equity credit for this amount of seller note. The Buyer will still be required to inject real cash equity - the note alone will be insufficient.

That said, you can structure the seller finance with a convertible feature. The exercise of this conversation right serves to satisfy the degt, and provide the seller equity.

let me know if you have any questions: redacted and###-###-#### .

+6 more replies.

Join the discussion