How does an equity rollover work in an asset purchase?

May 12, 2023

by a searcher in Florida, USA

Forgive my basic question but I've been thinking about this for a while and could use some advice.

Under an asset purchase, how does a transaction work if the sellers are selling 51% and rollover the remaining portion of "equity"? I ask because in an asset purchase the buyer is acquiring the assets of the company not the equity...

Is it assumed that the sellers retain the remaining portion of equity (or interest in the case of an LLC) in the assets?

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Reply by an intermediary
from The University of Chicago in Radnor, PA 19087, USA

I assume that you are acquiring 100% of the assets and your question is just how to pay them for the 49% of value they want to retain. They would receive equity in your company for the remaining 49% in lieu of cash.There are a number of different ways to structure this type of transaction. If your company, i.e. the company acquiring the assets, has no existing operations, i.e. is being created for the purpose of this transaction, in exchange for the assets, the company pays the seller cash for the 51% and equity in the company for the remaining 49%. If your company has existing operations, you will need to agree on a valuation for your company's equity (enterprise value minus the value of debt) and then you will provide the amount of equity in your company equal to the dollar value of the 49% of the transaction. You may have to hire a valuation firm to determine the valuation of your company.

Reply by a professional
from Dartmouth College in Los Angeles, CA, USA

Yes the seller acquires an equity interest in your new acquisition sub. It's crucial to have the right tax structuring advice (which isn't me, so this isn't tax advice, but I'm a deal lawyer and this is always the key issue), since the equity rollover in certain cases can be done as a tax free rollover so the seller isn't taxed on a sale of 100% of the assets. Often the seller doesn't have the right advisors, so you as the buyer have to alert them of this potential and recommend they hire someone with this experience so that it's less of a tax hit on the seller, which makes your bid more attractive.

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