LOI verbiage for equity roll-over?

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November 03, 2020

by a searcher in Los Angeles, CA, USA

Wondering if anyone could share an example of an LOI or verbiage in an LOI where the seller rolls over the equity###-###-#### %) in an asset sale. How is this accomplished structurally and contractually?

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Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
A modified version from an LOI .....Existing shareholders agree to have meaningful equity ownership in Newco going forward through a rollover investment of $x (it being understood that the Rollover Investment will be made in Newco, the holding company being formed by the Buyer to acquire seller's assets and various add-on portfolio companies ). The terms and exact % of of the NewCo equity that the shareholders will receive from the Rollover Investment will be established once the final capital structure is determined. The Rollover Investment will be pari passu and on the same terms and conditions as the equity invested by the other investors in Newco. In addition, Newco will endeavor to structure the Transaction and the Rollover Investment in a tax-efficient manner for Sellers.

I do not recommend the language that the rollover investments will be a % of price. That is risky b/c the actual "price" ALWAYS keeps changing and "price" is different from each party's perspective. Also, a fixed $ of rollover investment is psychologically is better for a seller. Further, do not promise tax-free rollover for a small transaction. One more thing: If P =1000 and rollover = 100 i.e. 10% of price, then shareholder will get a LARGER % of NewCo equity depending on leverage.
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Reply by an admin
from Stanford University in Honolulu, HI, USA
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