I have been looking into a high-tech manufacturing business in Canada.
I have negotiated a strategic partnership with the current owners, given my 20+ years of experience in the field. A possible structure is a 1/3 ownership.
The company has over 50 years of history serving its customers, and they acquired the company just a few years ago on a 100% VTB, but have struggled to run the business profitably. The current owners have technical knowledge of running production but lack business acumen and hence the revenue has declined by 15-20% since they have acquired the company.
I would appreciate some direction/input on what would be a fair deal term to offer in such scenarios where the existing owners have not put any money down themselves and have 100% VTB note.
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by a searcher
from University of Windsor
in Vancouver, BC, Canada
in Vancouver, BC, Canada
2yrs ago
Looking to get insights on deal tearms
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by a searcher
2yrs ago
from University of Pennsylvania in Jersey City, NJ, USA
from University of Pennsylvania in Jersey City, NJ, USA
Great to hear about unique means of getting into the cap structure of individual deals. Sounds like the business is struggling to run profitably - potentially implying difficulty in making their payments (and taking a further decrease in cashflow to bring you on).
A threshold question is whether you are contributing cash at all? If the answer is no, you could consider offering to have your equity vest via an earn out tiered to cash flow generation. Split the 1/3 of equity (or whatever you request) into fifths, and offer to vest into the equity based on annual cashflow growth. e.g., first 20% for hitting X in annual FCF, next 20% for hitting X+Y in annual FCF, etc.
You would need to clearly define FCF of course. An appropriate measure based on manufacturing could be unlevered free cash flow which takes EBITDA, capex and NWC into account.
A threshold question is whether you are contributing cash at all? If the answer is no, you could consider offering to have your equity vest via an earn out tiered to cash flow generation. Split the 1/3 of equity (or whatever you request) into fifths, and offer to vest into the equity based on annual cashflow growth. e.g., first 20% for hitting X in annual FCF, next 20% for hitting X+Y in annual FCF, etc.
You would need to clearly define FCF of course. An appropriate measure based on manufacturing could be unlevered free cash flow which takes EBITDA, capex and NWC into account.
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by a searcher
2yrs ago
from Harvard University in Montreal, QC, Canada
from Harvard University in Montreal, QC, Canada
I wouldn't think of the offer you have to make in terms of fairness. Whether the current owner paid for the business cash, got 100% VTB, or even got it for free, your offer should look into what you bring to the table - nothing else. Now, and that is most likely the case, if there's an outstanding debt on the previous transaction, you need to have conversation with the previous owner to understand that deal structure first. Good luck
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