Merger to create a larger Holdco

September 28, 2023

by an investor from Texas Tech University in Ann Arbor, MI, USA

Has anyone considered or done a deal, where they merged with another business to create a larger Holdco? Not a business purchase or sale, but a merger, where both original owners continue. The benefit would be scale and a more attractive entry point for potential PE investors.. I run a dumpster rental business (franchise), and recently bought out some smaller operators to be the only brand in the region. Have some close business associates in allied fields (restoration/porta/temporary fencing rentals) and we have been toying around with this merged Holdco idea. Any insights would be helpful.

Reply by an investor
from Harvard University in Santa Fe, NM, USA

You can accomplish it through an equity contribution agreement. The shareholders/members of each company contribute their equity up into a new TopCo. Presumably each major shareholder joins the board of TopCo. You would need to agree on a value for each company in order to determine how much of TopCo each party gets in exchange for their contribution.

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

Definitely talk to a tax lawyer to see if it's possible to do a tax-free exchange under Section 368 and structure accordingly. There should be a few ways to structure the merger itself without creating multiple layers of Holdcos. Structure, valuation, and governance are the key points to iron out.

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