Partial buyout, minority stake valuation and funding structure

searcher profile

September 11, 2023

by a searcher from Harvard University in Boston, MA, USA

Hi everyone,

In my business acquisition search I came across an opportunity where an owner is looking to maintain majority control but sees the value of bringing in an additional partner.

I was wondering if anyone had any experience with buying a minority stake in an existing business - we loosely discussed a rough 3x valuation (I'm estimating the business would sell between 3-4x normally) but I'm also going to have to work on the business, although not full time (current EBITDA is roughly 600k, was planning on buying 30-49%).

I was wondering if anyone had any experience with a minority partial buyout w/o a change of control, and how that impacts the valuation - I'd also want to fund the partial buyout with debt- obviously SBA is off the table so I'm wondering if anyone has experience with financing options as well.

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commentor profile
Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
With the new SBA partial buy-out rules, you could buy a minority interest in an operating company and get financing from the SBA to do so. However, if the seller continues to own 20% or more of the company they would be required to guarantee the loan as well and could be required to pledge personal assets to help back the loan if the deal is not fully secured by business assets. The SBA lender would also have a lien on the business assets and the business would technically be responsible for repaying the loan. So you would need a seller that sees this as an opportunity to bring someone in and leverage the business some and allow him to take some equity off the table, but also knowing full well he will need to step in and take the company back and payoff the debt if it does not work out. I have yet to see any deals get done where the seller retains more than 20%. This is still new territory in the SBA world. If you have questions you can reach me here or directly at redacted
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Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
1. As proposed, bank will not lend you for minority interest. Even if one lender says Yes, company cannot service the debt. You will have to service it from dividends,
2. Option: Buy the whole company for $D + $E. Seller keeps X%, yours is Y%(=100-X). Seller comes with X% of $E. This way debt will go on the company books and can be serviced. You will have to work out PG. Essentially, seller will get lot more $ then as proposed by you. This should help you convince him.
3. Negotiate rights for you to buy Seller's X% in increments or all at one time. Better yet, negotiate that the Company buys portion of X shares every year or as you wish. Some tax benefits of doing this way. Eventually company only has Y shares, all owned by you.
4. Negotiate no minority discount and no majority premium. Also, how to value each year.
5. Make sure valuation and financials reflect your salary.

Have been involved with such structures before.
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