Seller Equity Rollover Distribution Terms

searcher profile

August 30, 2024

by a searcher in Boston, MA, USA

Hi All,

Working on a partial buyout deal where the seller will retain 15% equity in the business. He'd like to agree on share distribution terms pre-LOI.

For those with experience with rollover equity, how have you handled distributions? Do sellers typically have rights to 15% of FCF after debt service and Capex (i.e required annual distributions), only have rights to 15% of distributions when the buyer chooses to take distributions themselves, or some other qualifier (i.e. only gets distributions if revenue or profit hits X threshold)?

Thank you!

0
6
98
Replies
6
commentor profile
Reply by a searcher
from The University of North Carolina at Chapel Hill in Atlanta, GA, USA
Anything can be negotiated, but the distribution of their pro rata share of FCF is not typical and may have negative tax consequences. It is more common that they get their pro rata share of dividends paid at the discretion of the majority owner. As the majority owner, you want the ability to reinvest in growth, paydown debt, etc. If you have experienced M&A counsel, they should be able to help. If you haven't raised capital yet, I would not agree to an "off market" structure like this at this point.
commentor profile
Reply by a searcher
from Concordia University in Milwaukee, WI, USA
If you set a threshold in which they get cash no matter what that is outside any remaining profits of the business, you may run into forcing distributions that impact your growth. I would try to stay away from this unless the seller can make a compelling reason why this is so important to them.
commentor profile
+4 more replies.
Join the discussion