Structuring rollover equity with sellers – What's worked?
May 22, 2024
by a searcher from New York University - Leonard N. Stern School of Business in Grand Rapids, MI, USA
Looking at potentially providing rollover equity in an SBA loan where the seller will retain 10-15% of the target. How should I be thinking of this? It feels like there are a lot of moving pieces that might not be amenable but need to be solved in a new operating agreement.
Thinking of things I might include in an LOI to set expectations up front:
1. Voting/decision rights.
2. What operating expenses do they share in?
Presumably, all – but the SBA loan payment will be a sticky issue given taxes
3. Are they silent or will they work set hours?
4. Will they receive compensation? Who approves the work they can do and be paid for above a set threshold? How will reimbursements be handled? Will benefits be continued? Will officers be insured?
5. First rights of a sale? Valuation at sale?
6. Division of responsibility?
What else should be noted and should this only go in the PA or in the LOI? Feels like a dealbreaker I can get ahead of with the LOI but maybe not as detailed.
DM or comment your thoughts.
from University of Michigan in Detroit, MI, USA
At 10-15% equity, there is no reason to grant seller a voice in the major decisions of the company and no reason to discuss this in the LOI. Instead, make it clear that you will offer standard minority protections, including preemptive rights and a tag-along (you'll also want a drag along incase you want to sell before the call option goes live).
I would also resist any attempt by seller to mandate certain distributions. Assuming you are not interested in different classes of equity, just agree that you, as the manager / managing member will make distributions in your discretion and that all members will receive distributions pro rata to their holdings.
As ^redacted points out above, separate out those deal points that impact seller as an equity holder and those that implicate his role as an employee / consultant of the company post-closing. The latter are better addressed separately. There is no need to have seller involved just because he is an equity holder. If you only need his involvement in the business during the first three months or so, negotiate accordingly.
There are so many ways to do this. It depends on the circumstances. Let me know if you want to discuss in greater depth. Feel free to reach out here or at redacted Good luck!
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
When you do a partial business acquisition you need to be aware that you cannot use a seller note on standby as part of your equity in the transaction. As a general rule you need to bring 10% equity into the transaction. However, there are some ways to get away with less equity based on the balance sheet. If you want to discuss SBA 7A financing options on a transaction like this you can reach me here or directly at redacted Good luck with this opportunity.