The seller wants to keep minority stake - can I make it work?
February 21, 2025
by a searcher from INSEAD in San Francisco, CA, USA
I'm looking at a deal where I suggested an earnout but the seller countered by offering to keep a minority percentage of the business (~14%). Still at the-pre LOI stage so nothing binding, but trying to figure out if there is a way I can make it work. Some terms I'm considering to protect myself:
1. Defining a clear buyout mechanism (mandatory buyout clause after 5 years, drag-along rights if I want to sell, right of first refusal if he wants to sell)
2. Ensuring he has no operational control (making his shares non-voting equity)
3. Ensuring salary / profit distribution control (I get to set my salary, no forced dividends)
Of course I'll be getting a lawyer involved if things move forward. Anyone been in this situation and have suggestions / advice?
in Stuart, FL, USA
First: Do you have to? From a sellers perspective, is the seller demanding this and if yes why. The answers to those questions may make or break the deal for you. From a lending perspective, is keeping the seller on as an owner being mandated by the lender.
Yes, this is a new way (work around) for licensing issues etc. under the newer SBA rules, but that doesn't mean the lender will absolutely mandate this structure. If there is no licensing issue, you should be able to find a lender that will still approve this when you can probably accomplish the same thing with a 1099 employment agreement of some sort for a specified time period with the seller.
Second: If you don't have to, do you really want to? There are many things to consider.
A-Partnerships are hard enough when you know the person let alone someone you just met.
B-Who will the employees be loyal to?
C-How will you feel when the seller is telling you how to spend your working capital/capital investment because of XYZ and you don't agree with it?
D-Human factor-A lot of people are very unhealthy minded. What if this person starts poisoning the well behind you back?
E-Remember, any adjustment to the running of the business is almost a condemnation of the sellers previous skills. How will that be received?
None of this could happen, or all of this could happen. I am just saying, you may want to be in the position where all of the mistakes and all of the successes are yours. And how you run the business falls on your shoulders. I've owned over 20 businesses, dealing with humans is the hardest part of any business. Just food for thought.
from University of Notre Dame in New York, NY, USA
One of the Transaction Closing Documents will be an Amended and Restated Operating Agreement (if an LLC)/ Shareholder's Agreement (if a corporation).
I'll go through your points below:
Mandatory Buy-Out - This would be a 5 year Call Right in your favor - you'd agree upon a FMV calculation upfront and you'll be able to repurchase sellers shares at that pre-determined valuation in 5 years, at your election.
Drag Right and ROFO - Both very typical provisions in any operating or shareholders' agreement. On ROFO, Seller would be allowed certain "permitted transfers" for estate/tax planning, etc., but any other transfer of his units would be subject to a ROFO in favor of you.
Operational control/distributions - Assuming the go-forward entity is an LLC, the easiest way to do this is to (1) make you the Manager of the LLC, (2) require minority shareholder consent for certain "Extraordinary Actions" or "Major Decisions" so they have some minority protections, (3) give Manager the remainder of discretion to operate the Company; and (4) have distributions be at the sole determination of the Manager.
There's some nuance around all of this, but that's the 50,000 foot view. Happy to discuss anytime or provide additional details. Shoot me an email redacted or DM me.