What to look out for and how to protect yourself when transferring equity via an acquisition of your company. As a business owner, why should you care about equity in your company?
Equity represents the value that would be returned to a company’s shareholders if all the assets were liquidated and all of the company’s debts were paid off. For a business owner looking to create a succession plan when you exit your company, many parts of the selling process can be scary. It should scare you. Many private equity (PE’S) buyers use very sophisticated financial instruments to reduce the value of your equity.
All equity is not created equal. There are many classes of equity: Class A, Class B, Class C, Preferred equity, Shadow equity, Reserve equity and the list goes on and on. Suffice it to say that the definitions of different types of equity change with each purchase and sale agreement. Paramount to the successful close of a transaction is understanding what type of equity a seller will retain.
As we at ASA continue to represent clients, the one truth is that the complexity of structure in equity transactions continues to grow. Gone are the days of leveraged buyouts (LBO’S) and one-hundred percent stock sales. More common these days is PE groups asking sellers to roll equity, buying somewhere in the 70% range, and asking sellers to retain somewhere in the 30% range.
As PE’s continue to consolidate fragmented markets, they have learned that earnouts and seller notes rarely align buyers and sellers. Aligning buyers and sellers though pa-ri pas-su equity seems to be a trend that is here to stay. In each of the last five transactions ASA has closed, our clients have rolled between 20 and 30 percent equity. We have encouraged these structures. Why? We know that if we have done our job and found the right partner, rolled equity will be worth substantially more than it is when the transaction closed.
The question becomes: How do you protect yourself through the sale of your company to know that your rolled equity will be treated the same as the buyers on a long-term basis? The truth is it takes experience; it takes seeing hundreds of transactions; it takes a trusted advisor.
We have a team of experienced Mergers & Acquisition professionals with a combined hundred years of transaction experience. We will take the time to educate you on the opportunities and pitfalls of the process.
We would welcome the opportunity to share our knowledge with you.