Good Succession plan: Seller has planned for retirement well and is therefore willing to sellBusiness has been groomed for sale, with exiting owner passive as possible in running the businessBusiness has been cleansed and positioned for a sale Strategic Fit for Natural motivated buyers: With good planning, the departing owner has identified potential buyers These may be internal management, a friendly strategic outside buyer, a market process to attract a strategic or financial buyer The better the business succession planning the greater the potential for after tax return to the vendorStrong rapport between buyer and seller Importance of establishing a relationship between buyer and seller Legacy of stewarding the business and protecting employees Trust in the buyers ability to succeed and repay any vendor finance
Illustrates the classes of finance available in succession buyouts.
Buyer’s equity amount and structure often depends on who the buyer is:whether it’s a strategic, PE deal or a MBO/entrepreneur dealPE deals usually include leverage but most have equity in between 25% and 50% of the PP. Depends on PE firm’s risk appetite.Strategic Buyers may wish to leverage 100% on the target on the back of the company making the acquisitionIndividual buyers (MBO/MBI) may have slimmer equity: 10% to 25% usually because of lack of resources.In larger deals, management teams may have to seek private equity to close a deal:PE investors typically look at deals over $10MM, usually $20 MM and upSome smaller family PE offices and pledge funds can provide additional patient capital for mid sized deals of $5 to $15MMManagement team likely to retain a minority position and perhaps an earn up provisionPersonal Guarantees:Usually required for smaller MBO and entrepreneur deals by senior lenders and sub lenders.May be limited or conditional for subordinate lenders
Vendor financing is often seen in succession financing; seen as a way to align interests between buyer and seller to ensure a smooth transition Can offers a means to offset against misrepresentations and warrantiesAdds strength to the equity box from the senior lenders perspectiveAdds some repayment flexibility for the buyer due to the postponement featureHowever for the vendor, VTBs are:Effectively Unsecured: even with a GSA, the deep subordination and postponement required by the lenders will relegate the security as effectively worthless in a wind down scenario, and payments are postponed in the event of lender defaultThe vendor loses control post sale so cannot step back in automatically to correct the businessIts an illiquid investment, not easy to get out and may not fit a well structured retirement portfolioThe typical interest rates on VTBs do not tend to be commensurate with this risk: usually seen as part of the deal and are at 0% to 12%, usually less than 8%