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CAPITAL FOR CLOSELY-HELD & RELATE-PARTY TRANSACTION
CRITICAL PATH FOR S2S TRANSACTIONS
OW N E R S H I PC AT E G O RY U S E O F P RO C E E D S F I N A N C I A L S
Overview
▪ An S2S acquires server-based intangible
assets that have little to no value on the
balance sheet.
▪ The assets are acquired for a higher value
which results a in capital gain for the seller.
▪ Because of the gain on sale, an S2S is a fit
for transactions where the use of proceeds
would have had capital gain in any case.
▪ Liquidity Event
▪ Shareholder Buyout
▪ Management Buyout
▪ Family Ownership Transition
▪ Strategic M&A
▪ Independent Sponsor Acquisition
Specifics
Exceptions
S Y S T E M S / DATA
Critical Path
Questions
▪ Leeward can provide growth capital and/or
a debt recapitalization alongside an S2S
when ~60% or less of total proceeds stay on
the balance sheet.
▪ An S2S may be a fit for pure growth or debt
recapitalizations when there is an NOL to
offset capital gain and/or when alternative
sources of capital are higher-cost or dilutive.
▪ An S2S a low-cost non-dilutive
alternative to unitranche,
mezzanine, and minority equity.
▪ S2S candidates are profitable
performing U.S. businesses.
▪ Ownership is usually closely-
held and transaction are often
related-party deals.
▪ Trailing twelve-month EBITDA
of $5 million or greater
▪ Investments of $10 million or
greater
▪ U.S. based businesses
▪ Owners must value the tax
shield of the S2S service
agreement payments.
▪ An S2S favors pass-through
tax entities.
▪ An S2S’ asset purchase is
inefficient for C-Corps due
to double taxation.
▪ Limited Liability Corp
▪ Partnership
▪ S-Corp
▪ Other pass-through entities
▪ Mission-critical systems & data are
sever-based assets that are difficult, if
not nearly impossible, to replace.
▪ If these assets were lost, the company
would fail to serve its customers.
▪ These assets are common in asset-
light to asset-moderate businesses as
well as some asset-heavy businesses.
▪ Customized ERP
▪ Proprietary Technology
▪ CRM & Marketing Systems
▪ Supply Chain Systems
▪ Indispensable Data
▪ Other Mission-Critical Systems
▪ Leeward may consider
businesses with EBITDA as low
as $2.5 million under select
circumstances.
▪ Businesses with recurring
revenue in excess of $10 million
may be a fit regardless of
profitability.
▪ Acquisition targets can be a
C-Corp if the transaction is
an asset purchase and the
acquirer is a pass-through
entity.
▪ A C-Corp may also be a fit
when alternative capital
sources are costly or dilutive.
Are ~40% or more of the
proceeds used for one of the
following transactions?
Does the transaction
meet the below
financial criteria?
Is the business
one of these
entity types?
Does the business have
mission-critical systems or
data?
▪ A business with license income like a
software business is not a fit for an
S2S
▪ A business that looks like a software
business but has revenue based on
anything other than license income
like transactions, commissions, or
leads is a fit for an S2S.
CAPITAL FOR CLOSELY-HELD & RELATE-PARTY TRANSACTION
SALE-TO-SERVICE TRANSACTION MAP
C AT E G O RY C A N D I DAT E C R I T E R I A
Critical Path Items
Pass-through Tax Entity
(S-Corps, LLCs, Partnerships)
Mission-Critical Systems and/or Data
(Not Always Apparent)
Profitable & Performing
($5M+ EBITDA, 10%+ Margins,
$10M+ investment)
H I G HF I T L OW M O D E R AT E
Use of Proceeds
▪ Control sale transactions to third parties
▪ Sole use of proceeds is debt
recapitalization
▪ Growth (unless next best alternative is
heavily dilutive)
▪ Liquidity Events
▪ Shareholder & Management Buyouts
▪ Family Ownership Transitions
▪ Strategic M&A
▪ Independent Sponsor Acquisitions
▪ Financial sponsor follow-on acquisitions
▪ Financial sponsor dividend recapitalizations
(hold period three years or greater)
Balance Sheet ▪ Asset-heavy (with exceptions) ▪ Asset-moderate to Asset-light▪ Asset-heavy to assets-moderate
Alternative Cost of Capital
▪ Less than 6%
▪ Transaction objectives can be
accomplished using only senior debt
▪ Greater than 10%
▪ No or modest warrants and equity
▪ 6% to 10%
▪ No or modest warrants
Domiciled State Tax-Rate
▪ Texas (None)
▪ Florida (None)
▪ *All States Are Viable for an S2S*
▪ California (13%)
▪ New Jersey (8.97%)
▪ New York (8.82%)
▪ Other States with high tax rates
▪ Georgia (6%)
▪ Virginia (5.75%)
▪ Colorado (4.63%)
▪ Other States with moderate tax rates
This transaction map outlines Leeward’s investment criteria and highlights company and transaction
attributes that offer the best fit for an S2S.

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Critical Path for Owners & Trusted Advisors

  • 1. CAPITAL FOR CLOSELY-HELD & RELATE-PARTY TRANSACTION CRITICAL PATH FOR S2S TRANSACTIONS OW N E R S H I PC AT E G O RY U S E O F P RO C E E D S F I N A N C I A L S Overview ▪ An S2S acquires server-based intangible assets that have little to no value on the balance sheet. ▪ The assets are acquired for a higher value which results a in capital gain for the seller. ▪ Because of the gain on sale, an S2S is a fit for transactions where the use of proceeds would have had capital gain in any case. ▪ Liquidity Event ▪ Shareholder Buyout ▪ Management Buyout ▪ Family Ownership Transition ▪ Strategic M&A ▪ Independent Sponsor Acquisition Specifics Exceptions S Y S T E M S / DATA Critical Path Questions ▪ Leeward can provide growth capital and/or a debt recapitalization alongside an S2S when ~60% or less of total proceeds stay on the balance sheet. ▪ An S2S may be a fit for pure growth or debt recapitalizations when there is an NOL to offset capital gain and/or when alternative sources of capital are higher-cost or dilutive. ▪ An S2S a low-cost non-dilutive alternative to unitranche, mezzanine, and minority equity. ▪ S2S candidates are profitable performing U.S. businesses. ▪ Ownership is usually closely- held and transaction are often related-party deals. ▪ Trailing twelve-month EBITDA of $5 million or greater ▪ Investments of $10 million or greater ▪ U.S. based businesses ▪ Owners must value the tax shield of the S2S service agreement payments. ▪ An S2S favors pass-through tax entities. ▪ An S2S’ asset purchase is inefficient for C-Corps due to double taxation. ▪ Limited Liability Corp ▪ Partnership ▪ S-Corp ▪ Other pass-through entities ▪ Mission-critical systems & data are sever-based assets that are difficult, if not nearly impossible, to replace. ▪ If these assets were lost, the company would fail to serve its customers. ▪ These assets are common in asset- light to asset-moderate businesses as well as some asset-heavy businesses. ▪ Customized ERP ▪ Proprietary Technology ▪ CRM & Marketing Systems ▪ Supply Chain Systems ▪ Indispensable Data ▪ Other Mission-Critical Systems ▪ Leeward may consider businesses with EBITDA as low as $2.5 million under select circumstances. ▪ Businesses with recurring revenue in excess of $10 million may be a fit regardless of profitability. ▪ Acquisition targets can be a C-Corp if the transaction is an asset purchase and the acquirer is a pass-through entity. ▪ A C-Corp may also be a fit when alternative capital sources are costly or dilutive. Are ~40% or more of the proceeds used for one of the following transactions? Does the transaction meet the below financial criteria? Is the business one of these entity types? Does the business have mission-critical systems or data? ▪ A business with license income like a software business is not a fit for an S2S ▪ A business that looks like a software business but has revenue based on anything other than license income like transactions, commissions, or leads is a fit for an S2S.
  • 2. CAPITAL FOR CLOSELY-HELD & RELATE-PARTY TRANSACTION SALE-TO-SERVICE TRANSACTION MAP C AT E G O RY C A N D I DAT E C R I T E R I A Critical Path Items Pass-through Tax Entity (S-Corps, LLCs, Partnerships) Mission-Critical Systems and/or Data (Not Always Apparent) Profitable & Performing ($5M+ EBITDA, 10%+ Margins, $10M+ investment) H I G HF I T L OW M O D E R AT E Use of Proceeds ▪ Control sale transactions to third parties ▪ Sole use of proceeds is debt recapitalization ▪ Growth (unless next best alternative is heavily dilutive) ▪ Liquidity Events ▪ Shareholder & Management Buyouts ▪ Family Ownership Transitions ▪ Strategic M&A ▪ Independent Sponsor Acquisitions ▪ Financial sponsor follow-on acquisitions ▪ Financial sponsor dividend recapitalizations (hold period three years or greater) Balance Sheet ▪ Asset-heavy (with exceptions) ▪ Asset-moderate to Asset-light▪ Asset-heavy to assets-moderate Alternative Cost of Capital ▪ Less than 6% ▪ Transaction objectives can be accomplished using only senior debt ▪ Greater than 10% ▪ No or modest warrants and equity ▪ 6% to 10% ▪ No or modest warrants Domiciled State Tax-Rate ▪ Texas (None) ▪ Florida (None) ▪ *All States Are Viable for an S2S* ▪ California (13%) ▪ New Jersey (8.97%) ▪ New York (8.82%) ▪ Other States with high tax rates ▪ Georgia (6%) ▪ Virginia (5.75%) ▪ Colorado (4.63%) ▪ Other States with moderate tax rates This transaction map outlines Leeward’s investment criteria and highlights company and transaction attributes that offer the best fit for an S2S.