Transaction Comparison Guide

Scott Stepanik — February 12, 2013
Company News

Sale to outside buyer

A transaction involves selling the entire company to a strategic or financial buyer. A strategic buyer is usually a competitor or a company operating in a similar area that wants to enter this particular line of business. A financial buyer invests in businesses for a financial return, and will often buy companies to combine with their existing portfolio companies. Financial buyers may become strategic if they own competitor companies. In a sale transaction, owners receive the majority (if not all) of the sale proceeds in cash at closing with the balance paid in the form of a note paid over time or an earn-out based on future performance. Generally this requires a 12 to 18 month time commitment of a seller in transition period.

Leveraged Recapitalization

Typically a transaction involves selling a portion of the company to a financial buyer, who is investing in the business for a financial return. The transaction is suited for owners who wish to sell a portion of their company for liquidity or estate planning purposes, while retaining significant equity ownership to participate in the company’s upside. With there being few exceptions, financial buyers aspire to obtain control in leverage recapitalizations and normally require management to reinvest in the new company such that they own between 10% and 49% post-transaction. The sellers receive cash proceeds at closing and continue to hold a substantial equity ownership position in the company. The owners continue to run the company but have a financial partner to assist with the important legal issues. This structure typically will free owners from all the personal guarantees tied to the company, and the financial partner either provides or assists in raising the necessary financing for internal growth or acquisitions.

Minority ESOP

This type of transaction involves selling a minority position, typically 30% to 49%, of the company to the employees using an ESOP. Very often , these transactions are the first step of an owner’s overall liquidity plan, where the intent is to use the ESOP as a vehicle to achieve full liquidity in the future through one or a series of future stock sales. This transaction is best-suited for owners who desire a liquidity event but do not want to relinquish control. This is also a popular strategy for many profitable businesses that are not strong sale candidates to outside buyers. Transactions are commonly funded with outside bank debt for 100% of the purchase price. If there is a gap between the purchase price and available bank financing it is usually bridged with seller financing, in which the owners become lenders to the transaction and earn market level returns. The sellers have the unique benefit of deferring their capital gains taxes from the sale if they re-invest the proceeds in qualified securities. The company also has significant ongoing tax benefits through future contributions made to the ESOP.

100% ESOP Buy-Out

This type of transaction involves selling 100% of the company to the employees using an ESOP. The transaction is best suited for owners who desire a liquidity event and are willing to continue running the company for the next 3 to 5 years. Transactions are funded with outside bank debt and either outside sub debt or seller financing. The owners then have the option of becoming a lender to the transaction and earning market-level returns. Seller financing returns will often include warrants to acquire stock of the company in the future, allowing the sellers to participate in the future upside of the business. There are substantial tax benefits available to both the selling shareholders and the post-transaction company. Sellers have the unique benefit of deferring their capital gains taxes from the sale if they re-invest the proceeds in qualified replacement securities. If a transaction is properly structured, the company will become exempt from paying all federal and state taxes for an indefinite period of time. This transaction typically results in greater after tax proceeds than any other liquidity option available to owners. Owners will then receive approximately 30% to 40% of the purchase price in cash at closing and generally realize all proceeds from the sale in 5 to 7 years.

Craig M. Taggart MBA – M&A Advisor at Meritage Partners

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