SEARCH  Right Arrow

Share This Info:  

Business Acquisition Financing With Equity Sharing

An interesting alternative to using borrowed money for small business acquisition financing is the plan to divide ownership of the target company among equity investors.

Instead of seeking loans to raise the purchase money, the buyer "sells" fractional interests in the business to friends and relatives. The resulting ownership scheme is similar to a publicly held corporation, only on a smaller scale and privately arranged. In some situations, this is an ideal plan. But a few provisions need to be included in the equity agreements to avoid problems later on.


They include:

1. Independent valuation: In order to equate a specific percentage of ownership with the size of each investor's contribution, it's critical to know the total value of the company.  And all individuals buying an equity interest might not be in agreement that the sales price is an accurate value. That's why it's important to hire a business valuation expert to determine an exact number on which to calculate ownership interests.

2. Legal ownership form: The structure of the company--will it be a corporation or a partnership--should be decided before equity interests are offered. Typically, investors will be shareholders of a corporation, or owners of interests in a limited partnership. Then the new company will be established, and will proceed with the deal, using invested funds for the business acquisition financing.

3. Definition of who does what: One or more of the investors--whether in a corporation or partnership--will be employed by the company to work in the newly-acquired business. The job description and compensation of each should be clearly spelled out. There might also be non-owners hired in some positions. With a clear understanding about these issues, all committed to writing, there is less risk of conflict and disagreement, months or years later, about who is supposed to do what, for how much compensation.

4. Procedure for buying and selling interests: At some point in the future investors may want to sell part or all of their interests. Can they sell to anybody, or must the buyer be an existing investor? And what will be the exact value of each person's share? These rules and formulae should be determined beforehand, with all investors in agreement.

5.  Agreements related to selling or closing the business. While planning for various eventualities, the investors should have a written agreement about what happens in the event one or more investors want to sell the business. Or want to close it. Ordinarily, a company's rules specify that each investor's voting power is directly related to his or her fractional share of ownership, and that a certain number of votes, or a percentage of the total, is required to take an action such as selling or closing a business.  It's also critical to specify how any proceeds of a business sale, or any money recovered if a business is closed and its assets sold, is to be divided among those having a financial interest in the entity.

Do those involved in the original acquisition financing have some priority or privileges not enjoyed by investors who bought later on? The rules governing the ownership aspects of the entity should provide the answer to this and related questions about the rights of the corporate shareholders or the partners.

The equity sharing method of  financing can be an effective way to raise the money to buy a company if the buyer is unwilling or unable to get the needed funds from business lenders. But those investing in such an entity should be prepared to learn about, and abide by a number of rules that will govern their involvement, and protect their interests in the business.

Contributor:

Peter Siegel MBA, BizBen Founder, ProBuy, ProSell, ProIntermediary Programs
Name: Peter Siegel, MBA
Company: BizBen.com
Area(s) Served: All Of California
Founder Of BizBen.com (since 1994). I am the Lead Advisor for the ProSell, ProBuy, & ProIntermediary Programs. I consult daily with buyers, sellers, and brokers daily about buying and selling California small to mid-sized businesses. Call 925-785-3118.
Details  | 
Share

Back To Articles & Blogs


Helpful Resources To Assist In Selling And Buying California Businesses
William F. Ziprick, Attorney: Legal Services For Buyers And Sellers

Through creative problem solving, attention to detail, accessibility, & understanding that unnecessary delay is often a deal killer, I work closely with my clients and other professionals to consistently achieve a high rate of closings. Office: 909-255-8353, Cell: 509-951-7230.

Brad Steinberg, Business Broker: Laundromat Specialist

PWS is the leading laundromat broker in California. Since 1968 PWS has brokered over 2,500 laundromat sales. With over 90 employees dedicated to the coin laundry industry, PWS has 18 licensed agents, a 3 person in-house finance department, 10 service technicians and a 20 person parts department.

Shalonda Chappel: Escrow & Bulk Sale Services - Southern California

Escrow services to brokers/agents, sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services. 951-808-3972.

Helen Yoo, New Century Escrow - Escrow Services In Southern California

New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.

Diane Boudreau-Tschetter: Escrow & Bulk Sale Services - CA

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

Janet Carrera: Escrow & Bulk Sale Service - SF Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.

Elizabeth McGovern: Escrow Services - San Francisco Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.


Related Articles, Events, Blog Posts, Discussions, Videos, Interviews
4 Reasons Why Business Brokers Do Not Cooperate With Other Brokers & Agents

Despite challenges in the business for sale marketplace, some of the business brokers who make a living by facilitating a deal between buyer and seller are known to stand in the way of a completed transaction because of some outdated ideas. Too bad they put greed ahead of the needs of their clients.

Top 100 List: This Week's Top Motivated Business Buyers & Their Requests!

If you're trying to sell a business - check out this week's top 100 business buyers - one of these buyers may be looking to buy your type and location of business! This list is updated weekly - make sure you check it frequently! Are you searching to buy - get on this list and reach seller direct!

If You Plan To Offer Seller Financing: 3 Things Owner Sellers Need to Know

When selling your business, offering seller financing is a great way to help your business standout from others on the market and it is also a good strategy to consider that can help you close a sale. Peter Siegel, MBA (BizBen ProSel Program & Financing Expert) explains. Reach him at 925-785-3118.

What Factors Are Considered In Valuing A Small Business? Advisors Weigh In

Valuing a small business is not guess work. It's not what some other businesses of the same type may have or may not have been sold for, it's not even what a business owner "feels" they want or deserve. It is a formula based on many factors. Peter Siegel, MBA from BizBen & others discuss this topic.

Tips For Faster SBA Loan Approvals For California Small Business Purchases

In this article on BizBen, business purchase financing advisor and SBA loan broker, consultant Peter Siegel (Business Purchase Financing Expert/Advisor & the ProBuy Program Director at BizBen) at 925-785-3118 shares his views of getting SBA loan financing faster for business purchase financing.

Absentee Run Businesses - A Myth Or Reality When Buying A Small CA Business?

Some buyers search for an absentee business to own, wanting to collect profits generated by a successful enterprise without having to stand at the sales counter or cash register, without having to cook, operate equipment or talk to customers. Here's some insight about finding such a business.

How Many Months Should I List My Business With A Business Broker?

It's important to remember that selling a business takes time. Unlike selling a house, which can be sold relatively fast, a business can take up to six months to a year to sell. Joe Ranieri (Orange County Business Broker) at 714-292-5448 explores this topic from a Business Brokers perspective.

The Bottomline: What Exactly Is Adjusted Net Income, SDC, And Cash Flow?

The use of add backs & adjusted net income is common among sellers of businesses when showing their financial information/performance. But buyers are cautioned to review financials and tax returns/documents closely. Peter Siegel, MBA with BizBen (ProBuy & ProSell Advisor, Lead Facilitator) explains.

SEARCH  Right Arrow


     

For Sale Postings · Wanted Postings · Blog · Events
Brokers · Resources · Advertising Info · Login
888-212-4747 · Full Version
Terms Of Use · Advertising Policy · Privacy Policy ·