Are you structuring an acquisition in which the seller’s want to participate in the same class of equity as the buying company’s founders? Or trying to figure out the proper class for retiring partners who are retaining equity? Whatever you’re doing, you’ll find that making the right equity and capital structuring decisions for your business is extremely important.
This week on the podcast episode we talk all about the sort of negotiation options you have. Take a deep dive with us and look into some of the big decisions you’re facing.
Capital Structuring & Founder’s Class of Equity
Acquiring another firm has its challenges. If you’ve done it before, you know how many nuances there are!
For example, bringing in people who want to be involved with the management team of the new entity. Structuring and negotiating this type of deal can pose a number of different challenges.
One scenario we discuss involves a client who is interested in acquiring a firm that offers additional products or services. This deal could potentially bring in 30-40% of the total revenue of the firm. The buyer has a capital structure with a founder’s class of equity. This means that they have certain voting and economic privileges.
One key structuring decision is whether the principles of the acquired company are treated as founders, or if they’ll get a different class of equity. If the acquired company doesn’t represent a material portion of revenue and profit, the decision is easy. (Very likely no founders equity.) However, if they do and are founders of their own firm, then it is a tougher decision. The negotiation to follow might be a bit trickier as well.
Elements like these, as well as the related level of participation in decision-making, are two key factors. Expect to navigate through them in the process of getting more material acquisitions done. When handled correctly, you are much more likely to have them work long-term.
Negotiations like these are completely possible. In fact, both parties can walk away feeling really good about the deal they’ve struck. Prepare well, and try to enjoy the process.
Capital Structuring & Retiring Partner Equity
In many cases, when a partner/owner retires, there are provisions in the company’s operating or shareholders agreement. These provisions ensure a complete purchase of their equity.
There are times, however, when retiring partners may retain some equity. They may want to continue to have some benefit from the continued growth of what they founded or helped to build. It could also be because the company is not in a financial position to buy them out entirely.
There are many decisions regarding the proper class of equity and rights. There are also many preferences about that equity. These decisions are crucial in situations like these. In addition, there are many negotiation solutions.
Figuring out the balance is tricky! You must consider the retiring partners’ right to protect their equity value by maintaining some say over certain decisions. You must also consider the working partners’ needs and desire to be able to control decisions. This is vital for the benefit of the company moving forward. Often, this balance is not easy.
If the retiring partners are founders, they are likely used to controlling decisions. Often it is even more challenging for them to cede control to the next generation. Should you treat the retiring partners more like investors with typical investor controls, or like passive former partners who are just along for the ride?
Often, the practical solution lies somewhere in between. Get the full episode here!
Learn More —
Corey Kupfer is an expert strategist, negotiator and dealmaker. He has more than 35 years of professional deal-making and negotiating experience. Corey is a successful entrepreneur, attorney, consultant, author and professional speaker who is passionate about deal-driven growth. He is also the creator and host of the DealQuest Podcast.
If you want to find out how deal-ready you are, take the Deal- Ready Assessment today!