Hi guys,
I have a quick question regarding a deal where there are two things happening, one of which is a majority acquisition where owners get a ton of liquidity, but retain a significant minority portion, and the other is an infusion of growth capital. How would this be modelled/structured?
- Let's assume this is a cash/debt free transaction. So the fact that this is a majority acquisition, this should be modelled like an LBO, and any infusion of capital (for growth) is just considered as a use of cash? IE. A $10M Purchase Price + $5M Growth Capital = $15M total uses of cash (plus fees, etc.). The valuation of the company is still considered the purchase price at the point of the transaction and infusion of capital?
Would that be correct?
- OR, Would this be considered two separate transactions? One is an LBO, the second is a growth equity type transaction with a pre/post valuation?
Thanks all!
Had this situation on the most recent deal I did and structured it similar to your first idea. The growth capex we capitalized was agreed upon and treated as seller debt so it effectively washed out in the sources and uses and purchase price remained the same to the seller.
i.e. Sources: $15m cash (from buyer); Uses: $10m Purchase Price (to seller), $5m "Debt" (to balance sheet)
How is a seller note serviced? Are you expecting the $5M to be amortized, or bear interest?
It's not a seller note, or debt owed to the sellers, it's effectively "debt" owed by the sellers to the company. Not interest bearing in any way, more of a legal concept than a financial one.
If the infusion of growth capital is by the same party at the same time this would simply be overfunding and is separate from the valuation of the company. This is quite common (eg to fund working capital needs, capex etc in the early life of the deal). If it’s subsequent it’s valued independently at each point but that’s mostly theoretical - never heard of that happening very shortly after each other or virtually simultaneously
If it is overfunding, that funding adds to cash in assets, and the balance into buyer equity since the buyer is funding the growth capital. Wouldn't this dilute any other shareholder, for example the owner that might be rolling over a minority position? Let's assume a seller rolls over 20% of the equity portion, I suppose we could model 20% before any growth capital (so they are diluted by the $ value of growth capital), and 20% after growth capital (no dilution to the seller)?
I think you need to let go of this ‘growth capital’ notion. There are a few ways to do this and dependent on yours needs / negotiations. What do you need this for so we can focus on something practical?
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