Technical Question on EBITDA Earnout with Mgmt Rollover
Hi all,
I was wondering if a more experienced monkey could help me walk through what exactly happens to management's share of rolled equity throughout a PE's hold period if they want to implement an EBITDA earnout structure for, say, the first couple of years.
Lemme make sure I'm clear on the facts. For example, you buy a business for $100M and management rolls $10M. You also sweeten the deal with up to $20M in earnouts based on some future EBITDA-related milestones.
Initial S&U (let's say fund with $50M debt; ignoring fees):
Sources:
Sponsor equity: $40M
Term loan: $50M
Rollover: $10M
Uses:
Cash to sellers: $90M
Rollover: $10M
Initial cap table is $40M (80%) sponsor and $10M (20%) rollover.
If the business achieves its EBITDA targets, the sellers will receive another $20M which would be funded either through (i) cash on BS that was built during hold period (of which, the sellers actually own 20% of that cash but too bad) OR (ii) incremental equity or debt which will ultimately impact the go-forward capitalization and may dilute the sellers' future exit proceeds (e.g., sponsor calls capital to fund the earn-out, which dilutes the rollover on the cap table but results in the cash funds today).
Lemme know if I captured your point.
Thanks! That's perfect. Exactly what I was looking for.
Note we've done some deals where it's specified that the cash needs to come from the Sponsor. Not typical, but occasionally sellers are smart enough to demand it.
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