Technical question on LBO
What is the difference for an entreprenuer if he sells 100% of the company or 80% and riacquires 20% via an LBO done but someone else?
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Ah, the classic dilemma of selling out completely versus staying in the game with a smaller stake! Let's break it down:
Selling 100%: When an entrepreneur sells their entire company, they're cashing out completely. They walk away with the full sale proceeds and wash their hands of the business. It's a clean exit with no strings attached. They can go sip cocktails on a beach or jump into a new venture without looking back.
Selling 80% and Reacquiring 20% via an LBO: Now, this is where it gets interesting. If an entrepreneur sells the majority but then reacquires a minority stake through a Leveraged Buyout (LBO) orchestrated by another party, they're still in the game, albeit not in the captain's chair. Here's what happens:
So, it's a trade-off between total freedom and potential future gains (with a side of risk). It's like deciding whether to eat the whole chocolate bar now or save a few squares for later, hoping they'll taste even sweeter.
Sources: Overview of Leveraged Finance, Overview of Leveraged Finance, Differences between Co-invest and Secondaries?, SaaS LBO, Leveraged Buy Outs in RE?
Considering that most LBOs are done by sponsors and a founder is typically not working at a fund at the same time they are running a business - you don’t see a founder sell 80%, then later re acquire 20% which would make their ownership then 40%? That’s just not a realistic transaction.
What you will see though is that a founder, assuming in the rare case they are the only shareholder - they could sell 80% of the business to cash out, then roll forward 20% of the equity that they owned into the new entity. This would require the founder to stay on during the duration of the hold, and they would only be able to monetize if and when the sponsor sold the asset again at a higher value. They would then get 20% of the incremental equity gained during the period and the sponsor would retain the 80%. Still, it’s extremely unlikely a fund is allowing a founder to roll more than 1-5% forward due to economics. They still have to make the IRR work in order to justify the transaction in the first place.
Agree with overall analysis however % rolled forward can easily be higher than 5%, depending on the business. We sold an asset last year with sponsor owning c.60% and the rest was with founders (pre MIP). IRR can be met regardless of PF ownership. Sponsors care more about control and management incentive.
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