0

Take the following scenario.

A company has an EBIDTA of 1 Million, and a PE firm values it with a 10 X multiple, but only wishes to purchase 50% from the founders.

In order to give the founders the $5M, they use bank leverage to borrow $4M against the company, and $1M they give themselves.

With that, they create NewCo where both the PE firm and the founders hold their shares.

Can the founders argue that essentially the PE firm has only given $1M to NewCo and they themselves have rolled over $5M in equity, so PE should only own 1/6th of NewCo, and the founders the rest?

Or would all PE houses demand that since the founders received $5M, they will only now own 50 percent of NewCo, even though the bank was the one that provided most of the funds.

EDIT: The leverage would be from the target company itself, which ore sale is owned by the founders in entirety.

RonJohn
  • 50,666
  • 10
  • 106
  • 170
Jake
  • 1
  • 1

1 Answers1

1

There are say 1 million shares, the Private Equity wants to buy 500K shares for 5 million with 50% stake.... How the PE raises money is not relevant, the PE has pledged it's 500K or appropriate number with Bank and got a loan that would be serviced by PE.

The ownership is now 50% with PE

Dheer
  • 57,070
  • 18
  • 88
  • 169
  • "a loan that would be serviced by PE" -- in a comment, OP said the question posits the company owing the debt, not the investor owing the debt. – nanoman May 04 '19 at 18:29
  • @nanoman OP has not clarified how the PE has leveraged... There are different ways... But most other ways would be after gaining company control using a bridge loan – Dheer May 05 '19 at 07:25
  • Thanks for this answer. Is this even in the case where they are using the target company for the leverage? Seeing as the founders have taken a loan from their own company, I don't understand why they should lose shares corresponding to that amount. Edited question for clarification. – Jake May 07 '19 at 11:01