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October 19, 2010
Transferring the ownership of an existing company can be a daunting process. In the most common scenario, employees without ownership interest seek to purchase a firm but lack sufficient capital to buy it outright. The current credit markets can make the process of obtaining a purchase loan difficult or even impossible. In addition, the purchase value of the company may be too high, based on projected future cash flow, when goodwill and other intangibles are considered. However, there are significant benefits to transferring ownership rather than establishing a new company. When facing RFP-based job procurement and surety bonding requirements, which would bar undercapitalized and inexperienced firms from entry into the construction industry, the new ownership benefits from the company’s established track record, balance sheet and project resume.
Oldco/Newco is a method of transferring an existing company to a single party or a management group which bypasses the difficulties of an outright purchase or new business startup. Under this method, the existing business (Oldco) remains under the original owner’s ownership and control. A new company (Newco) is formed by the individual or group that will manage future operations. Oldco executes a legal agreement to lease the Firm’s office space, facilities, and even employees to Newco. This arrangement allows Newco to launch its operations with very little capital and, if Newco fails, Oldco and its assets are not at risk. However, if Newco succeeds, it will have the opportunity to purchase Oldco’s equipment, facilities, and other assets including goodwill. The purchase will be based on real cash flow, not a bank loan, and while Newco is earning this capital it will benefit from Oldco’s resume, bonding capacity, and experienced staff.
The Oldco/Newco process has five essential steps:
The Oldco/Newco business transfer method is designed to give the original owners and the new management of a firm the best of all possible worlds by preserving assets, reducing costs, and limiting liability. It retains key management team members within an existing company by offering a path to ownership interest when they might otherwise form a new, competitive start-up. Oldco and its owner receive a longer and less risky stream of compensation than they would for the straight sale of equipment and hard assets, but the new management team is not required to pay a premium for any goodwill and intangibles. Whether or not traditional finance and purchase agreements are viable, Oldco/Newco offers a flexible and straightforward alternative that benefits both parties.
While the Oldco/Newco business transfer has obvious benefits from a surety perspective, it is a complex business transaction requiring the participation of key strategic parties, including attorneys, CPAs, bankers, and a well-versed surety representative. Commercial insurance programs may also be impacted by the ownership transfer. If you are considering an Oldco/Newco business transfer, contact your Parker, Smith & Feek representative for assistance in initiating the process with all strategic parties.
The views and opinions expressed within are those of the author(s) and do not necessarily reflect the official policy or position of Parker, Smith & Feek. While every effort has been taken in compiling this information to ensure that its contents are totally accurate, neither the publisher nor the author can accept liability for any inaccuracies or changed circumstances of any information herein or for the consequences of any reliance placed upon it.