Seller Debt in Acquisitions of Private Firms: A Security Design Approach

52 Pages Posted: 7 Jan 2021 Last revised: 9 Sep 2021

See all articles by Mark Jansen

Mark Jansen

University of Utah - Department of Finance

Thomas H. Noe

University of Oxford - Said Business School; University of Oxford - Balliol College; Bank of Finland; European Corporate Governance Institute

Ludovic Phalippou

University of Oxford - Said Business School

Date Written: September 8, 2021

Abstract

We propose a security design model in which a potential acquirer approaches a firm with a value-add plan. The target has a single owner, who possesses private information: he knows whether his firm is compatible with the plan, or not. The seller agrees the acquirer will add value but not as much as what the acquirer expects. Although the acquirer can choose any monotone limited liability security to offer along with cash, we show that, under general conditions, if a security is employed, it takes the form of non-recourse junior debt provided by the seller.

Keywords: Security design, private capital, private asset acquisition, asymmetric information, seller financing, screening equilibrium, tranching, disagreement

JEL Classification: G34, D86, D82, G32, G24

Suggested Citation

Jansen, Mark and Noe, Thomas H. and Phalippou, Ludovic, Seller Debt in Acquisitions of Private Firms: A Security Design Approach (September 8, 2021). Available at SSRN: https://ssrn.com/abstract=3731086 or http://dx.doi.org/10.2139/ssrn.3731086

Mark Jansen (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
1655 Campus Center Dr.
Salt Lake City, UT 84112
United States
801-213-6910 (Phone)

HOME PAGE: http://eccles.utah.edu/team/mark-jansen/

Thomas H. Noe

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 3BJ
United Kingdom

University of Oxford - Balliol College ( email )

Broad St
Oxford, OX1 3BJ
United Kingdom

Bank of Finland ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

European Corporate Governance Institute ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Ludovic Phalippou

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

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