Seller Debt in Acquisitions of Private Firms: A Security Design Approach
52 Pages Posted: 7 Jan 2021 Last revised: 9 Sep 2021
Date Written: September 8, 2021
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: Suggested Citation