Equity Kickers: Pushing Your Deal Across the Finish Line

Bridging the gap between buyer and seller can be difficult, particularly when the gulf is wide. Numerous tools exist to help provide an incentive sweetener (much like a warrant) to push a deal across the finish line. One such tool is the equity kicker. Equity kickers are typically used with asset-light companies, like software MBO and LBO deals where cash flow is solid, but senior lenders have little to lend against. Subordinated and mezzanine lenders will typically use equity kickers with a convertible feature for shares or warrants for some future double-dip.

When sufficient cash flow is available to service the debt, but senior lenders shy away for asset reasons, an equity kicker is typically included in mezz or other subordinated debt instrument. Because such lenders seek for ways to be compensated for their increased risk, they will include an equity kicker that occurs at some point in the future, typically triggered by a sale or other liquidity event. Sale-triggered equity kickers can typically be even larger, in some instances taking up the majority of the company equity.equity kicker

Seller Options of the Equity Kicker

Typically an equity kicker has the same effect as a takeback note: both serve to inflate the sale price above the fair market value of the business AND they can only be paid if future earnings potential is good or if a liquidity event takes place.

In some instances, a seller may receive an equity kicker in the form of preferred scenario when s/he sells the company. Perhaps an even more viable option is for the seller to maintain an equity position in the sold company. Said position could be deemed “participating preferred,” giving the seller access to regular dividends as a percentage of earnings or common dividends, allowing the seller to have access to the firm’s upside potential post-deal. Each scenario has its own tax issues, but such alternative structures can help both buyer and seller meet in the middle.

Recapitalization, LBOs and MBOs

Because company recaps often include subordinated debt, lenders may pile on additional warrant or kickers to existing equity. When we source capital for clients, we certainly have our “go to” options, but we prefer to go as broad as possible, letting the market speak for our clients. This tends to provide the most efficient and inexpensive capital. When an issuer has more options for recap, LBO and MBO, the capital will get less and less expensive. So while equity kickers can be usurious on a company looking for liquidity, running a full process can help ensure issuers get the best deal possible.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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