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Financing Internal Buyouts of Private Companies: SCIN Attractive If Valuation Issues Can Be Resolved

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  • Terry Crain

    (University of Oklahoma)

  • James Hamill

    (University of New Mexico)

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    Abstract

    In planning for succession of ownership, oftentimes the owner of a private business seeks to sell the business to either family members or employees. Arranging outside financing may be difficult or costly, making internal financing attractive. Self-cancelling installment notes (SCINs) provide an opportunity to finance the transfer of ownership at a favorable interest rate and to obtain income and estate tax advantages. However, to pass muster with the Internal Revenue Service, the SCIN must include a risk premium for the cancellation feature. In this paper, we provide a mathematical model for computation of the required risk premium associated with the cancellation provision. The premium may be in the form of either an interest premium or a principal premium and the computations for both are demonstrated in this paper. Appendix A provides an example of the use of the formulas.

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    File URL: http://jefsite.org/RePEc/pep/journl/jef-1995-04-2-c-crain.pdf
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    Bibliographic Info

    Article provided by Pepperdine University, Graziadio School of Business and Management in its journal Journal of Small Business Finance.

    Volume (Year): 4 (1995)
    Issue (Month): 2 (Fall)
    Pages: 129-42

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    Handle: RePEc:pep:journl:v:4:y:1995:i:2:p:129-42

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    Web page: http://bschool.pepperdine.edu/jef
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    Related research

    Keywords: Internal Buyouts; MBO; Private Firms; Private Companies; SCIN; Valuation;

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    1. Scott Holmes & Pam Kent, 1991. "An Empirical Analysis of the Financial Structure of Small and Large Australian Manufacturing Enterprises," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 1(2), pages 141-154 , Winter.
    2. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-87, May.
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