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

Author

Listed:
  • Terry Crain

    (University of Oklahoma)

  • James Hamill

    (University of New Mexico)

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.

Suggested Citation

  • Terry Crain & James Hamill, 1995. "Financing Internal Buyouts of Private Companies: SCIN Attractive If Valuation Issues Can Be Resolved," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 4(2), pages 129-142, Fall.
    • Handle: RePEc:pep:journl:v:4:y:1995:i:2:p:129-42
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    References listed on IDEAS

    as
    1. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-387, May.
    2. 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.
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    More about this item

    Keywords

    Internal Buyouts; MBO; Private Firms; Private Companies; SCIN; Valuation;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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