Online Appendix for 'Seller Debt in Acquisitions of Private Firms: A Security Design Approach'

Abstract

This appendix provides derivations and additional results for “Seller Debt in Acquisitions of Private Firms: A Security Design Approach.” Section A provides some background definitions and simple mathematical identities used in the subsequent sections. Section B provides derivations for those result not established in the main text. Section C provides an example of cash flow distribution that satisfy Assumptions 1 and 2 but not the ratio condition, Assumption 4. Section D shows that almost all common “textbook” distributions satisfy the ratio condition, Assumption 4, when they satisfy the MLR ordering assumptions, Assumptions 1 and 2. Section E considers a number of alternative scenarios using a simple three-point cash flow distribution model and shows that seller debt can be optimal whenever acquirers are confident about their value-add plan and sellers have private information about the compatibility of their assets with the plan. The paper is available at https://ssrn.com/abstract=3731086.