Financing Internal Buyouts of Private Companies: SCIN Attractive If Valuation Issues Can Be Resolved
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.
JEL Codes
G34, G32
Keywords
Internal Buyouts, MBO, Private Firms, Private Companies, SCIN, Valuation
Recommended Citation
Crain, Terry and Hamill, James
(1995)
"Financing Internal Buyouts of Private Companies: SCIN Attractive If Valuation Issues Can Be Resolved,"
Journal of Small Business Finance:
Vol. 4:
Iss.
2, pp. 129-142.
DOI: https://doi.org/10.57229/2373-1761.1172
Available at:
https://digitalcommons.pepperdine.edu/jef/vol4/iss2/3
