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.
Internal Buyouts, MBO, Private Firms, Private Companies, SCIN, Valuation
Crain, Terry and Hamill, James
"Financing Internal Buyouts of Private Companies: SCIN Attractive If Valuation Issues Can Be Resolved,"
Journal of Small Business Finance:
2, pp. 129-142.
Available at: http://digitalcommons.pepperdine.edu/jef/vol4/iss2/3