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

Terry Crain and James Hamill
Additional contact information
Terry Crain: University of Oklahoma
James Hamill: University of New Mexico

Journal of Entrepreneurial Finance, 1995, vol. 4, issue 2, 129-42

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.

Keywords: Internal Buyouts; MBO; Private Firms; Private Companies; SCIN; Valuation (search for similar items in EconPapers)
JEL-codes: G32 G34 (search for similar items in EconPapers)
Date: 1995
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://jefsite.org/RePEc/pep/journl/jef-1995-04-2-c-crain.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pep:journl:v:4:y:1995:i:2:p:129-42

Access Statistics for this article

More articles in Journal of Entrepreneurial Finance from Pepperdine University, Graziadio School of Business and Management Contact information at EDIRC.
Bibliographic data for series maintained by Craig Everett ().