The formulas, tricks and trade secrets of Private Equity

Term Sheets Drag Along Rights

Sample Chapter

A common term in a term sheet is the drag along right. A drag along right allows the applicable shareholder to drag all other shareholders into a sale of the business when they choose.

You may ask, why would shareholders disagree on a sale if it makes commercial sense. Well, there can be all sorts of extenuating circumstances whereby private equiteers and managers have opposing views. Private equiteers may want to cut losses if the business is flailing, whereas managers may want to make sacrifices to save face. Or, managers may not want to sell to a hostile bidder, whereas a private equiteer may not share the same emotion. Either way, the drag along right somewhat insures the private equiteer for differences in opinion at exit time.

For founders or managers partnering with private equiteers, they really need to be ready to leave the business at the behest of the private equiteer. It’s an unfortunate fact of life for founders considering a private equity deal, but it is necessary for private equiteers to know that they can take advantage of exit opportunities to achieve target returns.

On the flipside though, if it comes to exit time and the managers strongly disagree, they can be very disruptive to the exit process. If the potential acquirer needs the cooperation of management and staff to effect the transaction (very likely), then it goes without saying that management still have the final voice through their level of cooperation. So, like many terms in the term sheet, this is one that helps align interests rather than fully insure against a potential risk.

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