Legal Definitions - bootstrap sale

A bootstrap sale refers to a business acquisition where the purchase of a company is primarily financed using the assets or future earnings of the company being bought itself, rather than the buyer's independent funds. In essence, the acquired company's own resources are used to "bootstrap" or fund its own sale. This method is often employed in leveraged buyouts (LBOs) and can have significant implications for tax and corporate law.

Here are some examples to illustrate this concept:

• Example 1: Leveraged Buyout by a Private Equity Firm

  A private equity firm decides to acquire "Global Widgets Inc.," a well-established manufacturing company. Instead of paying the entire purchase price from its own cash reserves, the private equity firm arranges for Global Widgets Inc. to take out a substantial loan. The proceeds from this loan are then used to pay the original owners of Global Widgets Inc. The manufacturing company itself is now responsible for repaying this debt using its future profits and cash flow.

  This illustrates a bootstrap sale because Global Widgets Inc.'s own future earnings and assets are being used to finance its acquisition, effectively paying for its own change of ownership.

• Example 2: Management Buyout with Company Assets as Collateral

  The existing management team of "Innovate Solutions," a successful software development firm, wishes to buy out the current sole owner, who is retiring. The management team does not possess sufficient personal capital for the full purchase. They structure the deal so that a significant portion of the purchase price is paid through a loan secured by Innovate Solutions' intellectual property (patents, software code) and its future recurring revenue streams from client contracts. The company's ongoing operations will generate the funds necessary to service this debt.

  This is a bootstrap sale because Innovate Solutions' own valuable assets (IP) and future revenue are being used as collateral and the source of funds to finance the purchase, allowing the company to pay for its own acquisition.

• Example 3: Acquisition with a Performance-Based Earn-Out

  A large pharmaceutical corporation acquires a smaller biotech startup, "BioGenius Labs," known for its promising new drug compound. Part of the acquisition agreement includes a substantial "earn-out" clause, where a significant portion of the final payment to BioGenius Labs' founders is contingent on the startup (now operating as a subsidiary) achieving specific clinical trial milestones and revenue targets for its drug over the next five years. These additional payments are directly tied to and funded by the value generated by the acquired company itself.

  This demonstrates a bootstrap sale because the future payments to the sellers are directly contingent upon and funded by the successful performance and earnings of BioGenius Labs, meaning the acquired company is generating the funds for its own purchase.