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Toehold Position/Purchase

An investment strategy to get your foot in the door.

What is a Toehold Position/Purchase?

A toehold position is an acquisition or investment strategy where an investor targets a particular company and buys less than 5% of the company’s stock. This position allows them to exert pressure onto the company, whether this is to acquire them or to raise performance and bring in return. Due to the small ownership percentage, the purchase does not need to be filed with the Securities and Exchange Commission (SEC).


Toehold Position


Essentially, the toehold position gets the investor’s foot (or ‘toe’) in the door of the company. It is often the first step made by an investor that is looking to acquire the target company.

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How Does a Toehold Position Work?

As mentioned, a toehold position is the position an investor makes to get him or herself into a significant equity position with a company. The position taken does not exceed 5% of the company’s outstanding shares in order to avoid reporting the purchase to the SEC.

Only a purchase above the 5% threshold requires the buyer to file a notice with the SEC explaining what their intentions are. The notice must include whether more shares are going to be purchased, how many, and for what reason. This filing would reveal any potential takeover attempt.

Once the toehold position’s been taken, the investor – or investment firm – is likely to begin making additional purchases of the target company’s outstanding shares. The investor typically continues with small percentage purchases of shares because it can be done quietly. The purchases are more likely than not to go unnoticed or viewed as non-threatening by the target company.

Alternatively, rather than an acquisition, a toehold position can be used as a way to drive pressure into a firm. This is usually done to push the firm to make decisions that will increase their market value, increasing return for the investor. Often, the investor in a toehold position will make demands of the firm to take specific actions that they believe will increase performance. The goal is to increase market value and shareholder returns, thus increasing their own returns.


Acquisitions and Takeovers

As noted, an investor or investment firm often makes use of a toehold position when they are planning on making a move toward the takeover of the company whose shares they’ve purchased.

A toehold position is the first in a series of strategic moves an investor makes when it looks to acquire or take over the target company. The primary goal – when pursuing an acquisition or takeover – is to quickly and quietly build up a cache of the target company’s outstanding shares. It enables the acquirer to gradually obtain a greater equity interest in, and more control of, the target company.

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A toehold position strategy is specifically useful to a company pursuing a hostile takeover. For a company headed down such a path, establishing a toehold purchase can go undetected. The buying company can rapidly snatch up small parts of the company, with no need to report its purchases or intent to the SEC, provided they don’t cross the 5% threshold.


Additional Resources

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below!

  • Mergers & Acquisitions Financial Modeling
  • Buyout
  • Friendly Takeover
  • Non-Controlling Interest

M&A Modeling Course

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