webinar presentation galligan and emanuel aug11 final

Presented By:John Emanuel, Whyte Hirschboeck DudekDaniel Galligan, Whyte Hirschboeck Dudek August 11, 2009

Deal Issues From the Seller’s Perspective

Business owners contemplating a sale of their business should think about more than just getting the best price. When evaluating proposals from potential purchasers, other non-price considerations are equally critical, and need to be considered at the earliest stages of the process.

• Will the transaction close (at the price and on the terms proposed)?

• Will I receive the negotiated purchase price?

• Will I retain the purchase price post-closing?

Will the Transaction Close (At the Price and on the Terms Proposed)?

• General Considerations– Accepting a bid from one Buyer means rejecting bids

from all others.• Risks and problems of “busted deal” – If you strike a

“deal” with a Buyer, you want that deal to close.– Difficult to go back to a previously rejected Bidder to ask if

it’s still interested.

• Have you picked the “best” Buyer, or just the highest price (at the expense of better terms, more ideally situated Buyer, etc.)?


– Deals divert management and owner attention away from normal business operations.

• Putting the company up for sale does place a strain on the business.


– Timing: Before narrowing to one single Buyer, agreeing to exclusivity or signing letter of intent:

• Seek advice of legal counsel and other professionals.

• Conduct due diligence review of potential Buyer(s).

• Conduct company housekeeping/clean-up (Note: many of these “clean-up” tasks should be addressed before the sale process is initiated).


• Due Diligence Review of Bidder(s)– Conduct broad due diligence investigation of Buyer.

• Creditworthiness

• Reputation in industry (e.g. any reputation of re-trading purchase price after initial letter of intent is signed?)

• References

• Internet search


• Contingencies– Financing

• Buyer’s ability to secure its desired financing.• What financing and equity structure is Buyer

contemplating?• Does Buyer have preliminary approval from lenders?

Equity partners?• If private-equity Buyer, is it funded, or will it have to

conduct a capital-raise?– Environmental audits and investigations.


– Real estate title and survey, etc.

– Bank appraisals (becoming more common).

– Assignability of assets.

– Third-party consents and approvals.


• Company Housekeeping/clean-up– Environmental

– Financial matters

– Litigation (pending or threatened)

– “Personal” assets and liabilities

– Intellectual property

– Customer and suppliers contracts, etc.

– Stock and ownership records

Will I Receive the Negotiated Purchase Price?

• Many transactions involve some form of Seller financing, especially in today’s credit market.

• Reasons for this are primarily two-fold:– Debt Capacity: Agreed price exceeds available third

party debt, given the amount of the Buyer’s equity commitment.

– Valuations: Buyer is unwilling to pay Seller’s demanded price unless certain future performance targets are met. Referred to as an “earn-out.”


• Key Terms of Seller Debt (Other Than Earn-Outs)– Collateral

– Who is the Debtor?

– Repayment Terms

– Covenants and Restrictions

– Terms of Subordination


• Collateral:– Seller debt is typically unsecured, but not always.– If secured, subordinate to senior (institutional) debt.

• Despite subordination, security interest can still be advantageous.

• Assures payment at the time of a later sale of the Company.

• Value of seller’s security interest depends on degree of leverage (total debt vs. value of assets).


• Who is the Debtor?– Is the target company the sole debtor, or is there a guaranty by

a parent or sponsor entity?

• Repayment terms (interest payment and principal amortization).– Is interest payable at regular intervals?– Is principal amortized prior to repayment of senior debt?– Accelerated payment upon sale of company, equity raise,

etc.?


• Covenants and restrictions.

– Financial covenants.• Useful if tied to events of default.• Buyer unlikely to agree, and subordination severely limits ability to

exercise remedies on default (see following discussion regarding “standstills”).

– Operational restrictions (payments of dividends, compensation, capital expenditures, additional senior debt, acquisitions, etc).

– Reporting obligations (periodic financial reports, etc).– Cross-default to senior debt?


• Subordination.– Almost universally required; documentation is often

quite complex.

– Fundamental parameters include:• Senior debt gets paid first; Seller’s lien (if any) is junior to

senior lender.

• Limited rights to receive payments on junior debt.– Scheduled payments of interest (principal?) while senior debt not

in default.

– “Blockage” occurs once senior debt is defaulted.


• Right to accelerate and pursue creditor’s remedies upon default.

– “Standstill” period during which junior lender may not exercise rights or remedies of a creditor.

– Length of standstill is negotiable; should end upon senior lender’s taking action to enforce its debt

• Ceiling on amount of senior debt.– Senior lender will resist, and at least insist on significant

capacity for additional senior debt above its initial level.

• Obligation to re-subordinate in favor of replacement lender on refinancing (absent which, junior debt must be paid off).


• Consolidated credit facilities pose special risks:– Typical with investment firms’ portfolio companies,

especially “roll-up” structures.

– Company’s cash flows and assets support additional borrowing by other related companies, with cross-guarantees.

– Exposes profitable, successful company to risk of failure on the part of its affiliated companies.


• Additional Considerations Affecting Earn-Outs– Defining the “metric” by which achievement of the

targeted performance is measured.• Gross revenues

• Gross margin (gross profit)

• EBITDA/EBIT

• Net profit


– Controlling and “auditing” the metric: Can the chosen metric be “corrupted” or “manipulated” (intentionally or innocently) by the Buyer?

• Target business so amalgamated into Buyer’s other business units that it loses its separate identity, making the metric unmeasurable or meaningless.

• Buyer diverts business opportunities, revenues, profits to other business units within Buyer’s “family.”


• Buyer burdens company with expenses that are more appropriately borne by other business units in the Buyer’s family.

• These risks generally increase as the metric moves down the income statement from gross revenues toward net income.

– Will Seller’s management remain involved in the business, and therefore have some influence on the achievement of the earn-out targets?


– Failure of company to meet earn-out target might be due to inept management, poor decisions by Buyer, even though company is fundamentally sound. Should Seller bear this risk?

– Some of these risks can be addressed with careful drafting, but only to a limited degree. Some degree of risk or uncertainty is inevitable.

– If Buyer uses consolidated credit facilities, company may perform up to expectations and “earn” the earn-out, but still be unable to pay if its assets and cash flows are used to subsidize failing affiliates.

Will I Retain the Purchase Price Post-Closing?

• Allocation of risk of unknowns and “unknowables”, either contractual or non-contractual.

• Analysis will depend upon structure of sale transaction: Sale of Assets v. Sale of Equity.


• Contractual Risk Allocation. Risks allocated and addressed via express terms and provisions in the final Purchase Agreement– Assumed/Retained liabilities– Indemnification (baskets and caps)– Representations and warranties– Contract covenants


• Non-contractual Risk Allocation. Risks that are “allocated” between the parties by virtue of the inherent structure of transaction, regardless of contract terms. Primarily involves exposure to claims made by third-parties.

QUESTIONS ?

webinar presentation galligan and emanuel aug11 final

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