Webinar Presentation Galligan And Emanuel Aug11 Final

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Deal Issues From the Seller\'s Perspective: BEYOND PRICE

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Webinar Presentation Galligan And Emanuel Aug11 Final

  1. 1. Presented By: John Emanuel, Whyte Hirschboeck Dudek Daniel Galligan, Whyte Hirschboeck Dudek August 11, 2009
  2. 2. Deal Issues From the Seller’s Perspective <ul><li>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. </li></ul><ul><li>Will the transaction close (at the price and on the terms proposed)? </li></ul><ul><li>Will I receive the negotiated purchase price? </li></ul><ul><li>Will I retain the purchase price post-closing? </li></ul>
  3. 3. Will the Transaction Close (At the Price and on the Terms Proposed)? <ul><li>General Considerations </li></ul><ul><ul><li>Accepting a bid from one Buyer means rejecting bids from all others. </li></ul></ul><ul><ul><ul><li>Risks and problems of “busted deal” – If you strike a “deal” with a Buyer, you want that deal to close. </li></ul></ul></ul><ul><ul><ul><ul><li>Difficult to go back to a previously rejected Bidder to ask if it’s still interested. </li></ul></ul></ul></ul><ul><ul><ul><li>Have you picked the “best” Buyer, or just the highest price (at the expense of better terms, more ideally situated Buyer, etc.)? </li></ul></ul></ul>
  4. 4. Will the Transaction Close (At the Price and on the Terms Proposed)? <ul><ul><li>Deals divert management and owner attention away from normal business operations. </li></ul></ul><ul><ul><ul><li>Putting the company up for sale does place a strain on the business. </li></ul></ul></ul>
  5. 5. Will the Transaction Close (At the Price and on the Terms Proposed)? <ul><ul><li>Timing: Before narrowing to one single Buyer, agreeing to exclusivity or signing letter of intent: </li></ul></ul><ul><ul><ul><li>Seek advice of legal counsel and other professionals. </li></ul></ul></ul><ul><ul><ul><li>Conduct due diligence review of potential Buyer(s). </li></ul></ul></ul><ul><ul><ul><li>Conduct company housekeeping/clean-up (Note: many of these “clean-up” tasks should be addressed before the sale process is initiated). </li></ul></ul></ul>
  6. 6. Will the Transaction Close (At the Price and on the Terms Proposed)? <ul><li>Due Diligence Review of Bidder(s) </li></ul><ul><ul><li>Conduct broad due diligence investigation of Buyer. </li></ul></ul><ul><ul><ul><li>Creditworthiness </li></ul></ul></ul><ul><ul><ul><li>Reputation in industry (e.g. any reputation of re-trading purchase price after initial letter of intent is signed?) </li></ul></ul></ul><ul><ul><ul><li>References </li></ul></ul></ul><ul><ul><ul><li>Internet search </li></ul></ul></ul>
  7. 7. Will the Transaction Close (At the Price and on the Terms Proposed)? <ul><li>Contingencies </li></ul><ul><ul><li>Financing </li></ul></ul><ul><ul><ul><li>Buyer’s ability to secure its desired financing. </li></ul></ul></ul><ul><ul><ul><li>What financing and equity structure is Buyer contemplating? </li></ul></ul></ul><ul><ul><ul><li>Does Buyer have preliminary approval from lenders? Equity partners? </li></ul></ul></ul><ul><ul><ul><li>If private-equity Buyer, is it funded, or will it have to conduct a capital-raise? </li></ul></ul></ul><ul><ul><li>Environmental audits and investigations. </li></ul></ul>
  8. 8. Will the Transaction Close (At the Price and on the Terms Proposed)? <ul><ul><li>Real estate title and survey, etc. </li></ul></ul><ul><ul><li>Bank appraisals (becoming more common). </li></ul></ul><ul><ul><li>Assignability of assets. </li></ul></ul><ul><ul><li>Third-party consents and approvals. </li></ul></ul>
  9. 9. Will the Transaction Close (At the Price and on the Terms Proposed)? <ul><li>Company Housekeeping/clean-up </li></ul><ul><ul><li>Environmental </li></ul></ul><ul><ul><li>Financial matters </li></ul></ul><ul><ul><li>Litigation (pending or threatened) </li></ul></ul><ul><ul><li>“ Personal” assets and liabilities </li></ul></ul><ul><ul><li>Intellectual property </li></ul></ul><ul><ul><li>Customer and suppliers contracts, etc. </li></ul></ul><ul><ul><li>Stock and ownership records </li></ul></ul>
  10. 10. Will I Receive the Negotiated Purchase Price? <ul><li>Many transactions involve some form of Seller financing, especially in today’s credit market. </li></ul><ul><li>Reasons for this are primarily two-fold: </li></ul><ul><ul><li>Debt Capacity: Agreed price exceeds available third party debt, given the amount of the Buyer’s equity commitment. </li></ul></ul><ul><ul><li>Valuations: Buyer is unwilling to pay Seller’s demanded price unless certain future performance targets are met. Referred to as an “earn-out.” </li></ul></ul>
  11. 11. Will I Receive the Negotiated Purchase Price? <ul><li>Key Terms of Seller Debt ( Other Than Earn-Outs ) </li></ul><ul><ul><li>Collateral </li></ul></ul><ul><ul><li>Who is the Debtor? </li></ul></ul><ul><ul><li>Repayment Terms </li></ul></ul><ul><ul><li>Covenants and Restrictions </li></ul></ul><ul><ul><li>Terms of Subordination </li></ul></ul>
  12. 12. Will I Receive the Negotiated Purchase Price? <ul><li>Collateral : </li></ul><ul><ul><li>Seller debt is typically unsecured, but not always. </li></ul></ul><ul><ul><li>If secured, subordinate to senior (institutional) debt. </li></ul></ul><ul><ul><ul><li>Despite subordination, security interest can still be advantageous. </li></ul></ul></ul><ul><ul><ul><li>Assures payment at the time of a later sale of the Company. </li></ul></ul></ul><ul><ul><ul><li>Value of seller’s security interest depends on degree of leverage (total debt vs. value of assets). </li></ul></ul></ul>
  13. 13. Will I Receive the Negotiated Purchase Price? <ul><li>Who is the Debtor ? </li></ul><ul><ul><li>Is the target company the sole debtor, or is there a guaranty by a parent or sponsor entity? </li></ul></ul><ul><li>Repayment terms (interest payment and principal amortization). </li></ul><ul><ul><li>Is interest payable at regular intervals? </li></ul></ul><ul><ul><li>Is principal amortized prior to repayment of senior debt? </li></ul></ul><ul><ul><li>Accelerated payment upon sale of company, equity raise, etc.? </li></ul></ul>
  14. 14. Will I Receive the Negotiated Purchase Price? <ul><li>Covenants and restrictions . </li></ul><ul><ul><li>Financial covenants . </li></ul></ul><ul><ul><ul><li>Useful if tied to events of default. </li></ul></ul></ul><ul><ul><ul><li>Buyer unlikely to agree, and subordination severely limits ability to exercise remedies on default (see following discussion regarding “standstills”). </li></ul></ul></ul><ul><ul><li>Operational restrictions (payments of dividends, compensation, capital expenditures, additional senior debt, acquisitions, etc). </li></ul></ul><ul><ul><li>Reporting obligations (periodic financial reports, etc). </li></ul></ul><ul><ul><li>Cross-default to senior debt? </li></ul></ul>
  15. 15. Will I Receive the Negotiated Purchase Price? <ul><li>Subordination. </li></ul><ul><ul><li>Almost universally required; documentation is often quite complex. </li></ul></ul><ul><ul><li>Fundamental parameters include : </li></ul></ul><ul><ul><ul><li>Senior debt gets paid first; Seller’s lien (if any) is junior to senior lender. </li></ul></ul></ul><ul><ul><ul><li>Limited rights to receive payments on junior debt. </li></ul></ul></ul><ul><ul><ul><ul><li>Scheduled payments of interest (principal?) while senior debt not in default. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>“ Blockage” occurs once senior debt is defaulted. </li></ul></ul></ul></ul>
  16. 16. Will I Receive the Negotiated Purchase Price? <ul><ul><ul><li>Right to accelerate and pursue creditor’s remedies upon default. </li></ul></ul></ul><ul><ul><ul><ul><li>“ Standstill” period during which junior lender may not exercise rights or remedies of a creditor. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Length of standstill is negotiable; should end upon senior lender’s taking action to enforce its debt </li></ul></ul></ul></ul><ul><ul><ul><li>Ceiling on amount of senior debt. </li></ul></ul></ul><ul><ul><ul><ul><li>Senior lender will resist, and at least insist on significant capacity for additional senior debt above its initial level. </li></ul></ul></ul></ul><ul><ul><ul><li>Obligation to re-subordinate in favor of replacement lender on refinancing (absent which, junior debt must be paid off). </li></ul></ul></ul>
  17. 17. Will I Receive the Negotiated Purchase Price? <ul><li>Consolidated credit facilities pose special risks: </li></ul><ul><ul><li>Typical with investment firms’ portfolio companies, especially “roll-up” structures. </li></ul></ul><ul><ul><li>Company’s cash flows and assets support additional borrowing by other related companies, with cross-guarantees. </li></ul></ul><ul><ul><li>Exposes profitable, successful company to risk of failure on the part of its affiliated companies. </li></ul></ul>
  18. 18. Will I Receive the Negotiated Purchase Price? <ul><li>Additional Considerations Affecting Earn-Outs </li></ul><ul><ul><li>Defining the “metric” by which achievement of the targeted performance is measured. </li></ul></ul><ul><ul><ul><li>Gross revenues </li></ul></ul></ul><ul><ul><ul><li>Gross margin (gross profit) </li></ul></ul></ul><ul><ul><ul><li>EBITDA/EBIT </li></ul></ul></ul><ul><ul><ul><li>Net profit </li></ul></ul></ul>
  19. 19. Will I Receive the Negotiated Purchase Price? <ul><ul><li>Controlling and “auditing” the metric: Can the chosen metric be “corrupted” or “manipulated” (intentionally or innocently) by the Buyer? </li></ul></ul><ul><ul><ul><li>Target business so amalgamated into Buyer’s other business units that it loses its separate identity, making the metric unmeasurable or meaningless. </li></ul></ul></ul><ul><ul><ul><li>Buyer diverts business opportunities, revenues, profits to other business units within Buyer’s “family.” </li></ul></ul></ul>
  20. 20. Will I Receive the Negotiated Purchase Price? <ul><ul><ul><li>Buyer burdens company with expenses that are more appropriately borne by other business units in the Buyer’s family. </li></ul></ul></ul><ul><ul><ul><li>These risks generally increase as the metric moves down the income statement from gross revenues toward net income. </li></ul></ul></ul><ul><ul><li>Will Seller’s management remain involved in the business, and therefore have some influence on the achievement of the earn-out targets? </li></ul></ul>
  21. 21. Will I Receive the Negotiated Purchase Price? <ul><ul><li>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? </li></ul></ul><ul><ul><li>Some of these risks can be addressed with careful drafting, but only to a limited degree. Some degree of risk or uncertainty is inevitable. </li></ul></ul><ul><ul><li>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. </li></ul></ul>
  22. 22. Will I Retain the Purchase Price Post-Closing? <ul><li>Allocation of risk of unknowns and “unknowables”, either contractual or non-contractual. </li></ul><ul><li>Analysis will depend upon structure of sale transaction: Sale of Assets v. Sale of Equity. </li></ul>
  23. 23. Will I Retain the Purchase Price Post-Closing? <ul><li>Contractual Risk Allocation . Risks allocated and addressed via express terms and provisions in the final Purchase Agreement </li></ul><ul><ul><li>Assumed/Retained liabilities </li></ul></ul><ul><ul><li>Indemnification (baskets and caps) </li></ul></ul><ul><ul><li>Representations and warranties </li></ul></ul><ul><ul><li>Contract covenants </li></ul></ul>
  24. 24. Will I Retain the Purchase Price Post-Closing? <ul><li>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. </li></ul>
  25. 25. QUESTIONS ?

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