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Advanced Business Contracts: How to Minimize Purchase Price Disputes
1.
©2014 Baird Holm
LLP How to Minimize Purchase Price Disputes Advanced Business Contracts December 12, 2014
2.
More Information •
http://www.slideshare.net/jonathanwegner/ • https://www.linkedin.com/in/jonathanwegner ©2014 Baird Holm LLP jonathanwegner@bairdholm.com
3.
Agenda • Accounting
Standards and Methods • Key Structural Elements of Earn-Outs • Purchase Price Allocations • Post-Closing Purchase Price Adjustments • Purchase Price Dispute Resolution Provisions ©2014 Baird Holm LLP
4.
How to Minimize
Purchase Price Disputes: ACCOUNTING STANDARDS & METHODS ©2014 Baird Holm LLP
5.
Accounting Standards &
Methods • GAAP, consistently applied – Preferable Interpretations – Exceptions to GAAP ©2014 Baird Holm LLP • Cash-basis items • Vacation/PTO • Deferred Compensation
6.
Accounting Standards &
Methods • Accounting Principles – Based on interim or year-end reports? – Most-recent v. yearend balance sheet – Installment payments ©2014 Baird Holm LLP • Tax characterization (principal v. interest)
7.
Accounting Standards &
Methods • Accounting Principles – Common areas of dispute, timing of reviews ©2014 Baird Holm LLP • Excess or obsolete inventory • Doubtful receivables • Returns/allowances • Estimated liability accounts
8.
Accounting Standards &
Methods • Accounting Principles – Usually defined by reference to financial statements • Monday morning quarterbacking • The offset argument – Changes in accounting methodologies ©2014 Baird Holm LLP • Covenants and Reps to maintain consistency
9.
Accounting Standards &
Methods • GAAP, consistently applied – Use “consistently” consistently • “consistently provide allowance for bad debt” • “maintain allowance using consistent methodology” • “maintain a consistent amount in the allowance” – Sample Provision: ©2014 Baird Holm LLP • Allowance for Loan and Lease Losses
10.
Accounting Standards &
Methods 4.2 Allowance for Loan and Lease Losses. (a) As of the Pre-Closing Date, Seller’s ALLL shall be not less than the sum of the Minimum ASC 450 Reserves plus the Minimum ASC 310 Reserves, determined in accordance with this Section 4.2. (b) Exhibit 4.2(b) to the Disclosure Statement sets forth the methodology used to determine Seller's ALLL as of September 30, 2013, with allocations to Seller's Pass Credits and Non-Impaired Adversely Classified Loans (collectively, the "ASC 450 Reserves") and for Seller's Impaired Loans (the "ASC 310 Reserves"). (c) Seller's "Minimum ASC 450 Reserves" as of the Pre-Closing Date shall be equal to the sum of the Minimum ALLL for Pass Credits plus the Minimum ALLL for Non- Impaired Adversely Classified Loans, determined as follows: ©2014 Baird Holm LLP
11.
Accounting Standards &
Methods 4.2 Allowance for Loan and Lease Losses (cont’d). (i) Seller’s reserve for Seller's Pass Credits shall be not less than a sum equal to 3.1% times to aggregate dollar value of Seller's Pass Credits as of the Pre-Closing Date (the "Minimum ALLL for Pass Credits"). (ii) The portion of Seller’s ALLL allocated to Seller's Non-Impaired Adversely Classified Loans shall be not less than a sum equal to 11% times the aggregate dollar value of Seller's Non-Impaired Adversely Classified Loans as of the Pre-Closing Date (the "Minimum ALLL for Non-Impaired Adversely Classified Loans"). Seller shall not upgrade any Non-Impaired Adversely Classified Loans from the date of this Agreement to the Pre-Closing Date without the express written consent of Buyer. If Buyer withholds its consent, Seller may, at Seller's option, elect to designate one or more Non-Impaired Adversely Classified Loans as an Excluded Asset or maintain such loan's status as a Non-Impaired Adversely Classified Loan. ©2014 Baird Holm LLP
12.
Accounting Standards &
Methods 4.2 Allowance for Loan and Lease Losses (cont’d). (d) Exhibit 4.2(d) to the Disclosure Statement lists the amount of the total Seller Specific Reserves allocated in accordance with ASC 310 to each Loan Asset subject to impairment as of the date of this Agreement (the "Impaired Loans"). As of the date that is not fewer than 15 days prior to the Pre-Closing Date, Seller and Buyer shall reevaluate the portion of Seller’s ALLL attributed to each Impaired Loan and make additional reserves for any other loans that are subject to impairment testing under Seller's loan policy (including without limitation loans with balances in excess of $10,000.00, all classified loans, all nonaccrual loans, and any other loans required to be tested for impairment under Seller's loan policy) and which have suffered impairment in Buyer's or Seller's determination as of such date (the "Additional Impaired Loans"). If Seller disagrees with the reserve amount Buyer believes to be required for any Additional Impaired Loan or if Seller believes that all or a portion of any reserve previously made by Seller accordance with ASC 310 to an Impaired Loan should be reversed, Seller may request Buyer's consent to reverse all or a portion of the amount of such reserve. If Buyer denies Seller's request, Seller may, at Seller's option, elect to designate such Impaired Loan or Additional Impaired Loan as an Excluded Asset or maintain the level of Specific Reserve allocable to such loan. Seller and Buyer shall update Exhibit 4.2(d) to the Disclosure Statement as of the Pre-Closing Date to reflect the total agreed-upon reserves for all Impaired Loans and Additional Impaired Loans as of the Pre-Closing Date (the "Minimum ASC 310 Reserves"). ©2014 Baird Holm LLP
13.
How to Minimize
Purchase Price Disputes: EARN-OUT PROVISIONS ©2014 Baird Holm LLP
14.
Earn-Out Provisions •
Earn Outs: – Deal consideration payable to sellers that is contingent upon achievement of performance milestones or other metrics tied to future performance of a business. ©2014 Baird Holm LLP
15.
Earn-Out Provisions •
Purpose – Bridge reasonable valuation gap – Incentivize smooth transition – Realize full value of business – Reward future growth ©2014 Baird Holm LLP
16.
Earn-Out Provisions •
Commonly used for deals involving: – Early stage companies – New technology and innovations – Turnarounds – Private company deals – Management incentivization ©2014 Baird Holm LLP
17.
Earn-Out Provisions •
Negative Aspects – Buyer distraction / Seller overemphasis – Limitations on buyer/seller control • Restrictions on business operations • Delayed integration – Complex terms, protracted negotiation – Increases risk of post-closing dispute ©2014 Baird Holm LLP
18.
Earn-Out Provisions Source:
M&A Market Trends Subcommittee, Mergers & Acquisitions Committee, http://apps.americanbar.org/dch/committee.cfm?com=CL560003 ©2014 Baird Holm LLP
19.
Earn-Out Provisions Duration
of Earn-Out Provisions Source: M&A Market Trends Subcommittee, Mergers & Acquisitions Committee, http://apps.americanbar.org/dch/committee.cfm?com=CL560003 ©2014 Baird Holm LLP
20.
Earn-Out Provisions •
Timing Considerations – Shorter windows usually preferable • Lower credit and market risks for Sellers • Expedite Buyer integration • Elimination restrictions on operations imposed by the Earn-Out structure – However, longer windows may be necessary to achieve goals ©2014 Baird Holm LLP • Buyer defers earn-out payment (time value)
21.
Earn-Out Provisions •
Accounting Issues: Method – Buyer’s GAAP v. Seller’s GAAP – Changes to principles v. methods ©2014 Baird Holm LLP • Inventory • Bad debt
22.
Earn-Out Provisions •
Accounting Issues: Metrics – Revenues/Net Sales – Gross Margin – EBITDA – Net Profits ©2014 Baird Holm LLP
23.
Earn-Out Provisions •
Accounting Issues: Metrics – Common Seller Exclusions ©2014 Baird Holm LLP • Overhead costs • Capital improvements • Amortization of goodwill from acquisition • Interest charges • Extraordinary items • Management fees • Affiliate transactions
24.
Earn-Out Provisions •
Accounting Issues: Net Sales Sample “Net Sales” for any period means gross sales of the Products billed and shipped by COMPANY or its Affiliates, Licensees, or permitted assignees, less allowances and discounts actually given, fees or commissions to independent salesmen or independent sales representatives, returns, invoices written off as uncollectible (except if and insofar as such invoices are subsequently collected), billed taxes and customs duties paid by COMPANY or its Affiliates, Licensees, or permitted assignees, costs of insurance and transportation, freight and transit insurance and tax, and shall not include samples or demonstration materials or any sale to COMPANY employees or employees of its Affiliates, Licensees, independent sales representatives or permitted assignees for any reason other than resale. The term “Net Sales” shall not include: (i) sales directly or indirectly between the Parties, (ii) sales by independent distributors (but shall include sales to such independent distributors), or (iii) sales between COMPANY and its Affiliates, Licensees or permitted assignees. ©2014 Baird Holm LLP
25.
Earn-Out Provisions •
Accounting Issues: EBITDA Sample “EBITDA” of the Acquired Companies for any fiscal year shall mean their consolidated earnings from operations before interest, taxes, depreciation and amortization, calculated as if they were being operated as a single separate and independent corporation. EBITDA shall be determined in accordance with U.S. generally accepted accounting principles (GAAP) as consistently applied by Seller as determined by the firm of independent certified public accountants engaged by Buyer for purposes of its own audit (“Buyer’s Accountants”). In determining such EBITDA: ©2014 Baird Holm LLP
26.
Earn-Out Provisions •
Accounting Issues: EBITDA Sample (cont’d) (a) EBITDA shall be computed without regard to “extraordinary items” of gain or loss as that term shall be defined in GAAP; (b) EBITDA shall not include any gains, losses or profits realized from the sale of any assets other than in the ordinary course of business; (c) No deduction shall be made for any management fees, general overhead expenses or other intercompany charges, of whatever kind or nature, charged by Buyer to the Acquired Companies, except that Buyer may charge interest on any loans or advances made by Buyer to the Acquired Companies in connection with its business operations at a rate of 3.25%; (d) No deduction shall be made for legal or accounting fees and expenses arising out of this Agreement or the Purchase Agreement; and (e) The purchase and sales prices of goods and services sold by the Acquired Companies to Buyer or its affiliates or purchased by the Acquired Companies from Buyer or its affiliates shall be adjusted to reflect the amounts that the Acquired Companies would have realized or paid if dealing with an independent party in an arm’s-length commercial transaction. ©2014 Baird Holm LLP
27.
Earn-Out Provisions •
Non-Financial Metrics – Regulatory Approvals – Strategic Goals • Roll-up strategy • New Customers – Project Milestones ©2014 Baird Holm LLP • Product Launch • Number of Products Sold
28.
Earn-Out Provisions •
Payment Structure – All-or-Nothing v. Graduated • Graduated is more common • All-or-Nothing incentivizes Buyer to miss target – Right to offset indemnification – Valuation of Non-Cash Consideration ©2014 Baird Holm LLP
29.
Earn-Out Provisions •
Payment Structure: Stock Valuation The aggregate number of Parent Shares issuable pursuant to a Share Earnout Payment shall be determined by taking 50% of the Share Earnout Payment and dividing that amount by an amount equal to 95% of the volume weighted-average closing price per Parent Share as quoted on the NASDAQ Capital Market for the 30 trading days immediately prior to the end of the applicable EBITDA Calculation Period. All Parent Shares issued as Share Earnout Payments shall be subject to Lock-Up Agreements, provided that any Parent Shares issued as Share Earnout Payments shall not be restricted for a period in excess of six (6) months. An example of how Earnout Payments will be determined is attached hereto as Exhibit A . ©2014 Baird Holm LLP
30.
Earn-Out Provisions •
Information Rights – Quarterly, Semi- and Annual Reports ©2014 Baird Holm LLP • Sales Reports • Financial Statements • Security – Escrow funds – Security interest in target company
31.
Earn-Out Provisions Buyer
Covenants: Post-Closing Operation of Business Source: M&A Market Trends Subcommittee, Mergers & Acquisitions Committee, http://apps.americanbar.org/dch/committee.cfm?com=CL560003 ©2014 Baird Holm LLP
32.
Earn-Out Provisions Source:
M&A Market Trends Subcommittee, Mergers & Acquisitions Committee, http://apps.americanbar.org/dch/committee.cfm?com=CL560003 ©2014 Baird Holm LLP Fiduciary Disclaimer Provision
33.
Earn-Out Provisions •
Implied covenant of good faith and fair dealing – Horizon Holdings, L.L.C. v. Genmar Holdings, Inc., et al., 244 F. Supp. 2d 1250 (D. Kan. Feb. 11, 2003) ©2014 Baird Holm LLP
34.
Earn-Out Provisions •
Pro-Buyer Fiduciary Disclaimer The Seller acknowledges that (i) upon the closing of the transactions contemplated by the Purchase Agreement and except as expressly provided to the contrary in this Agreement, Buyer has the right to operate the Acquired Companies and Buyer’s other businesses in any way that Buyer deems appropriate in Buyer’s sole discretion, (ii) Buyer has no obligation to operate the Acquired Companies in order to achieve any Earnout Amount or to maximize the amount of any Earnout Amount, (iii) Buyer is under no obligation to continue to manufacture the Acquired Companies' product line(s), (iv) the Earnout Amount is speculative and is subject to numerous factors outside the control of Buyer, (v) there is no assurance that Seller will receive any Earnout Amount and Buyer has not promised nor projected any Earnout Amount, (vi) Buyer owes no fiduciary duty or express or implied duty to the Seller, including an implied duty of good faith and fair dealing, and (vii) the parties solely intend the express provisions of this Agreement to govern their contractual relationship. Seller hereby waives any fiduciary duty or express or implied duty of Buyer to the Seller, including an implied duty of good faith and fair dealing. ©2014 Baird Holm LLP
35.
Earn-Out Provisions •
Fiduciary disclaimers commonly avoided: – Avoid demands for extensive negative covenants – In the event of litigation, seller may challenge enforceability of waivers ©2014 Baird Holm LLP
36.
Earn-Out Provisions •
Pro-Seller Restrictive Covenants During the Earnout Period, Buyer agrees to act in good faith in the operation of the business of the Company as it relates to the achievement of the EBITDA Targets and the Parties agree that, except with the written consent of Seller, neither Buyer nor the Company, directly or indirectly shall cause or permit to be taken any action or engage in any transaction or series of related transactions, or enter into an agreement to do the same, with the primary purpose of reducing the Company’s EBITDA in order to reduce or eliminate any obligations to make an Earnout Payment hereunder, including, without limitation: ©2014 Baird Holm LLP
37.
Earn-Out Provisions •
Pro-Seller Restrictive Covenants (cont’d) (i) materially changing the nature of the business, (ii) changing the Company’s methods of accounting, billing and collection practices, (iii) making intercompany charges to the Company which reduce the Company EBITDA other than on arms-length terms not more costly than could be obtained from third parties, or (iv) failing to provide the Company with sufficient capital and bonding support. ©2014 Baird Holm LLP
38.
Earn-Out Provisions •
Pro-Seller Restrictive Covenants (cont’d) Buyer shall not directly or indirectly restrict or preclude the Company from pursuing business opportunities directly related to the Company’s business or the Company’s ability to deliver its products and services in a timely fashion in the ordinary course of business consistent with past practice. ©2014 Baird Holm LLP
39.
Earn-Out Provisions •
Pro-Seller Restrictive Covenants (cont’d) In the event that, during the Earnout Period, there is consummated a transaction or series of related transactions pursuant to which (A) all or substantially all of the assets used in the business of the Company are sold or transferred to a non-affiliate of Buyer, or (B) Buyer ceases to hold, directly or indirectly, a majority of the equity interests of the Company (whether by merger, consolidation, acquisition of equity interests or all or substantially all of the assets of the Company or otherwise), proper provision shall be made so that the successors and assigns of the Company or Buyer, as the case may be, assume the obligations set forth in Sections 2.4 and 2.5 and agree to be bound by the terms hereof to the same extent as Buyer. ©2014 Baird Holm LLP
40.
Earn-Out Provisions Source:
M&A Market Trends Subcommittee, Mergers & Acquisitions Committee, http://apps.americanbar.org/dch/committee.cfm?com=CL560003 ©2014 Baird Holm LLP Acceleration and Offset Rights
41.
How to Minimize
Purchase Price Disputes: PURCHASE PRICE ALLOCATIONS ©2014 Baird Holm LLP
42.
Purchase Price Allocation
• Tax effects of acquisitions – Section 1060 // Form 8594 – Section 338(h)(10) deemed asset sale – Section 368 tax-deferred reorganizations ©2014 Baird Holm LLP
43.
Purchase Price Allocation
• Asset Allocation – Arm’s length agreement between buyer and seller generally binding on parties IRS – Form 8594 requires “check the box” re: mutual agreement on allocation ©2014 Baird Holm LLP
44.
Purchase Price Allocation
• Seven Classes of Assets – Class I: Cash – Class II: Publicly traded securities – Class III: Accounts receivable, debts – Class IV: Inventory – Class V: Fixed assets – Class VI: Specific intangibles – Class VII: Goodwill ©2014 Baird Holm LLP
45.
Purchase Price Allocation
• Buyer Cost/Benefit of Allocations – Faster write-offs delay income recognition ©2014 Baird Holm LLP • Inventory generally fastest • Depreciable fixed assets (3-7 years) • Real estate improvements (15-39 years) – Land and subsidiary stock are not depreciable • Goodwill and other intangibles (15 years) – Cost Segregation of short-life property • Floor coverings, wall partitions, signs, window treatments, appliances
46.
Purchase Price Allocation
• Seller Cost/Benefit of Allocations – Capital gains vs. ordinary income recapture – Exceptions • Installment sale treatment for seller-financed deals (capital assets only) • 1031 tax-free exchange treatment – Goodwill (capital gain for amortization taken on purchased goodwill) ©2014 Baird Holm LLP
47.
Purchase Price Allocation
• Business Combinations (ASC 805) – Recognition criteria for identifiable intangible assets (e.g., contractual or legal right) • Valuation of Intangibles – Cost approach – Market approach – Income approach • Remaining Useful Life ©2014 Baird Holm LLP
48.
Purchase Price Allocation
• Business Combinations (ASC 805) – Categorize intangibles by type – Valuation approaches: income, market, cost • Ex.: Royalty relief, excess earnings, cost to create, – Determine remaining useful life ©2014 Baird Holm LLP • Definite: Specific estimate with support such as contract term or utilization of attrition rate (customer list/relationships) • Indefinite: Subject to impairment testing in subsequent reporting periods
49.
How to Minimize
Purchase Price Disputes: PURCHASE PRICE ADJUSTMENTS ©2014 Baird Holm LLP
50.
Why and When
These Matter Most True-Ups Delays: •Regulatory Approvals •Consents •Financing •Shareholder Approvals •Securities Registration ©2014 Baird Holm LLP
51.
Purchase Price Adjustments
• Benefits of Addressing in LOI – Back of the napkin // I-Banker Driven Terms – Detailed LOI ©2014 Baird Holm LLP • Fixed Price: Purchase price expressed as a simple statement of a fixed dollar amount, subject to working capital or total equity adjustments. • Formula Price: – Purchase price includes an Earn-Out – Non-cash consideration – Escrow holdback for true-ups or post-closing liabilities
52.
Purchase Price Adjustments
• Benefits of Addressing in LOI – Money left on the table (working capital) – Buyer gets benefit of agreed-upon balance sheet – Allocation of profits/economic risks in interim periods ©2014 Baird Holm LLP • Caveat: MAC Clause Protection
53.
Purchase Price Adjustments
Source: M&A Market Trends Subcommittee, Mergers & Acquisitions Committee, http://apps.americanbar.org/dch/committee.cfm?com=CL560003 ©2014 Baird Holm LLP
54.
Purchase Price Adjustments
• Definitions: Net Working Capital “Net Working Capital” means, as of a specified date and calculated in accordance with GAAP and the Accounting Principles by the Company prior to the Closing: (i) the sum of the dollar amounts of the following current asset accounts of the Company: cash and cash equivalents, accounts receivable, inventories, other current assets and prepaid expenses, less (ii) the sum of the dollar amounts of the following current liability accounts of the Company: accounts payable (which shall include the face amount of any checks of the Company outstanding as of the Closing) and accrued expenses. In no event will Net Working Capital include any portion of any Debt or Transaction Expenses (or any “prepaid” or other asset created as the result of the payment of a Transaction Expense). ©2014 Baird Holm LLP
55.
Purchase Price Adjustments
Exclusion of tax items from Net Working Capital Calculation Source: M&A Market Trends Subcommittee, Mergers & Acquisitions Committee, http://apps.americanbar.org/dch/committee.cfm?com=CL560003 ©2014 Baird Holm LLP
56.
Purchase Price Adjustments
• Definitions: Current Assets/Liabilities The term “Current Assets” shall mean the sum of the consolidated balances of cash, Company Accounts Receivable, prepaid expenses and any other current asset, other than Inventory (i.e., assets which will be amortized or expensed or received in cash within one year from the Closing Date). For the avoidance of doubt, Current Assets shall not include deferred tax assets. The term “Current Liabilities” shall mean the sum of the consolidated balances of accounts payable, accrued payrolls, accrued payroll taxes, accrued health care benefits and other current liabilities (i.e., liabilities which will be included in income or paid in cash within one year from the Closing Date). For the avoidance of doubt, Current Liabilities shall not include deferred tax liabilities. ©2014 Baird Holm LLP
57.
Purchase Price Adjustments
Source: M&A Market Trends Subcommittee, Mergers & Acquisitions Committee, http://apps.americanbar.org/dch/committee.cfm?com=CL560003 ©2014 Baird Holm LLP
58.
Purchase Price Adjustment
Source: M&A Market Trends Subcommittee, Mergers & Acquisitions Committee, http://apps.americanbar.org/dch/committee.cfm?com=CL560003 ©2014 Baird Holm LLP
59.
Purchase Price Adjustments
• Estimated NWC (No Collar) Not less than four (4) Business Days prior to the Closing Date, the Seller and the Shareholders shall provide Buyer with a good faith estimate (subject to Buyer's review and reasonable approval) of Net Working Capital as of Closing (“Estimated Net Working Capital”). For avoidance of doubt, consistent with the definition of Current Assets, the Estimated Net Working Capital will not contain any LIFO inventory reserve. The Estimated Payment shall be reduced by the amount, if any, by which the Target Net Working Capital exceeds the Estimated Net Working Capital, or increased by the amount, if any, by which the Estimated Net Working Capital exceeds the Target Net Working Capital (such reduction or increase, the “Estimated Net Working Capital Adjustment”). ©2014 Baird Holm LLP
60.
Purchase Price Adjustments
• Estimated NWC ($200,000 Collar) For purposes of this Agreement, the "Purchase Price" means an amount equal to: (i) $67,000,000 (the "Base Purchase Price"), plus (ii) Cash as of immediately prior to the Closing ("Closing Cash"), minus (iii) Indebtedness of Parent and Subsidiary as of immediately prior to the Closing ("Closing Indebtedness"), plus (iv) the amount, if any, by which the Net Working Capital (as defined below) exceeds the Baseline Working Capital Amount (as defined below) (but with it being understood that if Net Working Capital exceeds the Baseline Working Capital Amount by an amount that is less than or equal to $200,000, then Net Working Capital shall be deemed to be the Baseline Working Capital Amount and the amount of this clause (iv) shall be zero), minus (v) the amount, if any, by which the Net Working Capital is less than the Baseline Working Capital amount (but with it being understood that if Net Working Capital is less than the Baseline Working Capital Amount by an amount that is less than or equal to $200,000, then Net Working Capital shall be deemed to be the Baseline Working Capital Amount and the amount of this clause (v) shall be zero), minus (vi) the Transaction Expenses. ©2014 Baird Holm LLP
61.
Purchase Price Adjustments
Source: M&A Market Trends Subcommittee, Mergers & Acquisitions Committee, http://apps.americanbar.org/dch/committee.cfm?com=CL560003 ©2014 Baird Holm LLP Preparation of Closing Balance Sheet
62.
Purchase Price Adjustments
• Closing Balance Sheet Provision Within sixty (60) days after the Closing Date, Buyer shall deliver to the Seller a statement (“Closing Date Statement”) setting forth a calculation of Net Working Capital as of the Closing. In making its calculation of Net Working Capital on the Closing Date Statement, Buyer will have the right to reserve against or exclude from Current Assets any accounts receivable and inventory that have not been collected or that otherwise do not meet the requirements of Section 3.2(i)(iv) or Section 3.2(l), as applicable, at the time Buyer delivers its Closing Date Statement; provided that invoices aged less than 180 days when Buyer delivers its Closing Date Statement will not be excluded unless and to the extent there are other factors demonstrating their uncollectibility. For avoidance of doubt, consistent with the definition of Current Assets, the Actual Net Working Capital will not contain any LIFO inventory reserve. ©2014 Baird Holm LLP
63.
Purchase Price Adjustment:
Escrows Source: M&A Market Trends Subcommittee, Mergers & Acquisitions Committee, http://apps.americanbar.org/dch/committee.cfm?com=CL560003 ©2014 Baird Holm LLP
64.
Purchase Price Adjustments
• True-Up Process and Escrows – Indemnity provisions may require on their face that Seller pay Buyer twice for the same item. • Require language that prohibits indemnification for items addressed in the true-up procedures and the preparation of the closing date balance sheet. – Caps applicable to indemnification obligations should not affect purchase price adjustments. ©2014 Baird Holm LLP • Buyer will want right to the full amount of any indemnifiable loss exclusive of true-up items.
65.
Purchase Price Adjustments
• True-Up Escrow Provision Buyer shall pay to the Escrow Agent on the Closing Date via wire transfer of immediately available funds an amount equal to Two Hundred Fifty Thousand Dollars ($250,000.00) (the "True-Up Escrow Amount") to be held until completion of the true up process described in Sections 4.3 and ‑ 4.4 below and distributed in accordance with the provisions of this Agreement and the Escrow Agreement attached to this Agreement as Exhibit B. The True-Up Escrow Amount shall be paid by Buyer to the Escrow Agent at Closing. ©2014 Baird Holm LLP
66.
Purchase Price Adjustment
• Shortfall Obligation with Optional Draw from Indemnity Escrow If the Estimated Purchase Price is greater than the Final Purchase Price, then within five (5) Business Days after the Closing Statement becomes final and binding in accordance with the terms hereof (such difference, the "Short‑Fall Amount"), (1) the Shareholders shall jointly and severally make payment of the Short‑Fall Amount to Buyer, by wire transfer of immediately available funds to the account(s) previously designated by Buyer and (2) in addition to having the right to seek payment of the Short‑Fall Amount from the Shareholders, Buyer shall have the right (but not the obligation) to obtain payment of the Short‑Fall Amount from the Indemnity Escrow Account pursuant to the terms and conditions of this Agreement and the Escrow Agreement and the Shareholders' Representatives shall promptly (but in any event within ten (10) Business Days after receipt of written notice) cause the Shareholders to replenish the Indemnity Escrow Account by the amount of such payment. ©2014 Baird Holm LLP
67.
How to Minimize
Purchase Price Disputes: DISPUTE RESOLUTION PROVISIONS ©2014 Baird Holm LLP
68.
Dispute Resolution Provisions
• Aligning Incentives – Provisions should be designed to incentivize cooperation and reasonable negotiations. – Cost allocation is common method to incentivize good faith. ©2014 Baird Holm LLP
69.
Dispute Resolution Provisions
• Binding Arbitration Provision with Proportionate Fee Allocation All unresolved disputes shall be submitted to a third party arbitrator reasonably acceptable to Buyer and Seller (the “Arbitrator”), who shall be engaged to provide a final, binding and conclusive resolution of all such unresolved disputes within thirty (30) Business Days after such engagement. The Arbitrator shall act as an independent arbitrator to determine only those issues that remain in dispute. Upon final resolution of all disputed items, the Arbitrator shall issue a report showing its final calculation of such disputed items. The determination of the Arbitrator shall be final, binding and conclusive on Seller and Buyer and each of their respective Affiliates, successors and assigns, and not subject to collateral attack for any reason (other than manifest error on its face or fraud), and the fees and expenses of the Arbitrator shall be borne by Seller and Buyer in proportion to the amounts by which their proposals differed from the Arbitrator's final determination. ©2014 Baird Holm LLP
70.
Dispute Resolution Provisions
• Scope of Arbitrator’s Authority In no event shall the Arbitrator assign a value to any item greater than the greatest value for such item claimed by either Buyer or Seller, as applicable, or less than the small value for such item claimed by any such Party and the Arbitrator shall be required to make its determination in accordance with the following: (i) in accordance with GAAP and applying the Accounting Principles and the definition of Net Working Capital in Section 10.1(gg) ; (ii) based solely on the presentations by Seller and Buyer and not by independent review; (iii) bound by the principles set forth in this Section 2.2 (without regard to principles of equity); and (iv) only determining the items in dispute and taking into account at face value the items in the Closing Date Statement that were not specifically object to in the Objection Notice or that were otherwise resolved by Buyer and Seller in accordance with this Section 2.2(c). Any documents submitted by either Buyer or Seller to the Arbitrator, either unilaterally or at the Arbitrator’s request, shall be simultaneously submitted to the other Party. In connection with the resolution of any dispute, Seller and Buyer shall each pay its own fees and expenses, including without limitation, legal, accounting and consultant fees and expenses. ©2014 Baird Holm LLP
71.
Dispute Resolution Provisions
• Baseball Arbitration If issues in dispute are submitted to the Accountants for resolution, (i) each party will submit to the Accountant a proposed final Purchase Price, (ii) each party will furnish to the Accountants such workpapers and other documents and information relating to the disputed issues as the Accountants may request and are available to that party (or its independent public accountants), and will be afforded the opportunity to present to the Accountants any material relating to the determination and to discuss the determination with the Accountants; (iii) the Accountants will select the final Purchase Price proposed by either Buyer or the Shareholders' Representatives (and shall not be permitted to select any other amount), (iv) the Accountants determination of the final Purchase Price shall be based solely on the materials submitted by Buyer, on the one hand, and the Shareholders' Representative, on the other hand, which are in accordance with the guidelines and procedures (including definitions) set forth in this Agreement (i.e., not on the basis of an independent review), (v) the determination by the Accountants, as set forth in a notice delivered to both parties by the Accountants, will be binding and conclusive on the parties; and (vi) the fees and expenses of the Accountants for such determination shall be borne by the party whose final Purchase Price is not selected by the Accountant. ©2014 Baird Holm LLP
72.
©2014 Baird Holm
LLP Questions?
73.
More Information •
http://www.slideshare.net/jonathanwegner/ • https://www.linkedin.com/in/jonathanwegner ©2014 Baird Holm LLP jonathanwegner@bairdholm.com
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