Buying and Selling a Business: Getting the Deal Done October 7, 2009

Transcription

1 Buying and Selling a Business: Getting the Deal Done October 7,

2 Deal Sequencing Solicitation and confirmation of interest Confidentiality agreement Negotiation of key business terms Letter of intent Due diligence Deal documentation Satisfaction of closing conditions Closing Post-closing matters Riddell Williams P.S. 2 Tatum, LLC

3 The Deal Phase Months Identify buyer/seller Days/Weeks Negotiate key business terms Days Sign LOI Due diligence Weeks Days/Weeks Draft of purchase agreement Weeks Negotiate purchase agreement Days Sign purchase agreement Financing Months Months Approvals/consents Closing Days Post closing Up to years Riddell Williams P.S. 3 Tatum, LLC

4 Due Diligence Buyer s perspective Identify risks and avoid disasters Gain valuable knowledge for negotiations, transitioning, operational changes Seller s perspective: Risk to operations, employees, customers, suppliers, competitors Investigation of buyer (where seller will be compensated with buyer stock) Riddell Williams P.S. 4 Tatum, LLC

5 The Diligence Team May be comprised of insiders and outsiders Often involves expertise from several disciplines within an organization Most buyers do not have regular due diligence teams Riddell Williams P.S. 5 Tatum, LLC

6 Virtual Data Rooms Pros Security Efficiency Proof of disclosure Metrics Con Cost Riddell Williams P.S. 6 Tatum, LLC

7 Various Types of Due Diligence

8 Various Types of Due Diligence Businessperson s review What is the opportunity? Why should I pursue it? Investigative due diligence Initial In depth Confirmatory due diligence Riddell Williams P.S. 8 Tatum, LLC

9 Businessperson s Review Overview of key attributes of the target Objectives: Should the opportunity be pursued? If so, what price should be paid? Develop initial set of issues in pursuing acquisition Always situational Riddell Williams P.S. 9 Tatum, LLC

10 Investigative Due Diligence Before and after LOI (and before definitive agreement) Formulation of scope due diligence request list Negotiation often leads to revelations about the target Additional investigation while negotiations are ongoing Riddell Williams P.S. 10 Tatum, LLC

11 Areas of Investigation Corporate Records Employment/HR Government Regulation Financial Assets/Liabilities Environmental Tax Litigation Insurance IP/other business information Contracts Riddell Williams P.S. 11 Tatum, LLC

12 Confirmatory Due Diligence What representations has the seller made in the agreement? How can those be verified before closing? Riddell Williams P.S. 12 Tatum, LLC

13 Problems in Effective Due Diligence Lack of planning Team organization Is there an effective team leader? Who to report to? Communications/sharing problems Lack of clear reporting format Insufficient time Insufficient expertise Buyer already determined to do deal Riddell Williams P.S. 13 Tatum, LLC

14 Primary Deal Structures

15 Primary Deal Structures Purchase/sale of stock Purchase/sale of assets Merger (several variations) Riddell Williams P.S. 15 Tatum, LLC

16 Legend T = Target B = Buyer TH = Target s Holders BH = Buyer s Holders N = New Sub = Cash = Assets = Stock = Entity = Holders = Holdings = Transfer = Merger Riddell Williams P.S. 16 Tatum, LLC

17 Sale of Stock T Co. TH 1. T remains intact T T Co. B 2. T becomes a wholly owned subsidiary of B 3. TH cashed out and/or become shareholders of B Riddell Williams P.S. 17 Tatum, LLC

18 Sale of Stock: After Closing T Co. TH B T Riddell Williams P.S. 18 Tatum, LLC

19 Sale of Assets TH T BH B 1. T remains intact (and holds $ and/or B stock received from B) 2. T s assets and liabilities transfer to B 3. BH own B and business transferred from T 4. TH continue to own T Riddell Williams P.S. 19 Tatum, LLC

20 Sale of Assets: After Closing TH BH T B Riddell Williams P.S. 20 Tatum, LLC

21 Direct Merger TH BH 1. T shares converted into $ and/or B shares T Co. 2. T merged into B and ceases to exist T B Co. B 3. BH own combined B and T 4. TH cashed out and/or become shareholders of B Riddell Williams P.S. 21 Tatum, LLC

22 Direct Merger: After Closing TH BH B* *Includes T Riddell Williams P.S. 22 Tatum, LLC

23 Forward Triangular Merger BH 1. T shares converted into $ and/or stock of B TH B 2. T merged into N and ceases to exist 3. N remains a wholly owned subsidiary of B T T Co. N 4. BH own B and, indirectly, business of old T through N 5. TH cashed out and/or become s/hs of B Riddell Williams P.S. 23 Tatum, LLC

24 Forward Triangular Merger: After Closing TH BH B N* *Includes T Riddell Williams P.S. 24 Tatum, LLC

25 Reverse Triangular Merger BH 1. N shares converted into T shares 2. T shares converted into $ and/or B shares TH B 3. T becomes wholly owned subsidiary of B 4. BH own B and, indirectly, T T T Co. N 5. TH cashed out and/or become s/hs of B Riddell Williams P.S. 25 Tatum, LLC

26 Reverse Triangular Merger: After Closing TH BH B T* *Includes N Riddell Williams P.S. 26 Tatum, LLC

27 What Drives a Deal Structure? Stock sale, asset sale or merger? Division or business line vs. entity Liability concerns Tax considerations Third party consents Riddell Williams P.S. 27 Tatum, LLC

28 Other Structure Considerations Shareholder approvals (statutory or private rights) Voting agreement Dissenters rights Regulatory issues Note: no bulk sales law in WA Financing issues Influence of third parties (lenders, suppliers) Closing mechanics Ease of transition Riddell Williams P.S. 28 Tatum, LLC

29 Tax-Free Structure Alternatives Corporations only T Co. Purchase/sale of stock: Buyer s voting stock must constitute 100% of consideration to Target shareholders Buyer must own at least 80% of Target s stock post-closing Purchase/sale of assets: Buyer s voting stock must constitute at least 80% of consideration to Target Target must be liquidated Buyer must acquire substantially all of Target s assets Riddell Williams P.S. 29 Tatum, LLC

30 Tax-Free Structure Alternatives Direct Merger: Buyer s stock (voting or non-voting) must constitute at least 40-50% of consideration to Target shareholders Forward Triangular Merger: Buyer s stock (voting or non-voting) must constitute at least 40-50% of consideration to Target shareholders Acquisition sub must acquire substantially all of Target s assets Reverse Triangular Merger: Buyer s voting stock must constitute at least 80% of consideration to Target shareholders Target must retain substantially all its assets Riddell Williams P.S. 30 Tatum, LLC

31 Comparison of Structures Merger Stock Purchase Asset Purchase Liabilities Assumed 100% 100% As negotiated Assets/ Business Acquired 100% 100% As negotiated Tax Considerations Will affect decision, but tax-free or taxable deal can accommodate all three structures Riddell Williams P.S. 31 Tatum, LLC

32 Comparison of Structures Merger Stock Purchase Asset Purchase TH voting Yes No, but TH must agree to sell Only if all or substantially all assets sold BH voting Sometimes in direct merger, or if B public and issues > 20% of its stock Only if B public and issues > 20% of its stock Only if B public and issues > 20% of its stock Minority TH No Possibly No Riddell Williams P.S. 32 Tatum, LLC

33 Comparison of Structures Merger Stock Purchase Asset Purchase 3 rd Party Approvals More limited Most limited Extensive Closing Mechanics Straightforward Straightforward Complex Ease of Asset/ Employee Transfer High High Low Riddell Williams P.S. 33 Tatum, LLC

34 Deal Structure Summary Stock purchase more likely if: Buyer wishes to acquire all of the assets and liabilities of Seller, and Sole or small number of like-minded shareholders Asset purchase more likely if: Buyer will not agree to purchase all assets and/or assume all liabilities of Seller, or Seller is selling one line of business and retaining others Merger more likely if: Buyer will acquire all of the assets and liabilities of Seller, and Number of shareholders or number of recalcitrant shareholders makes stock purchase impractical Riddell Williams P.S. 34 Tatum, LLC

35 Asset Purchase Agreement Basic Functions

36 Asset Purchase Agreement Basic Functions Identification of parties Definitions Description of assets to be sold or excluded Description of consideration to be paid or transferred Allocation of purchase price Closing details Allocation of risks and costs Riddell Williams P.S. 36 Tatum, LLC

37 Identification of Parties Buyer/Seller Possibly others: Affiliates Guarantors Principal shareholders Key employees Riddell Williams P.S. 37 Tatum, LLC

38 Description of Assets Included assets Inclusive/exclusive descriptions Excluded assets Riddell Williams P.S. 38 Tatum, LLC

39 Consideration to be Paid/Transferred Amount Fixed price/formula price Payment terms Cash/stock Other property Deferred payment obligations Assumption of target liabilities Earnest money Riddell Williams P.S. 39 Tatum, LLC

40 Allocation of Purchase Price Allocate among categories of purchased assets Compromise of tax objectives Minimize exposure if audited Riddell Williams P.S. 40 Tatum, LLC

41 Closing Details Where When (with outside date) Effective time Deliveries Riddell Williams P.S. 41 Tatum, LLC

42 Allocation of Transaction Risks Critical components of the agreement Assurances that parties get what they expect Consequences of failure to perform Unexpected occurrences who bears cost Riddell Williams P.S. 42 Tatum, LLC

43 Allocation of Risk - Components Reps and warranties setting baseline Pre-closing covenants protecting baseline Closing conditions protecting closing expectations Post-closing covenants protecting post-closing expectations Collateral/guaranties protecting payment Indemnification Riddell Williams P.S. 43 Tatum, LLC

44 Representations and Warranties Setting the Baseline Seller disclosure organization and delivery of information, subject to disclosure schedules Confirmation of buyer s due diligence/ assumptions Identification of issues Establishment of closing expectations Basis for indemnification claims after closing Riddell Williams P.S. 44 Tatum, LLC

45 Pre-Closing Covenants Protecting the Baseline Provisions to get business to closing Continuation of business in ordinary course Preservation of business relationships Prohibition on certain activities Provisions to get transaction to closing Buyer access Confidentiality No shop covenant Commitment to satisfy closing conditions Riddell Williams P.S. 45 Tatum, LLC

46 Closing Conditions Protecting Closing Expectations Matters so fundamental that integrity of transaction at stake Accuracy of representations Performance of covenants Consents/approvals of government/contract/shareholders Purchaser financing Critical ancillary documents Third party assurances Riddell Williams P.S. 46 Tatum, LLC

47 Post-Closing Covenants Protecting Post-Closing Expectations Assistance to Buyer in post-closing period Transition services (separate agreement?) Access to books & records Confidentiality Protection in post-closing period Non-competition/non-solicitation covenants (separate agreement?) Credit protection (collateral) Protection of non-cash consideration Registration rights Riddell Williams P.S. 47 Tatum, LLC

48 Indemnification - Provisions FOR THE BUYER Vehicle for adjusting purchase price Protection against innocent misrepresentations FOR THE SELLER Protection against post-closing operations SCOPE Representation and warranties Third parties Pre-closing and ongoing liabilities Riddell Williams P.S. 48 Tatum, LLC

49 Indemnification - Provisions Sandbagging vs. actual knowledge Mechanisms for resolution of claims Ground rules Guaranties Set-off rights Escrow agreements Riddell Williams P.S. 49 Tatum, LLC

50 Indemnification - Limitations Baskets Deductible only damages that exceed the basket amount are recoverable by buyer Threshold once the basket is full (or overflowing), buyer can recover from dollar one (also called tipping basket ) Riddell Williams P.S. 50 Tatum, LLC

51 Indemnification - Limitations Caps The maximum amount buyer can recover under the indemnities Survival Period The length of time (in months) after closing during which reps & warranties must remain true and seller is responsible for indemnifying buyer Riddell Williams P.S. 51 Tatum, LLC

52 Indemnification - Limitations Exclusive remedy Carveouts Fraud Environmental Taxes Fundamental representations Riddell Williams P.S. 52 Tatum, LLC

53 Indemnification - Limitations (3) For years , inclusive From Houlihan Lokey s May 2009 Purchase Agreement Study Riddell Williams P.S. 53 Tatum, LLC

54 Ancillary Agreements Escrow Voting Employment Consulting Noncompete Transition services Earnout Riddell Williams P.S. 54 Tatum, LLC

55 Earnouts Arise out of disagreement over value of the business Constitute a portion of the purchase price Mechanism to make the deal possible while protecting both parties bridge the gap Additional payment for achievement of post-closing performance metrics Metrics usually relate to the income statement Riddell Williams P.S. 55 Tatum, LLC

56 Earnouts Buyer advantages: Can allow Buyer to prevail over competing offers Reduces initial cash payment Minimizes risk of overpayment Can motivate key Seller-managers operating the business post-closing Can align interests of key Seller-managers with Buyer Can be a retention device for key Seller-managers Can often be internally financed Riddell Williams P.S. 56 Tatum, LLC

57 Earnouts Seller advantages: Projects Seller s confidence in the business during negotiations May allow Seller to get a higher price than otherwise available Riddell Williams P.S. 57 Tatum, LLC

58 Earnouts Challenges: Inherently complex Metrics must be clear and comprehensive Targets must be objective and easy to measure Increased potential for conflict Sellers prefer gross revenue based formula Buyers prefer net earnings based formula Key issue: Seller s ability to control the business during the earnout period Riddell Williams P.S. 58 Tatum, LLC

59 Earnouts Work best when the acquired business can be operated by Seller as a separate entity, with Buyer hands-off Doesn t work if acquired business is quickly integrated into Buyer Next best is to establish detailed parameters for operation during the earnout period clear minimum requirements Missed earnout targets can lead to low Sellermanager morale Seller still well-advised to maximize up-front value Riddell Williams P.S. 59 Tatum, LLC

60 Buying and Selling a Business: Getting the Deal Done Questions? Bryce Holland and Josh Piper Riddell Williams P.S th Avenue, Suite 4500 Seattle, Washington T: F: Del Clark and David Douglass Tatum, LLC 601 Union Street, Suite Seattle, Washington Telephone: Facsimile: