Selling a Closely-Held BusinessNavigating Complexities Regarding Process, Valuation, Due Diligence, Structure, Negotiation

Strategy and More

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THURSDAY, MAY 23, 2019

Presenting a live 90-minute webinar with interactive Q&A

Michael A. Ellis, Partner, Buckingham Doolittle & Burroughs, Cleveland

Terri Krivosha, Partner, Maslon, Minneapolis]

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Selling a closely-held businessMichael Ellis | PartnerBuckingham, Doolittle & Burroughs, LLC

216.615.7302 | mellis@bdblaw.com

• What are post-sale plans for time?

• Money objectives:

• Self

• Family

• Employees

• Charities

• Objective may impact transaction structure

• Understand timing and process

• Align objectives of ALL owners

Establish Post-Sale Goals

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Broker |Lawyer |Accountant

• Due diligence –experience/reputation

• Determine process, auction process, unsolicited overture

Assembleyour team

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Determine value of the business

Adjust expectations of owners• Lower multiples for smaller

enterprises

• Comparable sales

• Uniqueness of enterprise

- Concentrated customer base

- Aging equipment/facility

Quality of Earnings report

Adjusted Income

Valuation

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• Corporate records

• Missing contracts, title

• Internal audit of intellectual property, environmental, employees’ noncompetes

Review, maintenance and clean-up

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• Ensure key personnel stay with organization through sale process/beyond

• Inclusion of other personnel in process

• It’s deductible and good vehicle to bolster confidentiality and non-complete provisions

• When paid? Who pays?

Stay/retention bonuses

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• Owners with varying objectives

• Passive vs. active owners (separate consideration for non-competes?)

• Majority vs. minority owners

• Post-sales continuation with business

Conflicts

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• Shareholder representative

• Starting to see use of Shareholder Representative Services, LLC

• Rep & warranty insurance

• Indemnification issues

Dealing with buyers

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Secure Buyer’s commitment that Seller’s counsel’s communications and files belong to the Seller’s equity owners

Waive conflict issues

Know your client

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Questions?

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© 2019 Maslon LLP

Selling a Closely-Held Business

Thursday, May 23, 2019

For Strafford

Presented by

Terri Krivosha, Partner

terri.krivosha@maslon.com

Maslon LLP

© 2019 Maslon LLP

• Sign NDA

• Obtain financials

• Coach client with

questions

• Interview more

than one

• Make decision

• Review IB

agreement;

negotiate tail, fee?

Choosing an Investment Banker

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© 2019 Maslon LLP

• Nondisclosure Agreement

➢ Review Form from IB

➢ Use as proxy for negotiating

transaction

• IOI

➢ Be part of deal team

➢ If multiple owners facilitate goal setting

process

▪ Prework

▪ Meeting

▪ Follow up

Process

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© 2019 Maslon LLP

• Purchaser usually provides

• Detail may indicate sophistication of buyer and

its counsel

• Consider bifurcating extension of stand still

period with milestones

• Stage due diligence information if Buyer is a

competitor; break up fee if walk away after last

stage of DD

• Consider whether and to what extent Earn Out if

proposed will be accepted

• Governing Law; Venue; Mand Mediation

Letter of Intent

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© 2019 Maslon LLP

• Consider corporate structure of Seller

• S corp, C Corp, LLC

• LLC Dropdown as possibility for

S corp seller and LLC buyer with

Seller roll over

• Stock transaction may require

fewer consents

• Buyers typically adverse to stock

transactions unless only way to

do deal

Structure

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© 2019 Maslon LLP

• Tax Impact

• Stock—typically more favorable

to Seller; if Seller C corp may be

deal breaker if buyer does not

buy stock

• Buyer may request 338(h)(10)

election to achieve basis step up;

Seller should negotiate gross up

for tax impact

Structure

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© 2019 Maslon LLP

Structure

• Tax Impact

• Asset—typically more favorable to

Buyer;

• Buyer achieves step up in basis of

assets;

• Result causes additional ordinary

income tax to Seller;

• Negotiate gross up for Seller

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© 2019 Maslon LLP

• List Preparation

• Seller Data Room Management

• Should Seller prepare environmental

audits, quality of earnings, audited

financials

Due Diligence

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• Escrow

• 10% is market

• 1 audit cycle survival

• Serve as cap for

indemnification

• Possibility of

representation and

warranty insurance

Drafting Issues

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Drafting Issues• Working Capital

• Cash free/TP debt free

• Current assets: A/R/ Inventory/Prepaids

• Current liabilities: Trade debt/deferred revenue/accrued employee obligations

• 12 month trailing average

• Attach example as schedule

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© 2019 Maslon LLP

• Allocation of Risk

• Interplay with Knowledge

• Knowledge Definition

➢ Actual

➢ Due Inquiry of employees and TP

➢ Reasonably Know

Representations & Warranties

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© 2019 Maslon LLP

Disclosure Schedules

• Prepare template for client

• Add cross referencing language:

Any event or condition specifically disclosed in any

of the Schedules in a manner that would be obvious

on its face shall be deemed disclosed and

incorporated into any other of the Schedules with

the same degree of specificity where such

disclosure would be appropriate, relevant and

obvious on its face.

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© 2019 Maslon LLP

Due Diligence. Purchaser acknowledges that it has had

the opportunity to conduct due diligence and investigation

with respect to the Company, and in no event shall the

Seller or Seller Shareholder have any liability to Purchaser

with respect to a breach of representation, warranty or

covenant under this Agreement to the extent that the

Purchaser or any of its employees, members, directors,

officers or consultants knew of such breach as of the

Closing Date.

Drafting Considerations/

Anti-Sandbag

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© 2019 Maslon LLP

Anti-Sandbag

• Consider whether governing law

requires reliance in order to bring a law

suit regarding breach of rep

• If reliance is required and agreement

has no anti-sandbag and can prove that

information was in data room, then

buyer may not be able to bring

indemnification claim.

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© 2019 Maslon LLP

• When to negotiate if joint/several,

several or limited; LOI or wait to PA

• Control

• Limitations

• Insurance Proceeds

• Settlement

• Multiple shareholders; need

representative

Drafting Considerations

Indemnification

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© 2019 Maslon LLP

Basket

• Tipping

• Non-Tipping

• De Minimis

• Materiality Scrape

• What is market

Cap

• 25-30%

Drafting Considerations

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© 2019 Maslon LLP

1. Talk to opposing counsel on the phone as early in the

process as possible to establish rapport.

2. Don’t be afraid of silence. Let it fill the space until

someone else talks.

3. Try to schedule at least one in person meeting.

4. If the conversation is stuck, call a short break.

Top Eleven Deal Negotiating Tips from Terri Krivosha

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© 2019 Maslon LLP

5. If the conversation is stuck on one issue, put the issue

in a “parking lot” and continue negotiating other points.

6. Propose a package deal on the “parking lot” issues

when all the issues have been discussed.

7. After the first draft of the agreement has been

commented on by opposing counsel, identify the high--

level issues in an issues list and resolve those in a call

or meeting before sending back a revised draft. Don’t

play “ping pong”.

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8. Build a good internal team and provide learning

opportunities for younger lawyers by allowing them to

attend any calls or negotiating sessions and write off

the time if it is purely educational for them.

9. Manage the expectations of opposing counsel and

your team proactively and be accurate. Under promise

and over deliver—always.

10. Prepare and send out a closing transcript no later than

two weeks after the deal is closed.

11. Celebrate the closing with your client as well as your

team.

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