M&A Purchase Price Adjustment Clauses Crafting Provisions to - PowerPoint PPT Presentation

Presenting a live 90-minute webinar with interactive Q&A M&A Purchase Price Adjustment Clauses Crafting Provisions to Mitigate Buyers' Financial Risks and Achieve Fair Compensation for Sellers THURS DAY, MARCH 29, 2012 1pm East ern | 12pm Cent ral | 11am Mount ain | 10am Pacific Today’s faculty features: W. Bryan Rakes, Part ner, Venable , Balt imore Michael T . Pedone, Vice President & Deput y General Counsel, Redwood Capital Investments , Balt imore Mat t hew Roberson, S enior Vice President , SC&H Capital , Balt imore The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .

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Purchase Price Adjustment Clauses in M&A March 29, 2012 W. Bryan Rakes Venable Michael T. Pedone Redwood Capital Investments Matthew Roberson SC&H Capital

6 Valuation and Purchase Price • "Price is what you pay. Value is what you get.“ Warren Buffett • Valuation is in the eye of the buyer. • Purchase price is what the seller receives in consideration for their company.

7 Valuation • How to buyers determine valuation? ▫ Intellectual property ▫ Customer access ▫ Contracts ▫ Employees ▫ Competitive advantage ▫ Sustainable cash flow

8 Purchase Price • Purchase price reflects the tangible statement of valuation that a buyer sees in a company • Purchase price can be structured to bridge gaps in valuation expectations • Purchase price is consideration paid for a going concern, which implies that the business will have an appropriate level of working capital to continue business operations and support future growth.

9 Working Capital • Working capital is critical to the continued operations of a company • Buyers want to ensure above adequate levels of working capital convey with the sale • Sellers should want to convey an adequate level of working capital, but no more than necessary • A purchase price adjustment is often used to assure both buyer and seller that a mutually agreed upon level of working capital is delivered at close

10 Working Capital in an LOI • Working capital is often addressed in the LOI, along with early language acknowledging the need for a purchase price adjustment • Simple Example: • Purchase Price Adjustment. The Definitive Agreement would provide for an upward or downward adjustment of the Purchase Price based on a mutually agreed working capital, net assets or similar target metric for the Business as of the Closing that is based on the Company’s current assets less current liabilities as historically accounted for by the Company, excluding any expenses related to the consummation of the transactions contemplated by this Letter.

11 Working Capital in an LOI • Consideration to the Sellers will be adjusted on a dollar for dollar basis upward or downward based upon the comparison of the actual closing working capital of the Company to the normalized average working capital requirements of the Company over a twelve month period ("Working Capital Target"), The Company will estimate the Working Capital as of the closing date ("Estimated Working Capital") and the Consideration to the Sellers will be adjusted for the difference between the Estimated Working Capital and the Working Capital Target. Within 90 days of closing, Newco will provide the Sellers the actual closing working capital balance (the "Closing Working Capital"), subject to a mutually agreed resolution mechanism. • There will then be a true-up adjustment based on the difference between the Estimated Working Capital and the Closing Working Capital, The Target Working Capital, Estimated Working Capital and Closing Working Capital shall (i) be prepared in accordance with GAAP and consistent with past practices (to the extent in accordance with GAAP), and (ii) not include any cash, indebtedness and other fixed obligations, income taxes, accounts receivable from affiliates (other than those from Company incurred in the ordinary course and on terms customary for the industry), accounts payable or other sums owing to affiliates (other than those from Company incurred in the ordinary course and on terms customary for the industry), Transaction-related expenses of the Company and Sellers, or any excluded assets or liabilities .

12 Definitions of Working Capital • “ Working Capital ” means, as of a given date, the total amount of the Company’s current assets, less the total amount of the Company’s current liabilities. • “ Working Capital ” means the working capital of the Business calculated in accordance with Exhibit A attached hereto.

13 Definitions Continued… “ Net Working Capital ” means the following:  prepaid expenses and other current assets included in the Purchased Assets;  less the sum of:  the accrued expenses of the Business included in the Assumed Liabilities; and  the accrued payroll, taxes, vacation and bonus liabilities (including commissions), and other current liabilities of the Business included in the Assumed Liabilities other than deferred revenue; it being understood that the following shall not be included in the calculation of “Net Working Capital”: (x) Business Receivables; (y) Business Payables; and (z) cash and cash equivalents.

14 Definitions Continued… “ Working Capital ” means the following, based on a balance sheet of Seller as of a given date prepared in accordance with GAAP: (a) the net accounts receivable of Seller as set forth on such balance sheet; (b) plus the accrued fees payable by Buyer to Seller under Section 5 of the XYZ Agreement as set forth on such balance sheet; and (c) less the sum of: (i) the accounts payable of Seller as set forth on such balance sheet, but not including any accounts payable representing amounts payable to independent contractors of the Business; (ii) the dollar amount of accrued but unpaid vacation time credited to Transferred Personnel by Buyer pursuant to Section 8.3(f) hereof; (iii) the accrued commissions payable by Seller under referral agreements as set forth on such balance sheet; (iv) the $39,600 in setup and on-boarding costs payable by Seller to Buyer under Section 4 of the XYZ Agreement as set forth on such balance sheet; and (v) the deferred revenue of Seller as set forth on such balance sheet.

15 Use of a “Collar” • “Working Capital Lower Target” means Six Hundred Sixty-Five Thousand Dollars ($665,000). • “Working Capital Upper Target” means Seven Hundred Forty-Five Thousand Dollars ($745,000). If the Final Net Working Capital is: i. greater than the applicable Working Capital Upper Target (the amount of such excess, the “Excess Amount” ), Buyer shall pay such Excess Amount to Seller within five (5) Business Days after the determination of the Final Balance Sheet; or ii. less than the applicable Working Capital Lower Target (the amount of such shortfall, the “Shortfall Amount” ), Seller shall pay such Excess Amount to Buyer within five (5) Business Days after the determination of the Final Balance Sheet.