Presenting a live 90-minute webinar with interactive Q&A Structuring Mergers and Sales of Closely Held Businesses Navigating Complexities Regarding Valuation, Due Diligence, Stock vs. Asset Sale, and More THURSDAY, FEBRUARY 26, 2015 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Benjamin Lindblad, Partner, Dorsey & Whitney , Minneapolis John Marsalek, Partner, Dorsey & Whitney , Minneapolis 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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STRUCTURING MERGERS AND SALES OF CLOSELY HELD BUSINESSES Ben Lindblad lindblad.ben@dorsey.com John Marsalek marsalek.john@dorsey.com February 26, 2015
Structuring Mergers and Sales of Closely Held Businesses • Introduction – Key legal, business and tax considerations – Due Diligence – Transaction structure – Valuation Challenges 6
Key Considerations
Key Considerations (Cont.) • Deal Structure – 3 basic types of transactions • Asset Purchase • Stock Purchase • Merger Discuss later in more depth 8
Key Considerations (Cont.) • Diligence/Pre-Sale Preparation – Discuss later in more depth 9
Key Considerations (Cont.) • Valuation Challenges – Discuss later in more depth 10
Key Considerations (Cont.) • Indemnification – Joint and several liability – Subject matter – Survival – Escrows 11
Key Considerations (Cont.) • Indemnification (Cont.) – Limits on Indemnification • Cap • Baskets – Deductible – Dollar One or tipping basket – Other Limits on Indemnification – Antisandbag – Disclaimer of Damages 12
Key Considerations (Cont.) • Closing Conditions – Conditions that must be true to close the deal – Representations and warranties – Common Closing Conditions 13
Key Considerations (Cont.) • Third Party – Timing Issues – Regulatory – Contracts – Stockholder Approval 14
Key Considerations (Cont.) • Non-competes – Scope – Geography – Length 15
Key Considerations Conclusion • Key Considerations • Focus on the following three – Due Diligence – Structure – Valuation Challenges 16
Pre-Sale Process Diligence
Pre-Sale Process Diligence • Start Planning Early – Sale preparation and sale process will take time – Know seller’s goals – Identify transaction objectives – Objectives may impact transaction structure – Assemble advisors 18
Pre-Sale Process Diligence (Cont.) • Valuation – Value of the business – Financial models – Key financial issues • Audited financials (last 2-3 years) • Quality of earnings • Balance Sheet – Working Capital • Projections 19
Pre-Sale Process Diligence (Cont.) • Get the Business Ready – Document procedures and business practices – Organize the business to address potential problems • General corporate clean-up – Organize and update corporate records and books – Qualified to do business in each jurisdiction? – In good standing? – Corporate filings/franchise taxes up-to-date? – Tax and financial records – Copies of records 20
Pre-Sale Process Diligence (Cont.) – Organize the business to address potential problems (Cont.) • Operations – Consider how best to convey information to buyer – Consider how to stage the disclosure of the information – Consider the good and the bad of the company’s business and how you will explain it 21
Pre-Sale Process Diligence (Cont.) – Organize the business to address potential problems (Cont.) • Customers, Vendor and Supplier contracts – Complete, written and signed copies of each contract – Check expiration dates and termination provisions – Check change of control or assignment clauses – Consider re-negotiating key contracts 22
Pre-Sale Process Diligence (Cont.) – Organize the business to address potential problems (Cont.) • Real Estate Leases • Real Property • Personal Property Leases • Material Contracts • Assets • Debt • Legal Claims • Intellectual Property 23
Pre-Sale Process Diligence (Cont.) – Identify Consents and Approvals • Third party consents • Required approvals and permits • Approvals necessary to effect the sale • Requisite board or stockholder approval 24
Pre-Sale Process Diligence (Cont.) – Employees • Protect the company’s confidential information and intellectual property, e.g., noncompetes • Loss of key employees • Cross-train employees • Extensive sale process will take its toll on your employees • Consider incentives to keep key people throughout the sale process • Company’s Benefit Plans 25
Pre-Sale Process Diligence Conclusion • Preparing a business for sale will help identify problem areas, which can be addressed in advance • Addressing any problems will help the seller – maximize its value – decrease risk – close quickly 26
Due Diligence Overview • Overview of Due Diligence – Factual investigation of the target company – Investigation will confirm desire to complete the acquisition and justify the purchase price – Due diligence used to negotiate the purchase agreement • Reps and warranties will reflect such risk allocation • Disclosure Schedule • Breach – indemnification claim – Integration 27
Due Diligence Overview (Cont.) • What Do You Review? – Financial Diligence to confirm value of the business • Audited financials (last 2-3 years) • Quality of earnings • Balance Sheet – Working Capital • Projections 28
Due Diligence Overview (Cont.) – Financial Diligence to confirm value of the business (Cont.) • Tax Diligence • Corporate Structure • Tax Returns and Workpapers • Audit Reports • State and Local Taxes • Tax Elections • Compensation and Employment Taxes 29
Due Diligence Overview (Cont.) • What Do You Review? (Cont.) – Legal Diligence • Steps required to effectuate transaction • Contractual obligations • Regulatory compliance – Environmental, FCPA, etc. 30
Due Diligence Overview (Cont.) • Diligence Team – Internal and External Experts – Accountants – Attorneys – Business team members – Corporate Development 31
Due Diligence Overview (Cont.) • How Does the Process Begin? – Financial Statements – Comprehensive Request List – In-person meetings – Meetings with customers, suppliers, regulators 32
Due Diligence Overview (Cont.) • Dealing with Diligence Results – Low risk, low cost issue • Ignore for purposes of transaction • Address post-closing – High risk, low(er) cost issue • Holdbacks or escrows • Additional reps + indemnification 33
Due Diligence Overview (Cont.) • Dealing with Diligence Results (Cont.) – Low risk, high cost issue • Purchase price adjustment – High risk, high cost issue • Walk away 34
Due Diligence Overview (Cont.) • Best Practices – Understand the key reason(s) for the transaction – Team Leader – Right team with right level of experience – Insist on full access – Ask lots of questions and be persistent – Bring material issues to the forefront immediately – Allow for time 35
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