PFFC - October 2007 - (Page 46)

BUSINESS TRANSACTIONS Assert Your Dominance You want to convey to the acquirers that your objectives and will are going to prevail on the substantive issues during the acquisition process. This dominance should be established early in the process, as it is far easier to establish dominance at the outset than it is to retake it from a dominant acquirer. My philosophy is that one side is basically “the boss” in all negotiations. This means that on substantive issues, you want the acquirers to feel that they must concede to you or risk losing the deal. Obviously this is not easy for a middlemarket seller, as the acquirers likely will be much larger than the seller. Furthermore, the acquirers are accustomed to prevailing in these matters. Correspondingly, you need an experienced, aggressive, determined negotiator to force the acquirers to “play your game.” This type of negotiator will convince the acquirers that these negotiations will be different from those with which they are familiar. Limit the “Reps” Although this subject is too complex and covers too many legal and investment banking considerations to cover in detail here, there are a number of points of which you should be aware. Fundamentally, acquirers are used to a rep, warranty, and covenant package (the “reps”) that basically encompasses a “mywatch, your-watch” concept. This approach says that anything that happened while the seller owned the company is the seller’s responsibility, regardless of when the issue manifests itself, and any issue that occurs while the acquirers own the company is their problem. The fundamental flaw with this concept is that one of the major reasons owners sell their companies is to escape the risk inherent in the equity ownership position. Under the “my-watch, your-watch” concept, a selling owner still is potentially responsible for all of the company’s pre-closing actions during the post-closing indemnification period, even if the issue had not matured or was not known to the seller at the time of the closing. Conversely, when the seller’s advisor developed a value for the company, it was based on factors known at the time. If issues positively affecting value had occurred, but were not yet known, they would not have been 46 | OCTOBER 2007 factored into the expected transaction price. So even though these positive factors matured under the “watch” of the seller, the seller will not get a post-closing price adjustment for their impact on the company’s true value. Since the seller doesn’t get the benefit of any unknown positive factors, the seller shouldn’t get the downside risk of any unknown negative factors. Unfortunately, the “my-watch, your-watch” concept is the norm. Most advisors and attorneys accept it as the way a deal should be structured. I don’t. I think that the majority of the seller’s reps should be limited to some form of “knowledge,” except for a few reps where absolute guarantees can and should be given an acquirer. Basically, the knowledge qualifier will limit a seller’s exposure to those things of which he/she is aware. That is what should be expected, and that is what’s fair. Although this position is not customary, it can be sustained if you have considerable negotiating skill on your side. Your indemnification exposure for violation of the reps will be on the personal level and, therefore, not limited by the protection of the corporate veil. It is conceivable that violations of the reps could cause a seller a loss that exceeds the sale price. This exposure usually is limited by placing a ceiling on the seller’s indemnifications. The ceiling will vary depending on the deal environment at that time and the unique characteristics of each company. However, the ceiling for the seller’s exposure should not exceed 15% –35% of the total deal price. Evaluate the Exclusivity Period All acquirers should be brought together simultaneously to leverage one buyer against the other to achieve the maximum selling price and deal terms before the execution of the Letter of Intent (LOI). At this stage of the process, most investment bankers select the company with whom to negotiate a Definitive Purchase Agreement (DPA). Their decision usually is based on only the level of the acquirer’s price and the composition of the deal consideration. However, there are other factors that should also be evaluated in making this decision. Prior to selecting the acquirer to enter into an LOI, all the prospective acquirers’ philosophies and general positions regarding the reps and indemnifications should be discussed, as the seller’s exposure in these WWW.PFFC-ONLINE.COM http://WWW.PFFC-ONLINE.COM

Table of Contents Feed for the Digital Edition of PFFC - October 2007

PFFC - October 2007 Contents First Glance From the Editor Calendar of Events Web Lines Process Management Package Converting News Clips Narrow Web & Label Reporter Narrow Web & Label What’s New Products Bagmaking Slitting/Rewinding Digital Printing EB Flexo Web Handling Paperboard Packaging Security Packaging Business Transactions What’s New Products Focus: Unwinds & Rewinds Trade Show in Print Services Directory Classified Marketplace Equipment Buyers & Sellers Advertisers Index thePLACE Experience Speaks

PFFC - October 2007

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.