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Best language to include is a SPA to allow the potential to buy-out a minority partner in the furture?

We are in the midst of negotiating an SPA with a company that is going to allow the current owner to retain a 5% stake in the resulting combined company. We want to include language that would allow the majority owner to buy-out the minority owner at a predetermined, agreed upon relative valuation. Something like 4x ttm revenue or 7x ttm EBITDA. Have any of you used such provisions and if so, how was the language structured around that provision? Thanks

Answers

Topic Expert
Marc Faerber
Title: CFO
Company: Amarantus
(CFO, Amarantus) |

I have not specifically had this situation but I am sure that you can have an agreed upon methodology to determine the value, simplest is to have an independent valuation done from two or three separate firms. Since the 5% minority owner is not being bought out now what is the trigger to initiate the buyout at a later date? If that is pinned down I think coming up with the valuation methodology and buyout terms is much easier.

Not sure this has helped much. Good luck.

Topic Expert
Lee Andrews
Title: P/T CFO, Business Consultant
Company: Pacific Bag, Inc./Other Clients
(P/T CFO, Business Consultant, Pacific Bag, Inc./Other Clients) |

I have done a few of these over the years -- e.g. buyouts of seller retained equity, buyouts of side equity/warrants arising from mezz debt financing, subsequent price adjustments based on post-deal EBITDA even after a 100% buyout, etc. It is all very similar -- just with different return expectations and trigger points.

As structured, your question leaves a lot of vague open points, some of which Marc addressed above. It is a lot of info to ask "how was the language structured". I can give you at least one somewhat redacted example offline rather than post for public reading, so you can email me if you want.

"Predetermined relative valuation" is a quick phrase but hard to define unless one crafts the contract wording carefully. A third party valuation is certainly one way to go, but has a high cost, include arbitration wording if disputed, etc.

However, here are some quick thoughts:

-- is it a put/call situation or only one-way? That usually needs a two-tier pricing/multiple structure.
-- if you are using EBITDA -- it needs to be clearly defined. There is no obvious GAAP definition of EBITDA, only contractual.
-- what triggers a buyout? Time? Reaching goals? Buyer/seller Impulse?
-- even with defined multiples of revenue or EBITDA, how will those drivers be verified? CPA review/audit? Management financials only? Seller's right to review the books?
-- be careful on post-deal financials that redefine revenues or EBITDA -- I have seen revenues reclassified, and I have seen EBITDA significantly managed on the theory of being "GAAP" with intercompany charges, management fees, amortization of price goodwill, etc. Could go in your favor, or be challenged in a legal claim. Consistency of basis, etc. helps both parties to be fair.
-- what amortization is clearly an "A" in EBITDA? Needs clarification in the contract. GAAP before may not be anything like GAAP after.
-- how/when will the buyout amount be paid?
etc. etc.

Too long a financial/legal topic for a complete posting answer to cover all the practical issues.

Lee

Topic Expert
Jim Quinlan
Title: CFO, Managing Director
Company: Trinity Group, BlueGold, Genergy, Wellco..
LinkedIn Profile
(CFO, Managing Director, Trinity Group, BlueGold, Genergy, Wellcount) |

Set the trigger event, describe a valuation method, account for tax effects, set binding arbitration (just use AAA rules but parties appoint two to select one arbitrator. Saves money.) Set time frames, how the amount is paid together with default effects. Set penalties for failures to meet time deadlines.

The language is long and needs more details to be tailored properly.

Wish you well, Jim

Miguel Nicolas Moreda
Title: Chief Financial Officer
Company: Wovenware
(Chief Financial Officer, Wovenware) |

Just adding to the conversation: make sure that the SPA considers "squeeze-outs" permitted by each state's Corporations Law.

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