Concerning the Seller

Representation and Warranty of vendors:

1 . Vendor (seller) has the authority to enter
into the agreement
2. Business information and financials are
accurate to the best of our knowledge
3. No outstanding legal liability
4. business operating as usual (conditions
of assets are stated)
Info from vendor:
1. Financials (I/S, B/S, Cash Flow
Projections)
2. Lease Obligations
3. Supplier Contracts
4. Tax Return
5. Operational Info
6. Employee remittance info
7. Asset list
Prior to close, the vendor shall:
1. open business as usual
2. no shop
3. not entering other contract (e.g. with a
major supplier) without our consent
4. no wage increase without our consent
5. consult deal for 5 years
6. introduction to supplier, employee,
customer
7. repair equipment
8. Can not sell assets
9. no new debt/loan/equity without our
consent
10. no hiring unless notified
11. working capital target (maintain
inventory levels)
12. landlord extension
13. non compete agreement
14. no capex > 50k
15. identification (completed tax)
This offer is valid for _24__hours

Sign the paper

Shotgun clause one person

offers shares, other party must by
or sell shares at that price
VTB If no profit is made, no
payment by buy, allows for
internal financing. Payments of
interest come from FCF, no
dividends payed before VTB is
complete
Claw back clause give money
but can take back if promises not
followed

Offer to purchase
Share or Asset? Shares - inherit liab
(lawsuit), capital gain exemption (tax fee,
can lower price of purchase), otherwise buy
in asset
Purchase Price: normalized EBITDA x
multiple (Private: 3-5, Public: 10-15)
Payment Terms:
SET PRIORITIES
1. Debt: bank secured by assets,
prime + 1 for the first 2 years and
prime + 2 for the next 3 years.
flexible payment terms
2. Vendor take back: payment
schedule? Paid equally amount?
Interest rate? (Commercial: 30% at
close, 70% in next 5 years; Family:
10%, 90%)
3. Cash or equity?
Other Terms:
12. no outstanding liability
13. AR on this call, let him chase the
bill
Timing: 60-90 days for due diligence, close
5-14 days

Term Loan- leverage buyout (acquisition of

a company using significant amount of
borrowed money)
rate, term ,annual (including a

potential cash sweep), collateral

and appropriate covenants, bullet
payment - one time payment at
maturity
Cash Sweep - use excess cash to
pay debt as to distribute it to
shareholders

Management buyout
Debt holders cares more about B/S
while equity holders are more
focused on I/S, Cash flow
projections
operating line of credit: prime+1 or
2%, A/R 75%, Inventory 40-50%
term loan: risk free rate + 1~3%,
equipment is @ 70-75%related to
life of asset,5-10yrs. Land/building mortgage @75%, 15-30yrs.
mezzanine financing (the amount,
rate 15-29%, collateral security
required and major covenants: ask
entrepreneur to invest as common
share)
VC/ equity (30-100% in return)
Sensitivity analysis
lenders don't want to getting paid!

Offer to Finance (to bank):

Purpose: e.g. acquire co., require working capital
Description of term, rates and collateral for the
instruments used in facility:
Term loan
Amount:
Terms: 10 years
Rate: prime + , no penalty for early payment
collateral: 1st secured mortgage
Op Line
Amount:
Term: Revolving
Rate: Prime + 1 (secured)
Collateral: A/R & Inv
Condition precedent to the loan approval:
1.
financial
2.
appraisal (valuation of company)
3.
asset list
4.
environmental test (factory/ office visit/ inspection)
5.
personal guarantee
6.
first priority to collateral
7.
credit check on director
8.
finance, insurance (co. life insurance policy)
9.
PPSA - personal credit background check
10. CRA (tax return)
Covenants:
1.
no dividend in first few year of business
2.
Renewal
3.
Hire new director/ SH/ GM upon approval
4.
No CAPEX more than _____
5.
Cannot take on new debt without approval
Fees:Legal Fees
Liquidation (replacement value)
Normalized EBITDA
Other consideration: 1.termination fee (deposit)
2. mgts biz development
3.
advisor (geography)
4.
my legals
5.
employee
6.
no shop
7.
free membership
8.
other partner
Franchise Model
Pros (What do you get):
1. Quick set up
2.
expertise
3.
lower initial investment
4.
easy access of finance
5.
established distribution channel and expand more
quickly than other growth methods
6.
brand awareness
7.
reduce entrepreneur risk (shared with franchisee)
8.
spreads profit incentive down to biz unit level,
thereby increasing unit performance and efficiency
9.
supplier network
10. package for success
11. training
Cons (What do you give):
1. Less likely of future growth
2.
not utilizing full ability
3.
competitor near by
4.
Royalty fee, marketing fee, training fee
Key terms:
1. exclusive geographic
2.VTB - If Rev does not hit a target, 0% interest rate,
otherwise, pay interest rate
3.
Training for industry knowledge
Vendors notesKey Management risk Go public/ private?
Sole Prop/ Partnership/ Corporation
Private Market: Love Money (seed money from fam/frd), Angel
Financing, Venture Capital

1.
Offer to Finance
Amount:
a)
$750,000 term loan to complete the acquisition of Company XYZ
a.
This would be considered your term loan backed by fixed assets
b.
Look at balance sheet and calculation liquidation value of assets
b)
_________ to provide for operations
a.
This would be your line of credit backed by short term assets
b.
Look at balance sheet and get liquidation value of inventory and A/R
Description of the term, rates and collateral for the instruments used in facility a) and b)
For Long term Loans: a) convertible debt
Term 3-5 years open to payout without penalty between 3-5 years.
Rate Interest of risk free rate + 5% per annum for every year that the loan is outstanding
Collateral no assets for collateral, instead between the 3-5 years, we have the option of converting our debt for an equity stake in company with a price cap of
___________________ (at least 3 million) - personal guarantee
For Line of Credit b) No line of credit
Fees:
Term revolving
Question: Generally how much fees do you charge
Rate Prime + _____%
1-3% or fixed
A/R Inventory Full amount not %

Conditions precedent to the loan approval:

Disclose all financial statements prior to deal and a promise to disclose all financial statements:
incomes statements, balance sheets, statement of cash flows, working capital schedule every
month after the deal

Valuation reports of the company

Notified every time equity structure changes or new debt is taken on

Personal Guarantees

Key management bios

Key executive contracts

Shareholder structure

Approval from all existing shareholders and debtors to taking on the new debt
2.

Covenants:

Put covenants on the most sensitive items crucial to the business

Interest Coverage 1.5-1x
Days of A/R
Who has first claim over what
No management change over next 5 years
No large one time expenditures without approval
Debt to equity ratio
Monthly statements age of a/r and a/p
Positive cash flow within two years meeting stated goal
Disclosure of all new contracts

Offer to Purchase

EF Bank Corp offer to purchase _______________ (shares/assets) of Bridgit

Price: $____________________

Usually the price is 3-5x the EBITDA of the company for private deals

However other considerations affect the price of the company such as (key strengths and key challenges of the business)
o
How much the owner wants to exit the business
o
If there is an economic downturn and there are industry uncertainties
o
If there are other comparable such as trading at X EBITDA in the public markets for competitors

When determining the purchase price always assume you are excluding the existing debt in the company (clean balance sheet)
TERMS:

Conditions under which you will purchase the company that shall be maintained after the company is purchased

How will the purchase be financed and how much of it

Whether you want the owner to stay on as an advisor/part owner

1.
2.
3.

Look at how much money you can pay in cash from your own pocket
Look at how much money you can raise based upon appraisal of long-term and short term assets
a.
Long term loans are usually backed by fixed assets
b.
Line of credits are usually backed by A/R and Inventory
State how much you want for VTB
a.
Can use as a method to test how certain they think their business will be successful and make sure they are not hiding anything in the closet
-
Ex. Vendor Back Financing (VTBs)
o
A type of financing in which the seller offers to lend funds to the buyer to help facilitate the purchase of the property. The take-back mortgage often represents a
secondary lien on the property, as most buyers will have a primary source of funding other than the seller
o
In most cases, the take-back mortgage is offered at a rate below market value. This makes the option more attractive for the buyer, which can translate into a fast sale for
the seller because another source of financing is being offered. Take-back mortgages often allow buyers to purchase property valued above their traditional financing
limits
o
State terms for VTB: (1- 4 years)

How much would you like the VTB to be

How many years will you repay the VTB

What will the annual interest rate be on the VTB (Prime + ___%?) rate of inflation

Will interest rate be on outstanding loan throughout the five years or fixed

Will the prime rate be a floating or fixed rate?

Payback principal loan at the end of the term or no penalty for repayment

SAC Shall have (90-120 days) days for due diligence and after waiving this clause shall proceed to close the transaction within (10-14) days.

Prior to close the vendor shall:

Things you want the vendor to do to ensure you do not
get screwed over

The offer is valid for usually 3-5 days.

Reps and Warranties:

Due Diligence:

Assertions that a seller makes in a purchase and sale

agreement

Seller's representations usually relate to the

information that the buyer is relying on to value the
company:

Financial Statements

Customer and supplier listings

All other major contracts

Equipment listings

Health and Safety Licenses

Insurance Documents

Lease documentation

Employee information

Any agreements with any other

party

A guarantee that information provided is accurate

to the best of the owners knowledge
o
No outstanding Debt
o
No outstanding legal claims
o
Information is accurate
o
The owner has the authority to enter
into this deal
o
State any other people who have claim
over assets

Not be able to ask anyone else for offers

Inform all suppliers or customer of changeover in
management
Give a thorough run down of operations
Take on no new debt
Sign a non-compete clause
Run operations normally
Cannot collect or accelerate payment of A/P
Payout bonuses fire anyone
Non-compete agreement
Enter contract for consulting agreement
Cannot shop for any buyers
No management changeover
Cannot sell any assets