This document discusses various aspects of buying and selling a small or mid-size business, including: 1) It provides an overview of current M&A market conditions, noting opportunities for quality companies and strong competition for assets. 2) It outlines the process of initiating a transaction, including assessing strategic options, valuation, identifying potential buyers, and engaging advisors. 3) It describes the roles of key members of the deal team, including owners, management, accountants, legal counsel, investment bankers, and tax advisors.

1. Buying and Selling
a Small or Mid-Size Business
Initiation of Discussions, Due Diligence
and Financing the Transaction
James L. Rench, Esq.
AKRON BAR ASSOCIATION BUSINESS AND CORPORATE SECTION
MONDAY, MARCH 25, 2013

2. CURRENT MARKET CONDITIONS
• Challenges of last recession have caused many to take very strategic look at their
industry
o What are growth prospects of industry?
o What will it take to become or remain competitive in industry?
o How will profits be affected by changing landscape?
• Many are making decision of whether they should be, or could be, a consolidator
• Others are assessing strategic alternatives
• Deal activity will continue to be fueled by
o Ongoing access to capital & financing
o Strengthened balance sheets of strategic buyers
o Increasing private equity activity
• S&P 500 companies have $2 trillion in cash on balance sheets & are increasing
acquisition activity
• Private equity firms have $348 billion in capital to invest
• Relatively healthy debt markets with lenders active & competitive in M&A lending

3. CURRENT MARKET CONDITIONS (Cont’d)
Current M&A market presents both
•
opportunities & challenges
o Companies that maintained or improved earnings over last 24 to 36
months can be highly valued in today’s M&A environment
o Strong competition for quality assets as both businesses & private
equity continue to seek deals to fuel growth & deploy capital
o General worldwide macro events & general trends in U.S. economy,
reflected in volatility of U.S. debt & equity markets, have a direct
impact on M&A market activity
o Assuming a relatively stable economy, 2013 & 2014 anticipated to be
an active M&A market with attractive valuation multiples

4. Will 2013 See Record Valuations for Middle
Market Business Sales?
On March 5, 2013, John Slater of FOCUS, a nation-wide investment bank, blogged the following (in part):
“Business owners time their exits for many reasons: health, retirement planning, availability or lack of family
successors, competition, technology change and many more. Yet overwhelmingly the question we are most
often asked as a financial advisor to entrepreneurial companies is “What’s my business worth?” All things
being equal, a rational business owner will presumably choose to sell at a point of optimal value for his or
her interest in the firm. For the reasons outlined below, we believe that the next eighteen months may see
the highest pricing for good middle market companies in the thirty years I have been in the M&A advisory
business.
While the M&A market could be derailed by a major decline in the equity markets or further chaos in
Washington, we believe that the odds favor a strong market for sales of middle market companies through
sometime in 2014. By then a correction will be overdue and the likelihood of a cyclical bear market in
equities may become increasingly high. Generally a serious decline in the stock markets leads to a
precipitous fall in M&A activity.
The next 12-18 months will almost certainly be a highly favorable period for business exits. If this proves to
be a cyclical market top, the next favorable period for businesses owners wishing to sell may not come
around before the 2020s. In 2020 today’s sixty-six year old Baby Boomer will be seventy-three and today’s
fifty-eight year old will be sixty-five and studying Medicare options.”

5. INITIATING THE TRANSACTION
•Privately held companies, by their nature, have less
perpetuity than their public counterparts
o Founder/CEO energies & shifts in personal desires
o Wealth concentration; desire to diversify
o Competitive landscape & cost of growth
•Ultimately, business owner is confronted with many
important decisions, including
o How do I monetize value I’ve built in my company for the past 10, 20, 30+
years?
o What is my company worth?
o Who are potential buyers (best partner) & what’s the best way to contact
them?
o What are my goals for a transaction & my role post-transaction?
o Who will help through this process?

6. INITIATING THE TRANSACTION (Cont’d)
•Often once-in-a-lifetime decision
•Issues are complex & impact many who have
contributed to success of enterprise
•Emotional aspects are real
•Getting it right is perfect stepping stone to next
chapter of life
•There are no go-to plans or established
formulas/rules
o Assessing client’s situation, objectives, dynamics of company & its
industry are critical steps
o Approach should be tailored to client’s desires

7. STRATEGIC OPTIONS CONSULTING
•Assist clients with understanding liquidity options available to
them based on their goals & unique characteristics of company
or industry
•Determine valuation range for their company & potential
interest level from buyer/investor/lenders
•Prepare after-tax proceeds analysis & tax strategies for various
options
•Identify value drivers of the company that could be leveraged
in negotiations with buyer/investor/lenders
•Identify potential red flags that might have an impact on
success of a transaction or impact valuation
•Discuss liquidity event process, timing & probability of a
successful transaction

8. LIQUIDITY EVENT PROCESS
• Research, interview and engage accountants and advisors
• Assemble and review financials
• Prepare financial analysis (including trends)
• Recast financial statements
• Prepare projections
• Market analysis
• Identify and research potential buyers (PE groups,
competitors, strategic buyers, others)
• Identify and research recent transactions in the industry
• Finalize offering materials
• Mailing and fulfillment of approved buyers
• Detailed tracking process
• Strict confidentiality screening

9. LIQUIDITY EVENT PROCESS (CONT’D)
• Coordinate buyer questions and responses
• Arrange interviews
• Schedule site visits
• Manage information exchange
• Negotiating letters of intent
• Coordinate competitive bidding process
• Buyer selection
• Prepare transaction schedule and deal team contacts
• Manage due diligence (virtual data room)
• Prepare transaction documents (Including ownership, acquisition and
finance agreements)
• Handling third-party matters
• Hart-Scott-Rodino procedure (see Annex A attached to these materials)
• Closing

10. LIQUIDITY EVENT PROCESS (CONT’D)
TYPICAL MARKET TO CLOSING TIMELINE:
Prepare for Market 1-3 Mos.
Identify Buyers 1 Mo.
Project Launch 1 Mo.
Manage Inquiries 1 Mo.
Select Buyer 1 Mo.
Due Diligence 1-3 Mos.
Negotiation & Closing 1-2 Mos.
TOTAL INCLUDING PRE-MARKET PLANNING: 9
MONTHS TO ONE YEAR

11. WHO IS ON THE TEAM
Key members of the deal team:
Owners
Management
Accountants
Legal Counsel
Investment Banker/Financial Advisor
Valuation expert
Tax Advisors

12. Going to Market…Questions
What business is the seller in?
Why is the seller in that business?
Who are the seller’s customers?
What are the seller’s immediate and long-term objectives?
How will the seller achieve those objectives?
Who is responsible and accountable for what?
Are those roles and responsibilities understood?
How does the seller compare to its competitors?
Through answers to these questions (and many, many more)
• More likely the seller will attract more buyers
• More likely the seller will get a higher valuation

13. FINANCIAL ADVISOR/VALUATION EXPERT
Benefits of using Financial Advisor:
• Manage the sale process (Save time)
• Create competitive bidding (Save money)
Selection criteria:
• Knowledge of the Market (potential buyers and sources of financing)
• Knowledge of the Industry
• Success Rate (percentage of engagements closed)
• Shared goals & vision
Benefits of Valuation Expert:
• Objective confirmation of rule of thumb
• Expertise to defend valuation against objectors
• Provide fairness opinion (if applicable)
Selection criteria:
• Financial credentials
• Industry experience

14. ENGAGEMENT OF FINANCIAL ADVISOR
Exclusivity
Contacts with potential Buyers
• Pre-screened and pre-approved
• Before first contact
Retainer fees
• Non-refundable
• Credited against success fee
Success Fee
• Lehman formula (1%-5% based on deal value) no longer market standard
• Typically 1%-4% with over/under thresholds
Scope of services
• Sale, investor, joint venture or capital raise
• Preparation and dissemination of the offering memorandum (the “deal
book”)
• Exclude existing investors and parties with options or known interest

15. ENGAGEMENT OF FINANCIAL ADVISOR (CONT’D)
Term and Termination
• Fixed term, renewable
• Terminable at-will upon notice
Tail coverage
• Typically 6 Mos. to 2 years
• Only pre-screened and pre-approved buyers
• Consider excluding any buyer not introduced by advisor
Expenses
• Ordinary out-of-pockets, billed monthly
• Expenses in excess of $x require pre-approval
• No general overhead or legal fees
Disclaimer of ownership of work product
Indemnification
Confidentiality, non-disclosure

16. ENGAGEMENT OF FINANCIAL ADVISOR (CONT’D)
Confidentiality/Non-Disclosure Agreement (NDA) to be provided to Recipients of Confidential
Information (CI)
• To be executed by Recipients upon first contact and before receiving any CI
• Seller’s counsel to approve any Recipient requested revisions to NDA
• Advisors prefer their “standard form” of NDA – Seller’s counsel should review and propose
revisions
• NDA should expressly cover postings to VDR as CI
• Disclosure does not waive attorney-client privilege; back-up with joint defense language
• Recipient should agree to indemnify Seller for breaches of NDA by 3rd parties to whom
Recipient discloses CI
• Recipient should be prohibited from “teaming” with others to make a joint bid
• Recipient should be prohibited from contacting Seller’s employees without Seller’s
consent
• Provide for return or destruction of CI upon deal termination, including revocation of access
to VDR (possible exception for one copy retained by Recipient’s counsel in event of future
litigation)
• Seller does not represent or warrant disclosure materials
Sample NDA with VDR provisions attached as Annex B to these materials

17. ENGAGEMENT OF FINANCIAL ADVISOR (CONT’D)
Advisor’s Engagement Agreement
• Advisors prefer their “standard form” of engagement letter – Seller will
focus on fee structure in letter - Seller’s counsel should review and
propose revisions to benefit Seller
• Some provisions of engagement deserving careful scrutiny:
• No contacts without signed NDA and Seller’s consent
• Seller to have final review & approval of Offering Memorandum and other disclosure
materials
• All postings to VDR to be pre-approved by Seller’s counsel
• Advisor must be licensed broker-dealer or affiliated with one
• Exclusivity of engagement to be mutual
• Carve-out leads provided by Seller or reduce fees for them
• Define carefully “Transaction” which triggers success fees
• Define carefully “Consideration” which provides basis for calculating success fees
• Provide for fees on deferred or contingent payments to be payable if and when paid to
Seller
• Provide a fixed term subject to termination without cause by either party upon notice
to the other

18. ENGAGEMENT OF FINANCIAL ADVISOR (CONT’D)
Advisor’s Engagement Agreement (cont’d.)
• Define carefully the “tail period” during which Advisor is
entitled to fees and the qualifying characteristics of the
tail period buyer (e.g., a party referred by Advisor & who
signed NDA during the term)
• Provide for confidentiality and non-warranty of
information provided to Advisor
• Provide for mutual indemnifications (usual standard is
gross negligence, bad faith or willful misconduct)
• Provide for controlling law and venue in Seller’s home
jurisdiction
Sample Engagement Letter with Drafting Tips attached as Annex C to these materials

19. LIQUIDITY EVENT OPTIONS
•Sale of 100% (or less) to strategic buyer
•Sale of 100% (or less) to financial buyer (Private Equity
Group or Family Office)
o Majority recap
o Minority recap
•Leveraged recap
•Sale to management team (MBO)
•ESOPs

20. STRATEGIC BUYERS
• Operating companies that provide comparable products & services
Often competitors, suppliers or customers
• Could also be unrelated to target or its industry
Companies looking to diversify revenue streams
Companies seeking to build upon their business model &/or competencies to
enhance earnings or reduce risks
• Buyer motivations are multifaceted & varied, including
• Strategic positioning
• Market share; new channels
o New products & processes
o New customers or deeper penetrations
o Technologies
o Scale; synergies; earnings enhancements
o Management skills; corporate know-how
o Diversification
o Accelerated growth; seeking higher margins & earnings

21. STRATEGIC BUYERS (CONT’D)
oPrimary advantages
o Potentially, deep universe of buyers
o Perspectives of risks & returns among candidate buyers can vary significantly
o Long-term investment horizons
o Often lower return hurdles (typically meaning higher valuations)
o May be motivated to grow in industry with average or below-average prospects
o Often, can bring deeper management talent
o Typically, cash/stock buyers with lower transitional demands
oIssues
o Confidentiality
o Tire kickers; data seekers
o Industry knowledge – double-edged sword
o Protecting sensitive performance data, IP, know-how
o Consolidation more prevalent
o What is current management’s role going forward?
o Is there a good culture fit?
o Potential loss of jobs

22. FINANCIAL/PRIVATE EQUITY/FAMILY OFFICE BUYERS
• Firms with capital & resources that look to buy companies & utilize value-creation
strategies
• Financial buyers can vary significantly
o Traditional buyout funds
o Firms with “buy & hold” strategies
o Firms with existing holdings
o Generalists vs. industry-specific funds
o Firms with CEO partners
o Special situation funds
• Hold periods often relatively short (generally, three to seven years, although there
are many buy & hold firms)
• Family office (typically longer holding period than traditional private equity fund)
• Leverage is often deployed to enhance returns
• Financial buyers may become strategic buyers as they execute their growth
strategies (add on acquisition vs. platform acquisition)
• PEGs have closed roughly 10%-20% of middle market deals in past 10 years

23. FINANCIAL/PRIVATE EQUITY/FAMILY OFFICE (Cont’d)
• In general, PEGs have been successful investors in middle market
o Disciplined buyers (pay for quality; shy from average)
o Deploy resources to assist growth
• This success has led to expanding universe of PEGs & large pool of capital to
deploy
• Current overhang is roughly $348 billion
• Primary advantages of PEG’s
o Large universe of efficient buyers
o Hot deals can garner aggressive bidding
o Equity stakes for incumbent management; noteworthy wealth creation
o Solid capital resources
o Pay for excellence
o Very focused growth agendas
o Need management teams & infrastructure

24. FINANCIAL/PRIVATE EQUITY/FAMILY OFFICE (Cont’d)
•Issues
o More need to sell industry attributes; due diligence scrutiny
o Use of leverage
o Aggressive growth & earnings enhancements is hard work
o Must have capable management team
o Center of influence?
o Possibility of near-term & medium-term sale

25. RECAPITALIZATIONS
•Portion of equity is purchased & selling
shareholder(s) often retain meaningful stake &
continue to operate company
•Popular for owners who desire to diversify their
personal wealth, yet remain active in growing
business & recognizing future wealth
•Majority vs. Minority vs. Leveraged Recaps

26. MAJORITY RECAPITALIZATIONS
Selling majority stake ‒ Advantages
o Provide liquidity to ownership
o Retain minority equity position that could potentially double or triple in
value in five to 10 years
o New investors provide capital/resources & will work with management to
formulate growth plan & assist in execution
o Key management remains with company (two- to three- year transition
period) with board representation
o If platform transaction, company typically continues to operate
independently
Issues
o New investor now controls company
o New investor will most likely leverage balance sheet
o Could experience major restructuring if acquired by portfolio company

27. MINORITY RECAPITALIZATIONS
•Sell minority equity stake
o Advantages
Ownership retains control
New investor can provide resources (financial & operating)
o Issues
Will most likely see lower enterprise valuation due to
minority investment
Operate with some leverage
Investor will have some minority protections (first right of
refusal, preemptive rights, anti-dilution provisions,
redemption rights, board representation, etc.)

28. LEVERAGED RECAPITALIZATIONS
•Leverage recap (leverage company & pay
dividend/buy out shareholders)
o Advantages
Do not give up any equity (potentially minority stake – 25%)
Allows for liquidity event to owners without a sale
o Issues
Have to service debt prior to distributions
Financial covenants can impact operating flexibility
Company more susceptible to macro events—industry or
economic events
Risk of bankruptcy (possible fraudulent conveyance)

29. MANAGEMENT BUY-OUTS (MBO’s)
•Owners often recognize team’s leadership contributed greatly to
his or her wealth creation
•High-performing teams in solid companies can execute
rewarding deals
•Personal capital investments do not need to be large, but they
do need to be meaningful
•Capital resources (Sr. & Jr. debt & private equity) to facilitate
deals for solid, well-managed companies
•Main element in MBO is control & continuity of management &
business operations
•Equity rewards can be far more rewarding if team controls deal
& pursues capital partners in competitive process

30. MANAGEMENT BUY-OUTS (MBO’s)
•Advantages
o Reward most meaningful long-term contributors
o Operating team remains in control of process
o Company maintains culture & community presence
o Due diligence issues are rare, as are purchase price modifications
o Can retain small equity stake in new company
o Balance sheet integrity can be maintained
•Issues
o Lackof strategic value
o Requires capable team with demonstrated results
o Team needs to have clear vision & articulate a compelling plan
o Operate with some leverage

31. ESOP’s
•Advantages
o Retain control & continue to run company (regardless of level of ESOP
ownership)
o Favorable tax treatment
Reduce or even eliminate corporate income tax
Company repays acquisition debt with pre-tax dollars
Interest & principal on acquisition debt is tax deductible
o Preserve culture, jobs & community
o Provide stockholder liquidity (over time) tax efficiently
o Reward key management & long-term employees
o Uniquely position company for growth via acquisitions
• Issues
o Sell company at fair market value; could potentially “leave money on the
table”
o Stockholder liquidity may be realized over time, not immediately

32. What is Private Equity?
Generally speaking, private equity is the use of capital
to invest in private or non-public companies.
PEG’s are intermediaries between investors and private
businesses.
Who invests in private equity?
• Public Pension Funds
• Corporate Pension Funds Hedge Funds
• Insurance Companies ,Endowments and Foundations
• Funds-of-Funds
• Family Offices
• High-Net-Worth Individuals
• Sovereign Wealth Funds

33. Basic Fund Structure
Sponsors/Principals
Manager/ Investors
General Partner
General Partnership/Carried Interest Limited Partnership Interests
(Active Management) (No active Management)
Fund
Portfolio Companies

34. Key Features of PE Funds
General Partner/Manager Compensation
• Management Fee (2% of commitments)
• “Carried Interest” (20% of profits)
• Subject to “hurdle rate” (8% of profits)
Limited Partners subject to capital commitments
Investment Period for new investments (5-6 years)
Term of Existence (10 years; Additional 1-year extensions;
Subject to early termination in event of “key person(s)” ceasing
to manage the fund)

35. PEG’s vs. Venture Capital
• Venture capital is a type of private equity capital typically invested in start-
up and early-stage companies with high-growth potential (PEG’s typically
invest in mature companies)
• VCs take greater risk with the expectation of a few “home runs” to
generate returns to investors (PEG’s typically use leverage to generate
management fees and returns)
• VCs take minority positions with provisions to protect their investment, but
generally are not actively involved in management (PEG’s typically demand
a controlling stake with management control)
• VCs typically are focused on their primary industry (PEG’s typically are
more financially driven)

36. Private Equity = Leverage
Use leverage to generate greater returns
Assume: Enterprise Value = $100MM
• Example #1 (Straight Equity)
• Investment of Capital = $100MM
• $120MM Sale = $20MM profit (20%)
• Example #2 (Equity and Debt)
• Investment of Capital = $40MM
• Debt Financing = $60MM
• $120MM Sale = $60MM profit (150%)
Leverage also allows for use of free cash flow to pay
management fees to the fund and make distributions to the
investors

37. Basic LBO Structure
Fund
Fund Co Inv estors
Co-Investors
Management Holding Company
Management Fees
Acquisition Vehicle
Debt
Target Company Lenders
Security

38. Selling to Private Equity
Positives
- Many players = maximum sale price
- Creative and flexible transaction financing
- Access to capital
- Financial, strategic and operational expertise
- Relationships with bankers, advisors
Negatives
- May not be familiar with your industry
- Unlike strategic buyer, lack of synergies
- Due diligence may be more involved
Neutrals
- Management continuity is necessary
- Firm exit strategy (5-7 years)
- Leverage

39. What a PE Group Wants
EBITDA (Cash is king, particularly in PE, and purchase price most
typically is calculated based upon EBITDA)
Strong growth prospects
Strong management team
Externally prepared financial statements
- Current account receivables and payables
- Clear understanding of non-business expenses
- Support for travel, meals and entertainment
- Rational executive “perks”
Comfort with known liabilities and pending claims
Supportable forecasts and business plans
- Include information on competitors
- Differentiation, advantages over competitors

40. Seller’s To-Do List
•Clearly articulate a business strategy
•Assemble an experienced team
•Allocate sufficient time and resources
•Clean house (Seller Due Diligence)
•Bepatient and realistic - A good company will sell at a
premium, irrespective of general economic conditions

41. Seller Due Diligence
•Purpose – Anticipate Buyer’s diligence examination, find
vulnerabilities to remediate or put on best case explanation
•Corporate & Shareholder Matters
•Business Information
•Financial Matters
•Material Contracts
•Intellectual Property
•Employment Matters
•Legal Matters, Permits, Regulatory Compliance
•Real Estate, Plant, Property & Equipment Insurance
•Material Transactions Outside Ordinary Course of Business
Sample Due Diligence Request attached as Annex D to these materials

42. Due Diligence
• Purpose – Verify the strategic business case for the acquisition
• More than identifying legal risks and verifying accuracy of reps and
warranties
• More than document production and review; includes interviews,
management presentations and detailed analysis by multi-disciplinary
experts
• Today’s tougher markets and slimmer markets requires deeper dive into
financial, legal, structural, operational and cultural attributes of deals
• Organizational due diligence recognizes difficulties of post-merger
integration (most common reason for failure to reach deal goals)
• Integration plan/team designed to blend operational and cultural
character of buyer and seller with periodic reviews of progress
• Integration focus on employee communication and buy-in
• Leverage technology – deploy VDR to organize Seller’s information and
efficiently provide access, security and control

43. Due Diligence (Cont’d)
Advantages of VDR:
• Promotes Seller readiness and review by Seller’s diligence team and
counsel before postings “go live” on VDR
• Professional presentation promotes marketing of deal
• Multiple parties may access data without knowledge of each other
• Accelerates diligence process while reducing travel time & expense
• Allows automatic notice of updates to deal participants
• Facilitates rapid Q&A exchanges among deal participants
• Provides online search and audit trail to reduce post-closing disputes
• Seller can track points of interest to various bidders
• Eliminates expense of creating, staffing and scheduling access to physical
data room
• VDR can be used for review and secure exchange of deal document drafts
• VDR can be used as secure post-closing repository for deal documents
and escrow processes

44. Due Diligence (Cont’d)
Risks to Seller:
• Disruption of business operations and staff
• Premature disclosure of confidential information (consider staging
disclosures with reaching certain deal milestones)
• Extreme demands on resource allocation in condensed timeframe
• Potential compromise of assets and relationships (customers, vendors,
staff, regulators, etc.)
• Potential loss of attorney-client privilege in disclosed information
• Breach of NDA’s with 3rd parties
Professional responsibility:
• Counsel should limit responsibility for due diligence (don’t be team
leader)
• Business people should be ultimate responsible party for review and
analysis of disclosures and application of business judgment to the
multiple inputs derived therefrom

45. Due Diligence (Cont’d)
Structuring Buyer’s Due Diligence Request:
• First, gather and analyze all publicly available information on Seller and the Advisor’s deal
book
• Then focus requests on information necessary to complete the picture of Seller and confirm
information of particular importance
• Buyer should not request information irrelevant to the particular Seller or its market
Management presentations and site visitations:
• Timing depends on nature of deal
• Auctions may dictate visits before VDR goes live (avoids disclosure to parties who lose
interest after visit)
• Negotiated deals may benefit from review of VDR materials before visits
• Plan visits to mitigate workplace disruption and control visitors access to staff
• Presentations should be scripted by Advisors and delivered by senior management of Seller
• Presentations and handouts vetted as potential sources of rep and warranty claims
• Maintain log of Q&A’s and discussions at visitations
• Consider presence of counsel to guard against inadvertent representations

46. Due Diligence (Cont’d)
Buyer’s use of due diligence results:
• Prepare diligence Memo with findings
• Buyer’s counsel uses Memo to formulate reps and warranties in
acquisition agreement
• Diligence discoveries may dictate specific terms of acquisition agreement
(specific reps and warranties, carve-outs from survival periods, caps and
baskets)
• Memo serves as check on Seller’s disclosure schedules
• Seller will warrant disclosure schedules but not VDR disclosures
• Buyer may be charged with its due diligence discoveries i.e.,
“sandbagging”
• Deals with signing and deferred closing risk renegotiating disclosure
schedules, acquisition agreement terms or purchase price based on
diligence discoveries in interim between signing and closing

47. Principal Transaction Documents
Acquisition Agreements Ownership Agreements
Financing Agreements

48. Acquisition Agreements
Letter of Intent
Acquisition
- Form (Asset, stock or combination)
- Purchase Price
Financing
- If Seller Financing, Terms of Subordination
Ownership Agreements
- Equity ownership (including pre-emptive rights)
- Board composition
- Rights, preferences, privileges and restrictions
- Liquidity rights (including registration rights)
Agreements regarding continuing operations
Exclusivity, Confidentiality and publicity
Employment agreements
- Non-competition
- Equity participation (incentive plans, options)
Non-binding
Sample Letter of Intent attached as Annex E to these materials.

49. Acquisition Agreements (Cont’d)
Purchase Agreement
Structure
- Equity contributions
- Working capital adjustments
- Allocation of purchase price
Financing contingencies
Earnouts
Representations and warranties
- Investment purpose
- Solvency
Covenants
- Employee retention
Indemnification
- Scope, thresholds and caps, joint/several liability
- Contribution agreement among former owners

50. Acquisition Agreements (Cont’d)
Other agreements and considerations:
Seller Note & Subordination Agreement
Management Agreement
- Fees paid to the fund
Employment agreements
- Good quit/bad quit provisions
- Restrictive covenants, severance
- Release
Incentive and option plans
- Benchmarks for performance plans
- Conversion rights, vesting (death, disability, sale)
- Payment terms, use of shares
- Registration rights (demand, piggyback, follow-on)
-- Expenses of registration
- Rights of transfer
Dispute resolution
- Differ among agreements
Key man & D&O insurance

51. Ownership Agreements
Investor Rights/Shareholder Agreement
Equity ownership
- Dividend or distribution policy
- Preferences, anti-dilution
Board Representation (golden rule in effect)
- Reflect percentage ownership
- Appointment and removal procedures
- Process for notice, written consents, veto rights
- Committee selection, scope and responsibility
- Board fees
Advisory board
Defaults and “swamping” rights (Enables changes in control upon certain events; e.g.
breaches in financial covenants, failure to pay management)
Transfer restrictions
- Permitted transfers to family trusts, affiliates
- Right of first refusal, Drag-along/Tag-along
Information disclosure
Buy-sell provisions

52. Acquisition Financing
Alternative sources of financing
• Buyer’s internal sources – cash flow, bank financing, capital infusion
• Seller financing – Seller note, earn-outs, roll-over Seller equity
• Bank financing – Line of credit, term facility, SBA backed loans
• Angel or venture funding - Capital infusion with control complications
• Growth capital – midway between VC & control buyout; uses redemption rights,
preferred equity securities & contractual covenants to effect operational control
without majority voting control
• A recent example of blended financing:
Pittsburgh-based Mylan, Inc. agreed Feb. 27, to buy Strides Arcolab Ltd.'s injectables
unit, Agila Specialties Pte. Ltd. for as much as $1.85 billion. Mylan will pay $1.6 billion
in cash at closing and potentially up to $250 million in additional cash subject to certain
unspecified conditions that Strides must satisfy. Mylan isn't assuming any debt or acquiring
any of Agila's cash through the deal. It has obtained a commitment letter from Morgan
Stanley for a new $1 billion senior unsecured bridge term loan to help finance the
transaction. Mylan will also use its existing credit lines and cash on hand to fund the buyout.

53. Acquisition Financing (Cont’d)
Issues in Seller financing:
• Credit risk of combined entities post-closing
• Parent guaranty, restrictions on operations & subordination to Buyer’s
creditors
• Intercreditor agreement between Seller & Buyer’s lenders
• Subordination of collateral available for other debt
• Potential set-offs for Seller breach of reps and warranties
Asset Based Lending (ABL’s)
• Revolving line secured by specific categories of assets (A/R’s, inventory,
etc.) with advance rate capped at % of each asset category
• Advantages of ABL’s
• Better pricing than cash flow facilities
• Unpledged assets available for other secured debt
• Covenants less stringent than cash flow facilities

54. Acquisition Financing (Cont’d)
Disadvantages of ABL’s
• Rigorous information & inspection requirements
• Frequent Borrowing Base Certificates to lender
• Regular appraisals of collateral
• Field examinations of collateral
• Cash dominion if “excess availability” falls below certain limits
ABL’s in M&A
• Seller’s assets may not support advance rate sufficient for
closing
• ABL’s usually employed with complementary forms of
financing (term facility, bridge loan or high-yield notes)

55. Acquisition Financing (Cont’d)
Crowdfunding – JOBS Act of 2012
Provides securities registration exemption for online sales of up to $1M every 12 months to unlimited
number of investors irrespective of accredited investor status
Limitations:
• Amount per investor limited on basis of income or net worth
• Transactions only thru broker or “funding portal” (new category of registered financial intermediary;
rules currently being written by FINRA)
• Broker or funding portal must provide prescribed disclosures
• Issuer must provide disclosure and information on use of funds
• Since the passage of the JOBS Act, there has been an uptick in the usage of crowdfunding platforms like
Fundable and Indiegogo, which have helped fund all types of small businesses.
Issues with Crowdfunding:
• Multitude of CF shareholders make subsequent financing rounds more complicated and expensive
• CF shareholders are not friends & family, thus more prone to be trouble-makers with an agenda
• Required CF disclosures creates risk of disclosing sensitive information at vulnerable time in business
development
• Routine corporate governance made more complicated and expensive
• CF shareholders have voting rights & owed fiduciary duties as minority shareholders

56. Acquisition Financing (Cont’d)
The JOBS Act crowdfunding provisions have generated substantial criticism. Below is excerpt
from New York Times opinion piece by Steven Rattner, dated March 3, 2013, entitled “A Sneaky
Way to Deregulate”:
“Slapping a catchy acronym like the JOBS Act on a piece of legislation makes it more
difficult for politicians to oppose it — and indeed that’s what happened with the Jumpstart
Our Business Startups Act.
Unveiled a year ago by House Republican leaders, the proposal was rushed into law with
large majorities just two months later; its provisions are gradually taking effect.
Its enticing acronym notwithstanding, the JOBS Act has little to do with employment; it’s a
hodgepodge of provisions that together constitute the greatest loosening of securities
regulation in modern history.
….
No wonder that the Securities and Exchange Commission, whose former chairwoman Mary
Schapiro opposed the legislation, has been taking its time writing the regulations to
implement these provisions.”

57. Questions?
Jim L. Rench, Esq.
Stark & Knoll Co., L.P.A.
3475 Ridgewood Road
Akron, Ohio 44333
jrench@stark-knoll.com
(330) 376-3300
www.stark-knoll.com