Legal Risk Management Tips
July 22, 2021
A. Valuation and Purchase Price
The company’s valuation, along with the amount of money invested, determines the purchase price of assets. The valuation should but does not need to be conducted by a neutral third party. In the event the purchaser is not buying 100% of the assets or the adviser’s business, the valuation is used to determine the purchase price based upon the percentage being purchased. For instance, if the valuation was $1,000,000 and the buyer wants to purchase 10%, the purchase price of that interest will be $100,000. The date of the final valuation is detrimental in the agreement since it affects the purchase price, payment terms, closing date, and other terms. When the purchase price is determined, there are different ways you can structure the payment. Some of the most common methods include: (1) Cash up-front in full, usually with the assistance of bank financing; (2) Seller financing, meaning that the buyer pays all or a part of the purchase price with a promissory note that buyer gives to seller; (3) Stock in purchaser’s company; and/or (4) Buyer’s assumption or payoff of seller’s debt. The deal can also be structured to incorporate a mixture of the above.B. Closing
Generally, you can expect closing to take about 4-5 weeks from signing the term sheet if the deal is on a normal pace. This assumes no significant delays, breaches, or amendments to the terms. Between signing the term sheet and before closing, any conditions to closing previously outlined or indicated in the term sheet should be performed, executed, closed, whatever the case may be. For instance, a closing condition may be that the buyer form the entity that will hold the assets post-closing, or perhaps establish the appropriate broker/dealer-custodial relationships, as necessary. During this same time, attorneys for each side will be busy drafting, reviewing, modifying, and finalizing the definitive documents. Depending on the structure, the definitive documents usually include the Purchase Agreement (Asset Purchase, Share/Stock Purchase, etc.), promissory note, security agreement, bill of sale, spousal consent (as applicable) and any other exhibits, addendums, or other documents (which may include restrictive covenants, independent contractor consulting agreements and other contracts to help facilitate the transaction and deal). When all the documents are finalized and closing conditions have been met, a date and time for closing shall be set. At this closing, all the definitive agreements will be executed, the purchase price payment will be made, and the deal is considered done. At that point, all the right title and interest in the assets (or other property subject to the transactions) will transfer to the buyer.C. Restrictive Covenants
The term sheet and the definitive agreements generally contain covenants that will restrict one or both of the parties’ ability to solicit clients, employees, independent contractors or other agents of the other. In certain circumstances there may be non-complete clauses or provisions that would restrict the ability of a party to own or operate a business that competes, directly or indirectly with the business or assets that were just sold. Further, there may be confidentiality agreements and other provisions that protect the disclosure of trade secrets, client lists, vendor lists, contracts, and other key information of the business. Generally, these provisions last for a finite period after closing (generally ranging from 2-5 years). Consequently, it is prudent for the party bound by these restrictive provisions to adhere to and comply with the conditions set forth or face potentially harsh consequences. Commonly, a breach of any of these provisions also could cause the other party to seek equitable remedies and trigger dispute resolution in the form of mediation, arbitration, or a lawsuit, which can be extremely costly. Ensuring these provisions are not only drafted correctly at the beginning but are also closely monitored post-closing is of the utmost importance. Conclusion A term sheet is essential for helping parties to outline the base which will form the definitive agreements. Having a term sheet solidifies the parties’ understanding on key terms before proceeding further in a transaction, potentially saving time, significant cost and efforts in negotiating an asset purchase or selling agreement and other related documents later on. A term sheet gives both the purchaser and seller peace of mind to proceed with a transaction, while negotiating final deal terms in an effective and efficient manner. Authors: Michelle L. Jacko, Managing Partner. Editor: JLG works extensively with investment advisers, broker-dealers, investment companies, private equity and hedge funds, banks and corporate clients on securities and corporate counsel matters. For more information, please visit https://www.jackolg.com/. The information contained in this article may contain information that is confidential and/or protected by the attorney-client privilege and attorney work product doctrine. This email is not intended for transmission to, or receipt by, any unauthorized persons. Inadvertent disclosure of the contents of this article to unintended recipients is not intended to and does not constitute a waiver of attorney-client privilege or attorney work product protections. The Risk Management Tip is published solely based off the interests and relationship between the clients and friends of the Jacko Law Group P.C. ("JLG") and in no way be construed as legal advice. The opinions shared in the publication reflect those of the authors, and not necessarily the views of JLG. For more specific information or recent industry developments or particular situations, you should seek legal opinion or counsel. You hereby are notified that any review, dissemination or copying of this message and its attachments, if any, is strictly prohibited. These materials may be considered ATTORNEY ADVERTISING in some jurisdictions.Michelle L. Jacko, Esq. is the Managing Partner and CEO of Jacko Law Group, PC (“JLG”), which offers securities, corporate, real estate, and employment law counsel to broker-dealers, investment advise...