Business Sale Transaction Planning
The family owners of a privately held, 30 year old California manufacturer of packaged foods, decided to sell the business and related real estate to one of their competitors. As a condition of the sale the family was concerned about the future welfare of some of the long time employees of the business and wanted protection for those individuals as well as a promise that the business would not be relocated after sale. Further, of course, the family wanted top dollar for the business and the real estate and were willing to carry back only a limited amount of financing.
The purchaser was arranging for an SBA loan to purchase the business which tied up all of his major assets leaving nothing substantial as security for the seller carried financing. Further, the SBA was insisting on strict limits on the seller carried financing. This requirement translated into the need for cash through escrow from the purchaser that he simply did not have available to spend without reselling the real estate after his purchase of the business and, subsequently, relocating the business to property he already owned hundreds of miles away and consolidating operations with his existing competitive business.
Given all of these competing needs and desires as well as financial complexities and limitations, Mr. Dallinger recommended and was able to persuade the parties to agree to a scenario in which
the key employees shared in a somewhat increased acquisition price by means of bonuses in accordance with a formula based on their longevity, thus assuaging the sellers’ desires to protect their employees and alleviating their expressed need to see that the business not relocate post-sale, and thus permitting the buyer to take advantage of economies of scale by selling the real estate to raise cash and relocating the business to his existing facility soon after close of escrow,
the daughter of the original operating officer (his successor in that position and a long time key employee) received a separate substantial post-sale consulting contract and personal consideration over time for the sale and subsequent non-disclosure of proprietary formulas in lieu of a portion of the purchase price, thus lowering the purchase price and alleviating the need for a larger seller carried note in order to satisfy the SBA’s lending requirements, and
the real estate sale and the business sale were separated so that the seller carried financing applied primarily to the real estate and the real estate was purchased by the owner of the purchasing corporate entity individually, thus altering the debt ratios and financial structure as viewed by the SBA based on valuation and consideration for the sale of the business itself.
Many years of hands on experience in structuring the sales of business assets as well as entity sales enabled Mr. Dallinger to ascertain, understand and appreciate the parties’ competing needs and to envision a practical method whereby each could be satisfied on an acceptable, practical compromise basis. Only the skills and knowledge flowing from such lengthy direct experience could have resulted in the successful critical and creative balancing of so many variables and parties in such complex, multi-layered circumstances.
Asked to assist a business broker who was having trouble closing a transaction in which the broker was a dual agent representing both sides to the deal, Mr. Dallinger met with the broker and learned the following critical facts:
the transaction involved a commercial window washing firm with customers across the country
buyer and seller had agreed to a price and terms, escrow was opened and deposits made
buyer had completed due diligence and had been satisfied with the details of the transaction
the parties had agreed to buyer’s early possession of the business prior to close of escrow subject to release from escrow of a significant percentage of the purchase price to the seller
after early possession and release of funds, the buyer began to have misgivings about the numbers and wanted to back away from the deal
the seller, upon hearing of the buyer’s remorse, took back possession of the business but kept the released funds
the escrow was about to fail completely and litigation was on the horizon.
The broker wanted to know how to communicate with the parties in a last ditch effort to bring them back together and to close the escrow.
Based on the transaction documents and the broker’s listing agreement, it appeared that both parties might be in breach of the purchase agreement and, further, that the seller might be in breach of the listing. The agreements gave the broker an independent right to demand mediation of the dispute between the buyer and seller as well as the potential commission dispute between the broker and the seller.
Given these circumstances, and with the need to protect the broker from an assertion that, as a dual agent, fiduciary duties to one side or the other might have been breached, Mr. Dallinger helped the broker craft communications in writing and verbally to both sides demanding prompt mediation and designed to inform them of what their duties and risks were and why closing the escrow was a much better and less risky alternative than not doing so.
Based on Mr. Dallinger’s analysis and explanations, the broker was, in turn, able to explain persuasively to the parties what their respective self-interests were. The transaction closed successfully without even the need for a formal mediation and the broker received his full commission. By virtue of Mr. Dallinger’s experience, insight, analytic and communication abilities, the transaction was saved in a matter of days after many months of hard work and frustration by the broker.
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