5 Key Purchase Agreement Considerations

5 Key Purchase Agreement Considerations

 

LUTZ BUSINESS INSIGHTS

 

5 key purchase agreement considerations

bill kenedy, LUTZ consulting and m&A shareholder

 

The purchase agreement is a major component of an M&A deal. It is the contract that documents all of the terms agreed upon between the buyer and the seller in a transaction. Without one, it would be nearly impossible to bring a deal to a successful closing. However, for a buyer and seller to reach deal closing, they must settle a few key matters within the final contract.

Below are five important topics to consider in an M&A transaction’s purchase agreement:

1. Purchase Price

Most M&A deals are negotiated on a “cash free/debt free” basis. In simple terms, this means the seller keeps all of the cash and pays off all of the debt at the time of the sale of the business. In almost all circumstances, shareholder loans, bank debt, unpaid dividends and overdraft facilities will be treated as debt.

2. Earn-Out

Earn-out is a mechanism used in an M&A transaction through which a portion of the purchase price is paid contingently upon the occurrence of certain events. This amount is usually calculated based on the performance of the acquired business over a specified period of time following the closing.

Earn-outs are most commonly used to bridge the business valuation gap between a seller and a buyer. It allows sellers to potentially facilitate a higher price and provide buyers with an additional financing option to pay for the acquisition through future profits of the acquired business.

3. Establishing a Net Working Capital Peg

A net working capital peg is used to ensure the seller is not collecting most of the A/R out of the business, liquidating inventories, or slowing payment of accounts payable prior to close. In the case of a deficit of net working capital at close, the buyer may reduce the cash to the seller by the amount of the deficit.

4. Equity Roll

Many buyers often encourage selling owners to “roll over” a portion of their equity. Meaning, the seller will own a minority equity position in the company after the transaction closes. Rollover equity is a form of seller financing and it is often used to bridge financing and valuation gaps. Rollover equity also represents a powerful tool for aligning the seller/founder’s interests with the buyer’s interests.

5. Other

Other topics outlined in a purchase agreement include:

  • Non-competes
  • Warranties
  • Employment agreements
  • Consents on certain contracts

All of these terms represent important legal components of the purchase agreement that should be given consideration when contemplating the sale of a business. Consulting with an M&A advisor on these matters can help your business deal come to a successful closing. Please contact Lutz M&A for questions on this topic or for transaction assistance.

ABOUT THE AUTHOR

bill kenedy

402.492.2132

bkenedy@lutz.us

BILL KENEDY + LUTZ CONSULTING AND M&A SHAREHOLDER

Bill Kenedy is a Lutz Consulting and M&A Shareholder at Lutz. He specializes in business valuation, litigation support, and merger and acquisition advisory services.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Public Accountant
  • Accredited in Business Valuation
  • Certified in Financial Forensic
  • Certified Exit Planning Advisor
EDUCATIONAL BACKGROUND
  • BSBA in Accounting, St. John’s University, Collegeville, MN
COMMUNITY SERVICE
  • Construction Financial Management Association, Past Treasurer, Board Member
  • A Time to Heal (non-profit focused on cancer patients), Past Board Member

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LINCOLN 

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Lincoln, NE 68508

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GRAND ISLAND

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Lutz M&A adds Mark Otte

Lutz M&A adds Mark Otte

 

LUTZ BUSINESS INSIGHTS

 

Lutz M&A adds Mark Otte

Lutz, a Nebraska-based business solutions firm, welcomes Mark Otte to its M&A division in the Omaha office.

Bringing over two years of consulting and valuation experience, Mark joins Lutz M&A as a Financial Analyst. He is responsible for performing business assessments and financial analyses, providing benchmarking reports to clients, and preparing marketing documents for businesses being acquired or seeking new investment. Otte graduated from the University of Northern Iowa with a Bachelor’s degree in accounting.

 

RECENT POSTS

5 Key Purchase Agreement Considerations

The purchase agreement is a major component of an M&A deal. It is the contract that documents all of the terms agreed upon between the buyer and the seller in a transaction. Without one, it would be…

read more

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

VIEW MODIFIED SUMMER HOURS HERE

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Lutz Announces Director Promotions

Lutz Announces Director Promotions

 

LUTZ BUSINESS INSIGHTS

 

Lutz Announces Director Promotions

Lutz, a Nebraska-based business solutions firm, has promoted seven to Director roles.

 

Joe Donovan, CPA, has been promoted to Tax Director, and has over six years of experience in taxation. Donovan is responsible for providing tax compliance, research, and consulting services to privately held companies in a variety of industries including real estate and construction. Joe works in Lutz’s Omaha office.

Ashley Englund, CPA, CVA, has been promoted to Tax Director. Englund has over six years of experience in the accounting industry. She is responsible for providing tax and consulting services to clients, managing client relationships, and assisting in leading accounting operations in Lutz’s Central offices. Ashley works in Lutz’s Hastings office.

Sharissa Fernau, CPA, has been promoted to Operations Director of Accounting in Lutz’s Omaha office. Fernau has over seven years of experience in taxation, and four years of experience leading Lutz’s tax department’s operations team. Her primary responsibilities include the implementation of new processes and procedures within the accounting division, managing the workflow schedule for accounting staff and upper-level management, and coordinating accounting training for interns.

Kyle Hofeldt, CPA, has been promoted to Audit Director in Lutz’s Omaha office, and he has over eight years of assurance and consulting experience. He is responsible for providing accounting, auditing and consulting services to privately-held companies in a variety of industries including agriculture, service, manufacturing, construction, technology, and transportation.

John Kampfe, CPA, has been promoted to Tax Director, and has over six years of experience in taxation. He is responsible for providing tax planning, research, and consulting services to individuals, as well as privately-held businesses in the construction and real estate industries. John works in Lutz’s Omaha office.

Ryan McGregor, CM&AA, CVA, has been promoted to Consulting Director in the Lutz M&A division. He has a combined 14 years of related experience. He specializes in business consulting, valuation, and sell-side advisory services. Ryan works in Lutz’s Omaha office.

Curtis Thompson, CPA, has been promoted to Tax Director in Lutz’s Hastings office. He has over seven years of experience in public accounting. Curtis is responsible for providing tax planning, consulting and compliance services to individuals and closely-held businesses with a focus in the agriculture industry.

RECENT POSTS

5 Key Purchase Agreement Considerations

The purchase agreement is a major component of an M&A deal. It is the contract that documents all of the terms agreed upon between the buyer and the seller in a transaction. Without one, it would be…

read more

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

VIEW MODIFIED SUMMER HOURS HERE

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

M&A Transactions + Seller Equity Roll

M&A Transactions + Seller Equity Roll

 

LUTZ BUSINESS INSIGHTS

 

m&a transactions + seller equity roll

dani sherrets, financial analyst

 

The popularity of equity rollovers in M&A transactions has increased in the past decade. Rolling equity is when certain equity holders in the target company are required or elect to roll a portion of their ownership stake into the post-closing business in lieu of receiving cash proceeds. This blog discusses the purpose of using this strategy in a business sale transaction.

Who Utilizes the Equity Rollover Strategy?

Financial buyers frequently use equity rollovers to incentivize and ensure seller participation in the post-closing company. By retaining an equity interest in the company, buyers believe that the seller will stay personally invested and work towards further growth of the company.

Why is this Strategy Popular?

The inclusion of an equity rollover reduces the buyer’s up-front capital investment and it allows the seller to share in the future equity appreciation. Maintaining an equity stake in the post-closing company provides the seller a potential “second bite at the apple”. Further growth of the business results in an increase in the value of the rollover equity, and thus, more money for the seller at a future sale or liquidity event of the post-closing company.

Equity rollover is also a popular vehicle for bridging a valuation gap. A valuation gap is when the seller values his business higher than what the buyer is willing to pay. The gap can be bridged by retaining some equity in the business and capture some of the future value.

Equity rollover also represents an attractive opportunity to owners that want to “take some chips off the table” while continuing to maintain an ownership position. Under this scenario, the owner is able to take some cash out of the business and retain a level of equity, as well as potential involvement in ongoing company operations. Key benefits for the seller could include removal of personal guarantees, funding expansion of the business, less personal risk. In addition, the amount of the equity roll can usually be structured to be tax deferred (no taxes due until the ownership interest included in the equity roll is sold for cash).

Rollover interest varies from deal to deal, but is frequently in the 10-40% range of total equity. It is important to note that the seller must wait until the buyer sells the business to realize the benefits of the rolled equity.

For more information on this topic, contact our Lutz M&A advisors.

 

ABOUT THE AUTHOR

402.796.7045

dsherrets@lutz.us

LINKEDIN

DANI SHERRETS + FINANCIAL ANALYST

Dani Sherrets is a Financial Analyst at Lutz with over three years of relevant experience. She specializes in merger and acquisition advisory services and business valuation.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • National Association of Certified Valuators and Analysts, Member
  • Certified Valuation Analyst
EDUCATIONAL BACKGROUND
  • BBA, Academy of Economic Studies, Bucharest, Romania
  • MBA in Finance, Bellevue University, Omaha, NE

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

VIEW MODIFIED SUMMER HOURS HERE

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Net Working Capital: What is it and How is it Used?

Net Working Capital: What is it and How is it Used?

 

LUTZ BUSINESS INSIGHTS

 

net working capital: what is it and how is it used?

bill kenedy, LUTZ consulting and m&a shareholder

 

A commonly misunderstood topic in M&A transactions is the concept of net working capital (NWC). This is recognized as a predetermined amount of capital that is included in the purchase price in a business sale transaction. Understanding what NWC encompasses and how this amount is calculated is an important step in the  M&A process.

 

What is Net Working Capital?

Net Working Capital is a measure of operating liquidity available to a business at a given point in time. Major NWC accounts include accounts receivables, inventory and accounts payable. In short, it can be calculated as your business’s current assets (less cash) minus its current liabilities. Here is an example calculation for NWC:

 Values from the balance sheet

 

Net Working Capital in Business Transactions

In most transactions, NWC stays with the company being acquired as it is considered a necessary operating asset of the business. However, by monthly tracking of collections, payments, and inventory levels, sellers of a business can minimize the amount of money locked up in NWC in order to retain more cash when the business sells.

For example, if the selling company has historically paid its vendors in 15 days even though they have 30 day payment terms, the company could adjust their payment timing to increase cash on hand and reduce NWC.  This change would need to occur well before starting an M&A process (more than a year).

The reason for needed to work on your NWC well before embarking on an M&A process is that most buyers will require a NWC peg based on the company’s historical averages.

A problem with relying on historical results is that the information can often be skewed. Seasonality, peaks and troughs, can often affect the validity of a company’s historical results of NWC. To get a more accurate estimate, buyers will establish “trends” by analyzing a company’s historical NWC over a 12-18 month period.

 

Overall, not understanding and addressing net working capital issues earlier in the M&A process could have a significant impact on the business transaction and the ultimate amount of cash the seller realizes from the transaction. If you have any questions regarding net working capital, please contact Lutz M&A.

ABOUT THE AUTHOR

bill kenedy

402.492.2132

bkenedy@lutz.us

BILL KENEDY + LUTZ CONSULTING AND M&A SHAREHOLDER

Bill Kenedy is a Lutz Consulting and M&A Shareholder at Lutz. He specializes in business valuation, litigation support, and merger and acquisition advisory services.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Public Accountant
  • Accredited in Business Valuation
  • Certified in Financial Forensic
  • Certified Exit Planning Advisor
EDUCATIONAL BACKGROUND
  • BSBA in Accounting, St. John’s University, Collegeville, MN
COMMUNITY SERVICE
  • Construction Financial Management Association, Past Treasurer, Board Member
  • A Time to Heal (non-profit focused on cancer patients), Past Board Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

VIEW MODIFIED SUMMER HOURS HERE

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

EBITDA Adjustments + 5 Expense Categories You Should Review

EBITDA Adjustments + 5 Expense Categories You Should Review

 

LUTZ BUSINESS INSIGHTS

 

ebitda adjustments + 5 expense categories you should review

dani sherrets, financial analyst

 

When assessing how to value a business for an M&A deal, buyers will typically focus on adjusted EBITDA as their primary metric. EBITDA looks at the business’ profitability from its core operations before the impact of capital structure, and non-cash items like depreciation are taken into account. Adjusted EBITDA removes various one-time, irregular, non-recurring items that are not related to the day-to-day, ongoing operations of a business. Since companies are often valued based on a multiple of Adjusted EBITDA, these expense items directly impact the value of your business. For example, if a business is valued at 6.0x EBITDA then simply adding back $500,000 of irregular expenses adds $3 million to the purchase price. This is why buyers pay very close attention and may disagree with certain adjustments. For more detail on this topic, please refer to our previous blog, “Understanding EBITDA and Normalizing Adjustments”.

The following are five most common EBITDA adjustments:

#1 Owner salary & Compensation

If the owner’s salary is deemed to be above market-rate levels, an add-back for any excess salary would be appropriate. Salary collected by spouses or family members that are not active in the business will also be removed.

 

#2 Other owner-related Expenses

If the owner has personal or business expenses that would not continue after the deal, they would be added back. Examples include personal vehicles, insurance, travel, entertainment, and club memberships. These items might be on the income statement purely as a tax mitigation strategy and are not essential to operate the business.

 

#3 Rent expenses

If a company pays above or below market rent, the income statement should be adjusted accordingly to reflect a true market rent level. If the real estate is owned by the business, but it is not critical to operations, any related expense (insurance, maintenance) would be removed from EBITDA. 

#4 Gaps in the Management Team

Should a buyer need to hire new executives to fill out the team, there would likely be a negative adjustment to EBITDA for salary and other items related to such hires.

 

#5 Legal/Litigation Items

One-time or highly unusual lawsuits are considered to be add-backs. Importantly, this would not include typical ongoing legal expenses that are common to a business. 

 

Are you considering an exit or recapitalization and have questions about EBITDA addbacks and their potential impact on the value of your business?  If so, please contact us.

 

ABOUT THE AUTHOR

402.796.7045

dsherrets@lutz.us

LINKEDIN

DANI SHERRETS + FINANCIAL ANALYST

Dani Sherrets is a Financial Analyst at Lutz with over three years of relevant experience. She specializes in merger and acquisition advisory services and business valuation.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • National Association of Certified Valuators and Analysts, Member
  • Certified Valuation Analyst
EDUCATIONAL BACKGROUND
  • BBA, Academy of Economic Studies, Bucharest, Romania
  • MBA in Finance, Bellevue University, Omaha, NE

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

VIEW MODIFIED SUMMER HOURS HERE

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850