They have agreed to a purchase price of $MM, consisting of $MM in cash at the closing ND the balance of $MM in a promissory note due to the Seller to be paid out in no more than 5 years. Anne will contribute $1. MM, Barry $0. MM. The partners have agreed to a 50/50 ownership split. The following terms will need to be negotiated and summarized In a term sheet: The structure of the $MM promissory note to Seller A Buy/Sell agreement between the partners An agreement that addresses the differential capital contributions and the ownership agreement.
Promissory Note (See “Basic Considerations for Notes in Selling Shareholder Agreements”): Term Form of Note (e. G. Interest only plus balloon, equal quarterly payments of interest and principal, etc. ) Payment Schedule Interest Rate Level Interest Rate: Fixed or Floating Priority in Company Capital Structure Security: In the event of default, what assets of the company or the principals can the mentholated claim? Prepayment: Right or Obligation Events of Default/Rights of Holder/Ability of Company to Cure: In the event of penalty?
What constitutes final default? What additional rights do the nonetheless get in the event of default? Buy/Sell Agreement (See “Buy-Sell Agreements
Valuation Process Fixed price Formula 3rd party valuation Standard of Value: E. G. , Fair Market Value, Investment Value, Fair Value, etc. Level of Value: Financial Control, marketable minority, non-marketable minority, etc. Funding Mechanism Life insurance? Note payable? Other? Mechanism for handling deadlocks Right of First Refusal “Tag-along” Rights “Drag-along” Rights Allowing additional partners to Join?
Deal Structure Develop a deal structure that accomplishes the following: Recognizes the differential in capital contribution Reflects the 50/50 split in equity ownership between partners Assignment Prepare 3 term sheets that describe the principal terms of each of the three 1) A term sheet between the Seller and the two partners that describes the principal terms of the note. 2) A term sheet between the two buying partners that describes he key provisions of the buy/sell agreement. 3) A term sheet between the two buying partners that describes the overall deal structure in terms of type of security and ownership position post closing.