*Market comparables (if available)
*Financial or strategic buyer (who may buy at a higher price due to synergies)
*Trends in the company’s time sequenced financial performance
*Strategic alliances and partnerships
*Projected financial growth
*Proprietary technology
*Legal risks
*Experience/quality of management and key employees
*Multiple bidders or a single interested party
If a purchase price cannot be agreed upon, contingency clauses such as “earn-outs” can be drafted as a way of bringing the parties together. For example, with an earn-out, payment of a certain portion of the purchase price is contingent upon the purchased business meeting specific targets. This is helpful when the parties differ on the valuation of the business.
However, earn outs should be used with caution; these clauses can entail a fair amount of risk for a selling party, as the seller will have to depend on the business stewardship of the purchaser to actually meet those targets and if the targets aren’t met, the seller will be out a portion of the purchase price. Of course, carefully drafting can also help protect the seller in an earn-out situation. A seller also exposes itself to the risk of a buyer not paying the earn-out when due in the event a dispute arises relating to the target being met. For that reason, a clear dispute resolution clause in the agreement is paramount. It is equally important for the seller to obtain some form of security from the buyer in the event the buyer does not pay the earn out when due. This security can take the form of a registered general security agreement or personal and corporate guarantees.
Due diligence
Before buying an asset, a prudent purchaser will need to ensure that it knows exactly what it is buying and what kinds of obligations and liabilities it is assuming. This can mean worrisome contracts, litigation risks or intellectual property problems.
The seller should ensure all its records, books and contracts can withstand a buyer’s in-depth review. Some issues that may arise are:
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