Proven Results
Bioscience and Food Processing Company
The Problem
The buyer was backed by highly sophisticated and experienced investors, and as a result we had to prepare for negotiations with reasoned objectives and a persuasive approach to the changes we proposed. Our client’s biologics division had experienced significant growth and was extremely profitable. The food group, however, was struggling to break even – a formidable challenge considering that it provided the by-products used by its profitable counterpart. The company also had a defined benefit pension plan that was significantly underfunded. To further complicate matters, the CEO/Owner also owned the real estate and buildings which housed the business as well as possessing a lease agreement with the company to pay rent and other charges.
The latter served as a prime example of one of our overarching challenges: How to successfully balance the CEO/Owner’s expectations for the price he wanted to receive for the company, while managing the buyer’s expectations for the lower value they were willing to pay. These factors, along with the desire to successfully complete the transaction within the time frame the buyer had established, presented significant challenges to achieving a successful exit.
The buyer was backed by highly sophisticated and experienced investors, and as a result we had to prepare for negotiations with reasoned objectives and a persuasive approach to the changes we proposed. Our client’s biologics division had experienced significant growth and was extremely profitable. The food group, however, was struggling to break even – a formidable challenge considering that it provided the by-products used by its profitable counterpart. The company also had a defined benefit pension plan that was significantly underfunded. To further complicate matters, the CEO/Owner also owned the real estate and buildings which housed the business as well as possessing a lease agreement with the company to pay rent and other charges.
The latter served as a prime example of one of our overarching challenges: How to successfully balance the CEO/Owner’s expectations for the price he wanted to receive for the company, while managing the buyer’s expectations for the lower value they were willing to pay. These factors, along with the desire to successfully complete the transaction within the time frame the buyer had established, presented significant challenges to achieving a successful exit.
Unique Challenges
Process
After completing initial due diligence and financial review, the buyer presented us with an initial letter of intent to purchase the assets of the company. Working with the CEO/Owner, we evaluated the term sheet and identified areas where we wanted changes and more favorable terms.
One of the initial road blocks we encountered was that the buyer only wanted to purchase the biologics division. That prospect was not appealing to the seller as it would leave him with an underperforming food processing business. Allowing the buyer to achieve a carve-out could result in post-closing complications.
The initial offer involved three components, including a cash payment up front; a promissory note with no principal payments until maturity; and a substantial earn-out provision. One additional deal point that required negotiation was the required targeted working capital contribution. Our goal was to negotiate terms that would minimize any reduction in the purchase price, and which could be beneficial to the owner.
Ultimately, the final letter of intent was accepted and signed, and the buyer and the company began their due diligence. We managed the process to ensure there were no material issues that could negatively impact the negotiated purchase price. After an extended period of negotiations, the asset purchase agreement and related agreements were finalized.
Notably, one of the final complications encountered was the beginning of the pandemic, which injected a high degree of uncertainty and volatility concerning its overall impact on the economy and, potentially, the company’s future prospects. Despite these challenges, we successfully closed the deal — with no decrease in purchase price.
The company was sold for a strategic valuation at a multiple of trailing 12 months EBITDA. In addition, we were successful in increasing the cash offer and the amount of the promissory note, while decreasing the amount of earn-outs with more favorable terms. We also negotiated a series of annual promissory note payments that increased over the term of the note. And, in one of the more pivotal aspects of the deal, we successfully convinced the buyer to purchase the food division along with the biologics group and increased the offer with an additional earn-out provision.
Other big wins included negotiating a lengthy new term lease with the buyer, resulting in a substantial increase in rent and related charges. Subsequent to closing, the owner received a favorable working capital adjustment, as well as the maximum earn out possible under the asset purchase agreement.