Countersignature Stock Purchase Agreement Template Made Easy

Digisign stock purchase agreement

hi team in this video we're going to explore purchase price in the context of buying a company because it is not as straightforward as it might otherwise sound to give this some context let's say that I'm buying this company from you the first time that you will see the value I'm prepared to pay for your company is in either an indication of interest or letter of intent and in either of these documents the value of the company known as enterprise value is typically expressed as a multiple of some measure of profitability which is almost always a beta which stands for earnings before interest taxes depreciation and amortization EBIT a' is one of the most frequently cited measures of profitability in private equity and a lot of people don't know this but it was actually just invented by billionaire investor John Malone to convince Wall Street to look further up the income statement as he was consolidating cable systems in the 70s and 80s I'll include a link to the story in the notes it's really pretty fascinating but this shorthand valuation expressed as a multiple of a beta is what I think the company is worth in its entirety and it is highly unlikely to be the number that appears in your bank account when we close the transaction to determine how we did from the value stated in the letter of intent to what is actually paid for the stock of the business we need to look at the stock purchase agreement this initial value that value I'm willing to pay for the business is often defined in the stock purchase agreement as base purchase price a series of adjustments are then typically made to arrive at the purchase price and this is largely because most transactions are contemplated on a cash tree debt free basis and assume an appropriate level of net working capital at close and it may be impossible to accurately measure what net working capital is on or prior to the closing date consequently to arrive at the purchase price the base purchase price will need to be adjusted for the following the amount of cash on the balance sheet indebtedness net working capital and transaction expenses the first two items are just the base purchase price for a cash free debt free transaction this means that the seller is entitled to the cash on the balance sheet on the closing date and that the seller is responsible for debts owed by the company defined as indebtedness please see the video that covers this topic for more information net working capital will be addressed in a separate lesson it's a sufficiently detailed item to require a dedicated post and the last item transaction expenses is a included to ensure that the seller and that's you and our exercise is responsible for the fees and expenses associated with the transaction that are incurred by you or your company as a quick recap because it requires a few steps the purchase price will be calculated as follows the base purchase price which again reflects the value of the entire company plus cash minus embeddedness plus the amount if any by which net working capital is greater than the net working capital target - the amount if any by which net working capital is less than the net working capital target - the transaction expenses only then do you arrive at purchase price nothing about this any stock purchase agreement all of the capitalized words and the bullets above will change the amount that ends up in your bank account consequently they need to be very carefully defined I attended a cat and sponsored conference earlier this year where one of the presenting attendees stated that this discrepancy between enterprise value and a letter of intent and purchase price and the stock purchase agreement occasionally surprised sellers and particularly those that don't transact often and that he always provided sellers with a copy of his calculations as early as possible to help the process move forward smoothly because the surprise on this front can quickly kill a transaction in my experience typically what happens is that sellers get attached to a number especially when you're buying from a founder entrepreneur they start to imagine their life post acquisition some imagine how they will responsibly invest the proceeds to enjoy retirement and others imagine yachts and jet skis and any fluctuation can cause an emotional reaction and a big enough reaction will kill the deal that you have spent months working on so clear communication is paramount another speaker at the Katan conference had a far more urgent message this speakers profession exposed them to a lot of transactions and they claimed that an increasing number of buyers we're using this calculation as a way to clawback purchase price in response to elevated EBIT on multiples which is an entirely unethical practice but unfortunately if the other party has deal fatigued or doesn't understand the process well enough this calculation can be used to manipulate the proceeds that the seller will receive so you need to be focused on the base purchase price just as much as you need to be focused on this and the associated definitions the definition for indebtedness for example frequently covers half a page we've included abbreviated definitions to make the document easier to digest and to help you visualize how the definitions and the calculation of purchase price come together in a stock purchase agreement we have also included hypothetical language detailing the above sequence as it might appear in the s.p.a so please download the document associated with this video to familiarize yourself with the process alright team that's all for now thanks for watching