Hello guys,
Calling on experienced PE/Search Fund/Investment guys and girls. I am currently looking at a distressed asset in the industrial manufacturing sector that hasn't been operating since the end of 2017. The business is laden with debt and the owners are willing to entertain a transaction where the buyer would take 100% ownership of the company in return for assuming the debt.
Now i am trying to draft an NBO for the sellers and given that most of my experience is in growth equity and minority deals, I am looking to get input from more experienced members on what are the key things to note when drafting that offer.
In a growth equity deal, I will usually throw in the kitchen sink in reps and warranties and put some of the transaction value in escrow or include clawbacks etc, but given that these people are selling a 100% and there is no cash exchange I am not sure how to protect against any downside.
Things i considered are: (1) getting a pledge on some external asset or (2) having the sellers deposit some checks in Escrow, etc. But what else?
If people have resources they can share, i would be grateful as well.
Mind if I ask some questions? So the factory has been non-operational for ~18 months? No revenues, no assembled workforce? But debt and maybe some costs? But, and here's where I'm confused, you still call it a business and refer to the owners as having a voice? Isn't that like someone 18 months dead talking about... well, anything? Or are they just hanging out servicing debt because no better idea has occurred to them?
Buying a dead asset for assumption of debt is simple. I can guide you offline if you want.
Here's how to uncluttered your mind on reps and warranties, if you were buying a truck from me, what R&W would you expect? That I have valid title and that's about it. No escrow, clawbacks, etc. Now escalate that, if you were buying a stamping machine, what additional R&W would you expect? Again, probably not much beyond valid title? Your mechanic would sign off on the shape of equipment, as you would have them do with a van. Okay, now imagine 10 stamping machines and 5 vans plus tables and chairs, maybe some other equipment, racking, etc. It's a big pile of assets - looks intimidating but one-by-one it's very simple. A 18 month mothballed mfg business is just a pile of assets like described above - so why would you need any R&W beyond valid title?
And if you buy assets for fair market value, what's the risk? If I can buy a Toyota Camry at low bluebook today I can probably sell it at low bluebook tomorrow.
To paraphrase Buffet, your DD and your risk are your purchase price. The value creation resides in you, the entrepreneur, not in idle assets. The world is full of idle assets and cash - look how few people can make them work together.
I am happy to provide more color on the matter - can i PM you and we take this offline?
You can build r&w into the debt assumption. I did that with a recent distressed deal.
Can you shed more light on the matter?
M1, you wove R&W into the bank loan agreement? Good for you. What sort beyond the basics?
Keep in mind this was a very small deal relative to what most (and you) do. Total revenue of about $5M USD and EBITDA of about $1M before they moved into being distressed.
Basically, kept all debt that wasn't personally guaranteed by the owner under the original LLC.
Any personally guaranteed debt she stayed on as the guarantor for. We only moved the lease to be under our corp that did the acquisition.
We are obligated to make "minimum" payments in the APA but we since amended that to say that we're allowed to let the accounts default unless the creditors accept 30% or less of what they are owed.
Plus the majority of her comp comes from royalty based on company performance.
So basically we just subtract anything we feel we're owed from debt bal/royalty.
Like I said, this probably only works on smaller deals...but since homeboy is running a search fund I'm guessing the target is pretty small too.
Usually distressed assets, especially an idled facility is purchased on a "as is, where is" basis, no rep and warranties. Also, there is no escrow on these types of deals.
True - the problem with the As is, where is basis at this point is that where i am from there is no established procedural way to deal with contingent liabilities if things blow in your face post acquisition.
You default, you face jail time. Hence, the need to secure my downside.
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