1. What do you do when it’s time to go? Stan Johnson Eric Johnson 2013 Annual Convention September 25-27, 2013

2. Know When to Fold ‘Em Things to think about BEFORE Selling (or Buying) a Business

3. The Gambler by Kenny Rogers You got to know when to hold ‘em, know when to fold ‘em Know when to walk away and know when to run You never count your money when your sittin’ at the table There’ll be time enough for countin’ when the dealin’s done

4. Family Businesses Dominate According to Business Beware a significant amount of small business stats were centered around family businesses:  The average life span of a family owned business is 24 years  The number of businesses run by women has grown 37% in the last 5 years  Family businesses comprise 80-90% of all small business enterprises in North America  Only 40% of family owned businesses survive to the second generation, 12% to the third and 3% to the fourth

5. Fail to Plan, Plan to Fail Why are we in here today? How are you going to sell your company? What are you selling? How do you value it? What are the terms? Who is going to be your expert, advisor or attorney? Do you have a plan; a plan that keeps you active?

6. Going Solo…Not!!! Please don’t think you can do this without strong support Yes, Virginia, there is a Santa Claus and it is NOT your buyer Details, details, details; take care of the details before you close or be sure to have a good lawyer after you close I’ve got to take care of my people Wait until you see what your competition tries to do to your customer base

7. Let an Expert Guide You If you had not had training on changing a compressor before you started changing them how many would you have burned up? There are many qualified merger and acquisition specialists; the bigger the company the more sophisticated the advisor Business brokers, accountants, attorneys; ask for references and check them out; interview more than one This person is helping you chart the rest of your life

8. Deciphering the Legalese High-level walkthrough of the basic legal documents to discuss: the process and the timing of a typical sale transaction; and some of the big issues that you and the buyer will negotiate.

9. Confidentiality Agreement Usually the first agreement entered into between a seller and a potential buyer Preserve confidentiality of sensitive information, etc. Limit Buyer’s use of information to evaluating and negotiating transaction Return or destruction of information if negotiations are terminated Non-solicitation of employees

10. Letter of Intent (a/k/a the Term Sheet) Outline of parties’ current understanding of the deal terms (structure, purchase price, etc.) -- Non-binding Binding terms (cooperate in Buyer’s due diligence investigation, exclusivity, conduct business ordinary course, confidentiality) Seller’s maximum leverage is typically at the letter of intent stage. Make sure your lawyer is involved.

11. Purchase Agreement Structure (Stock Purchase vs. Asset Purchase vs. Merger) – Stock purchase is generally the seller preferred structure – Buyer may push for asset purchase (successor liability issues, tax benefits to Buyer) Tax Treatment – talk to your advisors!; every seller’s tax situation is unique; state tax treatment varies

12. Purchase Agreement Assume stock purchase for cash (other options – cash/stock mix, seller financing with a note, etc.) Break down of a typical stock purchase agreement: – the basic sale/closing provisions – “reps and warranties” – covenants – conditions to closing – termination provisions – indemnity provisions

13. Basic Sale/Close Provisions Shares to be sold Purchase price to be paid by Buyer Closing (timing; separate sign and close?) Documents to be delivered at Closing Purchase Price Adjustments – not included in every deal – often tied to working capital – interplay with indemnity (no “double dipping”)

14. Reps and Warranties “Representations” and “Warranties” are statements and promises regarding past, existing or future facts about your business (essentially, a formal description of your business organized by subject) Serve 3 Primary Purposes: – Diligence/Risk Allocation – Conditions to Closing/Termination – Post-Closing Indemnity claims

15. Reps and Warranties Subjects typically covered – organization and good standing – authority and enforceability; no conflict – capitalization – financial statements – books and records – real and personal property – condition and sufficiency of assets – accounts receivable

16. Reps and Warranties Subjects typically covered (cont.) – inventories – no undisclosed liabilities – taxes – employee benefits – compliance with law – litigation – absence of certain changes/events – material contracts

17. Reps and Warranties Subjects typically covered (cont.) – insurance – environmental matters – employee matters/compliance; labor disputes – intellectual property – relationships with related persons – customers and suppliers – product liabilities and warranties – brokers/finders

18. Reps and Warranties Seller would prefer no reps and warranties (“as is/where is” deal), but unrealistic absent significant Seller leverage or deeply discounted sale price Disclosure Schedules Time qualifiers Knowledge qualifiers Materiality qualifiers

19. Reps and Warranties In an all cash deal, the Buyer’s reps and warranties to the Seller are limited: – authority and enforceability – any required financing in place for closing

20. Covenants Pre-closing covenants – Access for due diligence – Operate business in ordinary course – Cooperation on governmental and third party notices and consents – Payoff of related party indebtedness – Exclusivity – “Efforts” standard (best efforts vs. commercially reasonable efforts)

21. Covenants Post-closing covenants – Cooperation; Access to records – Noncompetition, Nonsolicitation and Nondisparagement – Confidentiality

22. Conditions to Closing Accuracy of Reps and Warranties (“bring down”) Performance of all covenants Receipt of consents and governmental authorizations No litigation challenging transaction No Material Adverse Change (“MAC walk right” – case law favors sellers but beware of objective conditions)

23. Termination How? – By mutual agreement – Material breach by other side and no cure within prescribed time period – Conditions to Closing not satisfied – End Date Effect? – Walk away; “no further force or effect” – Termination fees and expense reimbursements

24. Indemnity General contract remedies vs. indemnification provisions (exclusive remedy) For what? – Breaches of reps and warranties – Breaches of covenants – Other matters separately identified (taxes, environmental, litigation, etc.) Who is on the hook? Joint and several liability issues.

25. Indemnity Limitations – Time (“Survival” and notice requirements) – Amount “Thresholds” (first dollar) and “Deductibles” “Cap” – “Offsets” for insurance proceeds – Purchase price adjustments (no “double dipping”) – Exceptions or “carve-outs” from the limitations

26. Indemnity Escrow Agreement or “holdback” Buyer setoff rights – Promissory notes – Earnouts

27. Earnouts Portion of purchase price is contingent upon achieving certain negotiated financial or non-financial performance goals. Solution to a “valuation gap” Seems simple, but a difficult drafting exercise (disputes – and litigation – are common) Tax issues – risk of ordinary income treatment if continued involvement

28. Employment/Consulting Can be beneficial to both Seller and Buyer Issues: – Duties – Term – Comp./Benefits (Independent Contractor?) – Noncompetition – Beware of Buyer setoff rights – What if the Buyer sells your business? (change of control payments?)

29. Post-Closing Closing your deal is just a new beginning: – Transition issues – Purchase Price Adjustments – Earnouts – Indemnity claims

30. Q&A Any questions?