00:00:13:01 - 00:00:13:17 Welcome

00:00:13:17 - 00:00:16:21 to our weekly livestream recording of the Amazing Podcast series

00:00:16:21 - 00:00:20:14 devoted to acquisition entrepreneurs, search funds and how co builders in the UK

00:00:20:14 - 00:00:23:31 and EU discussing the topics and challenges that impacts SMB

00:00:23:31 - 00:00:27:11 succession, M&A and exploring the highs and lows of searching,

00:00:27:11 - 00:00:31:02 acquiring, owning and operating small and medium sized businesses.

00:00:31:05 - 00:00:34:24 I'm joined, as ever by my last year co-host Gareth Wilkins,

00:00:34:24 - 00:00:38:21 CEO of BIS Crunch, Serial, acquirer and font of all M&A knowledge.

00:00:38:21 - 00:00:40:27 How are you this week, Gareth?

00:00:40:27 - 00:00:42:25 I'm alright, thanks, Alfie. How are you?

00:00:42:25 - 00:00:43:23 I'm good, thank you. Yeah.

00:00:43:23 - 00:00:46:23 Enjoying the nice weather, isn't it great.

00:00:46:26 - 00:00:47:00 Yeah.

00:00:47:00 - 00:00:47:31 I love this time of year.

00:00:47:31 - 00:00:50:22 Really makes you feel like everything's possible.

00:00:50:22 - 00:00:55:25 Reminds me that what needs to be possible is just happening in.

00:00:55:28 - 00:00:57:05 I'll write a new one.

00:00:57:05 - 00:00:59:16 Yeah. Okay. Very

00:00:59:18 - 00:00:59:31 cool.

00:00:59:31 - 00:01:00:28 Well, let's get stuck in.

00:01:00:28 - 00:01:03:04 We want to make this a quick fire, right? Yes.

00:01:03:04 - 00:01:06:04 So why don't you start off with the news and then we'll get into our topic.

00:01:06:08 - 00:01:07:19 We'll do so.

00:01:07:19 - 00:01:09:01 I had the privilege, privilege and pleasure

00:01:09:01 - 00:01:13:15 of being at the Business Leaders Summit yesterday in Westminster, which

00:01:13:18 - 00:01:16:18 since Richard Hopping acquired the business leader

00:01:16:20 - 00:01:21:14 kind of community and publication a couple of years ago is really

00:01:21:17 - 00:01:23:29 kind of super scaled it and supercharged it.

00:01:23:29 - 00:01:24:29 It's it's awesome.

00:01:24:29 - 00:01:27:08 And this summit yesterday was filled with great minds.

00:01:27:08 - 00:01:30:18 There was, you know, several hundred business leaders in the room,

00:01:30:21 - 00:01:35:17 as well as a number of illustrious speakers from places

00:01:35:17 - 00:01:40:14 like Goldman Sachs and the CBI, so that the morning opened with Rupert.

00:01:40:14 - 00:01:43:28 So as the chair of the Confederation of British Industry

00:01:43:31 - 00:01:47:23 having a very frank kind of fireside, if you will, in a in a panel at the

00:01:47:23 - 00:01:52:23 at the launch in which in addition to declaring on behalf of the sentiment

00:01:52:23 - 00:01:54:22 of all British businesses that we're all very pissed off

00:01:54:22 - 00:01:58:13 and irritated with the Labor government, which I thought was nice and candid,

00:01:58:16 - 00:01:59:26 he declared that

00:01:59:26 - 00:02:03:13 the biggest opportunity right now is retirement age owned businesses,

00:02:03:13 - 00:02:09:05 which was delightful to hear him say because it's a it's a great acknowledgment

00:02:09:05 - 00:02:12:27 really, from someone who is very senior in the business

00:02:12:27 - 00:02:16:12 landscape for Britain acknowledging the problem.

00:02:16:15 - 00:02:18:04 Yeah, that's fantastic.

00:02:18:04 - 00:02:19:28 It's really nice to see people.

00:02:19:28 - 00:02:23:15 So waking up to this, we've been banging on this drum for a little while now.

00:02:23:17 - 00:02:25:19 It's nice to see everyone else coming on board.

00:02:25:19 - 00:02:28:27 Well, my hope is the comments from people like

00:02:28:32 - 00:02:33:10 Rupert will have the Department for Business, you know,

00:02:33:10 - 00:02:36:33 wake up and smell the coffee and realize that something needs to be done.

00:02:36:33 - 00:02:40:25 I think if whilst the Innovate UK and the British Business

00:02:40:25 - 00:02:45:03 Bank are all kind of dancing to a new tune,

00:02:45:06 - 00:02:45:23 and certainly

00:02:45:23 - 00:02:50:00 Stephen Whelton and Lewis at the British Business Bank are very keen

00:02:50:01 - 00:02:53:23 to ensure that they are funding growth.

00:02:53:26 - 00:02:58:04 This this is where, you know, growth can come through continuity of businesses.

00:02:58:04 - 00:03:03:01 So I really hope that, you know, this gets on the Jonathan Reynolds radar properly

00:03:03:04 - 00:03:06:28 and that something is done about, you know, earmarking some funds

00:03:06:30 - 00:03:10:00 specifically for succession M&A, because we have to solve this problem

00:03:10:00 - 00:03:13:00 as a nation so wholeheartedly agree.

00:03:13:06 - 00:03:14:08 It's great.

00:03:14:08 - 00:03:17:06 It's so often very exciting news.

00:03:17:06 - 00:03:18:22 A new talent sourcing platform

00:03:18:22 - 00:03:22:21 for searches has gone live search fun careers dot com

00:03:22:24 - 00:03:26:10 so it's initially seems to be useful cost.

00:03:26:12 - 00:03:27:12 I had a look on there

00:03:27:12 - 00:03:31:31 some of the jobs at secret sites and it's mainly sort of MBA internships

00:03:32:00 - 00:03:34:08 with search funds it's hot on the heels of Smith list

00:03:34:08 - 00:03:37:10 who develops a great following among lots of sort of ambitious great operators.

00:03:37:10 - 00:03:41:30 We love Will Smith we do but yes, really exciting.

00:03:41:30 - 00:03:44:30 Lots of really cool jobs on there, some great sort of avenues in

00:03:44:30 - 00:03:46:06 for those finishing their MBAs

00:03:46:06 - 00:03:49:04 and getting into search funds and acquiring businesses.

00:03:49:04 - 00:03:50:18 So it's really cool.

00:03:50:18 - 00:03:55:21 And another kind of milestone, I think, that shows how far we are progressing.

00:03:55:21 - 00:03:56:32 You know, the fact that there are

00:03:56:32 - 00:04:00:13 this didn't exist before now it has is a kind of testament to how this

00:04:00:16 - 00:04:05:03 search fund and acquisition entrepreneurship is is is growing.

00:04:05:05 - 00:04:08:13 It's coming of age and actually becoming a destination.

00:04:08:15 - 00:04:10:33 You know, beyond those that are graduating

00:04:10:33 - 00:04:15:30 and looking to buy businesses to operate, those that want to go out and work

00:04:15:30 - 00:04:19:27 for their teeth in acquired companies, that's that's fantastic.

00:04:19:27 - 00:04:23:11 And to think that there are now these kind of forums, these communities

00:04:23:11 - 00:04:27:07 in which people with that inclination can can find work brilliant.

00:04:27:10 - 00:04:30:10 And you know, God knows most of the searches

00:04:30:10 - 00:04:34:26 want to surround themselves with more talent, more ambitious talent.

00:04:34:29 - 00:04:37:29 Internships is one way of doing that cost effectively.

00:04:37:33 - 00:04:40:08 Yeah, absolutely.

00:04:40:11 - 00:04:42:02 Anyone who's Gareth,

00:04:42:02 - 00:04:46:15 I guess one final piece of news for me and that's really for our listeners down

00:04:46:15 - 00:04:50:28 under that there is a growing like we have here in Europe.

00:04:50:28 - 00:04:53:20 There is a growing ETA

00:04:53:20 - 00:04:56:07 ecosystem, if you will, in those

00:04:56:07 - 00:05:01:00 and central is at the center of that very aptly named

00:05:01:03 - 00:05:03:10 and they have a couple of events coming up.

00:05:03:10 - 00:05:06:18 Firstly, have a meet up in Brisbane from about 4 p.m.

00:05:06:18 - 00:05:10:21 next Wednesday, the 2nd of April at the Stock Exchange Hotel in Brisbane.

00:05:10:24 - 00:05:14:06 And then shortly after that one week later they have a two day

00:05:14:06 - 00:05:18:03 ETA forum taking place in Queenstown on the 10th and 11th of April.

00:05:18:03 - 00:05:22:00 And it looks like some pretty awesome speakers actually on the roster for that.

00:05:22:03 - 00:05:25:22 If it wasn't the best part of a day's flying away, I would too.

00:05:25:25 - 00:05:29:20 It would be there in a heartbeat that yeah, as this continues to grow,

00:05:29:20 - 00:05:33:06 I definitely need to get down under and check out this thing.

00:05:33:09 - 00:05:35:03 It's something that I hear about quite a lot.

00:05:35:03 - 00:05:37:01 The scene in in Australia,

00:05:37:01 - 00:05:39:25 I've spoken to a few of my customers about that and I know that people

00:05:39:25 - 00:05:43:17 have come up to spoke to you about some of the things you've spoken out before, so

00:05:43:20 - 00:05:45:32 some exciting opportunities down there.

00:05:45:32 - 00:05:46:29 Most definitely, yeah.

00:05:46:29 - 00:05:49:27 Suffers from the same baby boomer generation,

00:05:49:27 - 00:05:51:18 the retirement business, they're going to challenge that.

00:05:51:18 - 00:05:54:00 A lot of the developed world does.

00:05:54:00 - 00:05:55:10 So yeah, good.

00:05:55:10 - 00:05:58:32 Well, so we've got 125 minutes

00:05:58:32 - 00:06:03:07 to get stuck into a key topic today, which is we're going to a quickfire today.

00:06:03:07 - 00:06:04:33 Let's talk legals.

00:06:04:33 - 00:06:08:27 I got to know I got to go back and forth with five points each

00:06:08:30 - 00:06:09:24 for some of the most important

00:06:09:24 - 00:06:13:22 legal documents that you will need in your acquisition process.

00:06:13:25 - 00:06:15:04 Blimey. There's a lot of them out there.

00:06:15:04 - 00:06:17:14 I mean, when you really sit there and lay them all out,

00:06:17:14 - 00:06:21:07 there's quite a smorgasbord of, of legal docs

00:06:21:10 - 00:06:24:28 that you may need depending on the structure

00:06:24:28 - 00:06:28:20 of the transaction that you're pursuing, not what you won't need all of them,

00:06:28:20 - 00:06:34:03 but to be able to pick from a, you know, salad cup of different

00:06:34:06 - 00:06:36:17 different documents to suit your need.

00:06:36:17 - 00:06:40:06 We've certainly picked a tough topic to do quickfire on because we could do

00:06:40:09 - 00:06:42:13 we could do a couple of hours on this, I'm sure.

00:06:42:13 - 00:06:45:32 Well, to continue the food analogy, let's call this an appetizer

00:06:46:00 - 00:06:50:21 because we have a queue of very competent, experienced M&A lawyers

00:06:50:21 - 00:06:53:03 that are quite keen to come onto this podcast

00:06:53:03 - 00:06:57:07 and give the listeners a break from just listening to me all the time.

00:06:57:10 - 00:07:00:09 So, yeah, let's let's,

00:07:00:09 - 00:07:02:26 let's get started with this, but know that we're going to get some more

00:07:02:26 - 00:07:06:25 competent professionals to come and elaborate over the coming weeks.

00:07:06:31 - 00:07:07:22 Fantastic.

00:07:07:22 - 00:07:08:29 Maybe we can base some of the topics

00:07:08:29 - 00:07:10:03 on, on questions that we get

00:07:10:03 - 00:07:12:24 and you know, the things that people find most interesting.

00:07:12:24 - 00:07:14:32 Okay, so put them in the comments.

00:07:14:32 - 00:07:15:31 Yes, please do.

00:07:15:31 - 00:07:18:09 So we're going to go through these in chronological order.

00:07:18:09 - 00:07:20:10 How they should pop up in your acquisition journey.

00:07:20:10 - 00:07:24:12 So I'm going to start us off with otherwise letters of intent.

00:07:24:15 - 00:07:25:05 So here's my

00:07:25:05 - 00:07:27:33 five points to think about binding and non-binding terms.

00:07:27:33 - 00:07:29:07 So it's crucial to understand

00:07:29:07 - 00:07:34:03 which parts are binding and which ones aren't so usually very

00:07:34:06 - 00:07:35:15 well. Yes, generally.

00:07:35:15 - 00:07:37:22 And most people kind of think of them as a gentlemen's agreement,

00:07:37:22 - 00:07:38:33 But there are some provisions

00:07:38:33 - 00:07:43:18 like confidentiality or exclusivity which are legally enforceable.

00:07:43:21 - 00:07:46:13 So a lot of people make that mistake and then realize that, you know,

00:07:46:13 - 00:07:50:17 if you break some of these clauses, you can face real consequences.

00:07:50:17 - 00:07:56:29 So be absolutely clear from the start what's indicative and what's locked in

00:07:56:32 - 00:07:58:25 point to purchase price and structure.

00:07:58:25 - 00:08:02:25 So does the Alawites stay a fixed amount or is open to adjustments?

00:08:02:25 - 00:08:04:21 You know, maybe there's an earn out when the seller gets more.

00:08:04:21 - 00:08:06:05 If the business hits certain targets.

00:08:06:05 - 00:08:07:27 You also want to clarify whether you're buying the shares

00:08:07:27 - 00:08:09:22 outright or purchasing assets only.

00:08:09:22 - 00:08:13:29 Again, some of these things can sort of come out in the wash, as we would say,

00:08:13:32 - 00:08:17:04 but it could just kind of stall out early on, especially if you do have

00:08:17:04 - 00:08:21:14 a specific structure in mind that may be slightly out of the ordinary.

00:08:21:17 - 00:08:22:17 You know, so dealing with a seller

00:08:22:17 - 00:08:25:03 that hasn't come across some of these things before,

00:08:25:03 - 00:08:27:14 it's a good idea to set the stall out at the start.

00:08:27:14 - 00:08:31:08 And hopefully if you have road bumps down the line,

00:08:31:11 - 00:08:33:21 which leads me to 2.3 due diligence.

00:08:33:21 - 00:08:36:07 So we talked a lot about this last week.

00:08:36:07 - 00:08:37:12 And one of the things that we touched on

00:08:37:12 - 00:08:40:12 is how having a prepared seller can make a real difference

00:08:40:19 - 00:08:44:24 and this is your chance to set them off in the right direction so your ally could

00:08:44:24 - 00:08:47:01 and should contain an outline of, you know,

00:08:47:01 - 00:08:50:06 what kind of investigations you'll be conducting, financial legal

00:08:50:06 - 00:08:54:01 operation, operational story, and how deep you can go.

00:08:54:04 - 00:08:56:10 It's your chance to make sure that you have access

00:08:56:10 - 00:08:58:05 to the records you need further down the line.

00:08:58:05 - 00:09:01:05 It's better to kind of iron out these expectations now

00:09:01:07 - 00:09:05:14 than have those awkward surprises later down the line.

00:09:05:16 - 00:09:07:24 Number four is the exclusivity period.

00:09:07:24 - 00:09:10:31 So typically you'll see a clause that says a seller can't negotiate

00:09:10:31 - 00:09:13:31 with other potential buyers for a certain number of days.

00:09:14:00 - 00:09:17:07 And this can be a game changer if you're investing time and resources

00:09:17:07 - 00:09:18:11 into this whole process.

00:09:18:11 - 00:09:22:08 You don't want to risk another by swooping in and

00:09:22:11 - 00:09:24:22 taking this off your plate, as it were.

00:09:24:22 - 00:09:28:22 But you have to get the right balance of making sure the exclusivity window

00:09:28:22 - 00:09:29:24 isn't too short for you

00:09:29:24 - 00:09:33:28 to get your checks done well, so long that they feel locked up indefinitely.

00:09:33:30 - 00:09:35:33 You know, if you separately agree.

00:09:35:33 - 00:09:40:09 So it's a must you must have an activity period in that

00:09:40:12 - 00:09:44:05 you don't want to be into a dumping situation.

00:09:44:07 - 00:09:45:27 No, absolutely.

00:09:45:27 - 00:09:48:07 But, you know, as a seller, they don't want you to come along and say,

00:09:48:07 - 00:09:51:08 hey, it's you know, it's a year or something like that, because that's going

00:09:51:08 - 00:09:55:00 to obviously put them off and so, yeah, you need to strike that balance.

00:09:55:00 - 00:09:56:14 Absolutely.

00:09:56:14 - 00:09:59:00 And this was a nice way of setting an expectation on timeframe

00:09:59:00 - 00:10:01:08 for getting the deal done, by the way.

00:10:01:11 - 00:10:02:09 Yeah, that's another great point.

00:10:02:09 - 00:10:03:22 I hadn't thought of it that way. Yes.

00:10:03:22 - 00:10:05:32 I suppose early on you're kind of, you know, setting them up

00:10:05:32 - 00:10:08:07 for how long this might take and preparing them in their minds.

00:10:08:07 - 00:10:10:07 I think some people go into this

00:10:10:07 - 00:10:13:02 expecting it to be a much quicker process than it is.

00:10:13:02 - 00:10:17:24 So again, I think the kind of common theme of this alloys is, is,

00:10:17:27 - 00:10:21:01 you know, setting the boundaries, kind of, you know, letting the seller know

00:10:21:04 - 00:10:23:17 what you're going to want from them. And how long this might take.

00:10:23:17 - 00:10:27:32 You know, which leads us nicely onto break fees and termination rights.

00:10:27:32 - 00:10:33:31 So some alibis include a penalty if one party walks away without good reason.

00:10:33:33 - 00:10:36:32 On the flip side, you want to specify under what circumstances it's

00:10:36:32 - 00:10:38:11 acceptable to exit the deal.

00:10:38:11 - 00:10:42:19 So, you know, if a major red flag comes up in due diligence, for example, you know,

00:10:42:21 - 00:10:47:10 having that break clause and a termination rights set out at the start

00:10:47:12 - 00:10:50:04 keeps everyone motivated, perceived fairly.

00:10:50:04 - 00:10:50:15 Yeah.

00:10:50:15 - 00:10:53:17 I mean, I've tended to put a nominal cut of ten K in mine

00:10:53:17 - 00:10:59:11 just to kind of cover preliminary legals, and it tends to run one way

00:10:59:13 - 00:11:02:13 in my head and

00:11:02:13 - 00:11:05:30 yeah, so there are no rules.

00:11:05:33 - 00:11:07:32 No, absolutely.

00:11:07:32 - 00:11:10:14 And yet the common theme across all of those things is

00:11:10:14 - 00:11:13:22 letting the seller know what you expect from them, what they can expect from you.

00:11:13:22 - 00:11:15:06 It's kind of setting the rules of the game.

00:11:15:06 - 00:11:19:05 I think what comes next.

00:11:19:08 - 00:11:22:06 So which is

00:11:22:06 - 00:11:24:10 offensive terms. Yeah.

00:11:24:10 - 00:11:28:33 So once you have an offer accepted, if you like, your,

00:11:28:33 - 00:11:33:00 your letter of intent is, is really formalization of your offer.

00:11:33:03 - 00:11:36:24 And some folks actually attach a kind of signature piece to that,

00:11:36:24 - 00:11:40:17 which is like an acknowledgment of an it, you know, an acceptance of like

00:11:40:17 - 00:11:42:25 you say, non-binding.

00:11:42:27 - 00:11:44:24 But as you move from that

00:11:44:24 - 00:11:49:16 into preparing your share purchase agreement, you want to summarize

00:11:49:19 - 00:11:52:11 almost like your shopping list, your checklist of things

00:11:52:11 - 00:11:56:07 that are going to go into that in a very kind of like high level

00:11:56:15 - 00:11:59:15 because this becomes the recipe that goes to the lawyers

00:11:59:16 - 00:12:01:31 for them to make sure that they're capturing all those points

00:12:01:31 - 00:12:05:25 and putting them into the long form clauses in the CPA.

00:12:05:28 - 00:12:08:14 But yeah, what should they look like?

00:12:08:14 - 00:12:12:00 Well, of course, the key commercial terms are front and center.

00:12:12:00 - 00:12:15:21 So, you know, what's the price, how we reaching that value

00:12:15:23 - 00:12:18:27 is that how much of that is upfront and how much of that is deferred,

00:12:19:02 - 00:12:20:15 deferred over what period?

00:12:20:15 - 00:12:24:03 So you've got those kind of terms that need to go in there.

00:12:24:06 - 00:12:28:06 Are there any conditionalities around

00:12:28:09 - 00:12:30:10 the earnout, for example?

00:12:30:10 - 00:12:34:19 So if you've got X percent contingent on performance,

00:12:34:27 - 00:12:38:07 you may want to be making a mention, at least around that

00:12:38:07 - 00:12:42:14 without necessarily at this stage setting huge targets.

00:12:42:14 - 00:12:44:09 They they can come out with a clear targets.

00:12:44:09 - 00:12:46:29 They can come out in at the SBA.

00:12:46:29 - 00:12:50:32 Actually, you might want to sort of nod to them here in the head to terms.

00:12:51:01 - 00:12:56:12 So what with those conditionalities, what are the sort of triggers

00:12:56:14 - 00:12:59:05 in order to achieve, say, for example, an earnout

00:12:59:05 - 00:13:03:06 or growth equity conversion?

00:13:03:09 - 00:13:04:27 What are the closing plans?

00:13:04:27 - 00:13:05:26 What are the closing conditions?

00:13:05:26 - 00:13:08:26 Are we using a lockbox for simplicity

00:13:08:27 - 00:13:11:27 in terms of like taking a valuation on a day?

00:13:12:01 - 00:13:15:06 And therefore there's no kind of post completion fluctuation there?

00:13:15:13 - 00:13:17:00 Or are we doing completion accounts

00:13:17:00 - 00:13:20:22 and getting a third party to come and verify to that end

00:13:20:22 - 00:13:24:05 what's happening with any surplus working capital in the business?

00:13:24:13 - 00:13:26:32 So if you're doing a debt free, cash free,

00:13:26:32 - 00:13:29:32 then anything that's left after the debt is netted off,

00:13:30:03 - 00:13:33:23 There is an element of right to that for the seller, but

00:13:33:28 - 00:13:37:30 obviously they've got to leave X amount in for some element of working capital

00:13:37:30 - 00:13:39:08 in most transactions.

00:13:39:08 - 00:13:42:21 So you could define that here.

00:13:42:23 - 00:13:45:23 Speaking to warranties and covenants,

00:13:45:25 - 00:13:48:22 those are obviously key parts of any s.p.a

00:13:48:22 - 00:13:53:19 you would talk in outline to those here in the head to terms

00:13:53:22 - 00:13:57:22 around the scope of the warranties, any indemnities, any risks

00:13:57:22 - 00:14:02:22 that have been identified or that expect to be identified in due diligence

00:14:02:24 - 00:14:05:09 and things like restrictions.

00:14:05:09 - 00:14:10:00 So non-compete, non solicitations, non, so conventions, these kind of things that

00:14:10:03 - 00:14:13:03 will limit future business activities of the seller

00:14:13:09 - 00:14:15:03 but for good cause because you don't want them going out

00:14:15:03 - 00:14:16:31 and dropping you off at the knees.

00:14:16:31 - 00:14:20:07 And then I guess the final piece there is dispute resolution you know

00:14:20:07 - 00:14:24:25 what are you, how are you resolving a dispute post s.p.a.

00:14:24:31 - 00:14:28:23 So is that going to be done by arbitration adjudication?

00:14:28:26 - 00:14:32:32 What kind of expert might you appoint to be able to resolve

00:14:32:32 - 00:14:36:04 a certain question, particularly with a completion account scenario?

00:14:36:07 - 00:14:40:23 So yeah, those are maybe the key things that are,

00:14:40:26 - 00:14:44:23 you know, the precursor, if you like, to the share purchase agreement,

00:14:44:23 - 00:14:46:15 which I'll come on to talk to in a little while.

00:14:46:15 - 00:14:49:17 But parallel to that, given that you're going to be owning the

00:14:49:17 - 00:14:52:01 business and going forward,

00:14:52:04 - 00:14:56:29 perhaps this is an opportunity to change

00:14:56:32 - 00:14:59:32 the shareholders shareholders agreement

00:15:00:05 - 00:15:00:27 set me up for that.

00:15:00:27 - 00:15:03:27 I completely missed that.

00:15:03:28 - 00:15:06:19 So yes, shareholders agreement, this is something that you'll be familiar

00:15:06:19 - 00:15:08:01 with if you've been involved in business,

00:15:08:01 - 00:15:12:02 even outside of acquisition, it's fairly standard piece of documentation.

00:15:12:02 - 00:15:15:05 So we do look first at voting rights and decision making.

00:15:15:05 - 00:15:18:20 So it's really important to begin to understand the governance structure

00:15:18:27 - 00:15:21:02 and approval thresholds for key business decisions.

00:15:21:02 - 00:15:23:26 You know, investor consents, vetoes that kind of thing.

00:15:23:26 - 00:15:25:33 If you've ever been involved in a board meeting,

00:15:25:33 - 00:15:27:27 you know how this kind of stuff goes.

00:15:27:27 - 00:15:33:04 And again, we are setting the, I must say, the boundaries again.

00:15:33:04 - 00:15:36:04 But, you know, we're setting the pace for what comes later, what goes into the spa

00:15:36:04 - 00:15:41:16 signs kind of feel out how things will look post acquisition,

00:15:41:19 - 00:15:43:12 transfer restrictions are also very important.

00:15:43:12 - 00:15:47:18 So we need to check for preemption rights, rights of first refusal,

00:15:47:24 - 00:15:50:24 drag along, tagalong provisions, that kind of thing.

00:15:50:24 - 00:15:54:21 It's important to kind of set your marks on that early on.

00:15:54:23 - 00:15:57:23 We don't want a nasty surprise down the line.

00:15:57:29 - 00:16:00:22 Point three is the dividend policy.

00:16:00:22 - 00:16:03:30 So something that people

00:16:03:30 - 00:16:08:05 are very keen to be clear on.

00:16:08:07 - 00:16:08:14 You know,

00:16:08:14 - 00:16:09:00 Congressman, profit

00:16:09:00 - 00:16:12:25 distribution, you know, where the minority shareholders are protected.

00:16:12:27 - 00:16:14:22 You know what happens at the end of the year

00:16:14:22 - 00:16:18:10 when you have some profit left after all this is said and done?

00:16:18:13 - 00:16:21:30 And the next point is exit strategy.

00:16:21:30 - 00:16:27:21 So we're looking for provisions governing future sales, IPOs, buyouts,

00:16:27:23 - 00:16:29:06 you know, all this kind of stuff. Again,

00:16:29:06 - 00:16:33:00 we're going into this most acquirers with an eye on an exit at the end.

00:16:33:00 - 00:16:34:08 So absolutely.

00:16:34:08 - 00:16:37:10 Where my eyes are drawn, I mean, to be honest,

00:16:37:10 - 00:16:40:14 when I'm given a shareholder's agreement, it's okay.

00:16:40:14 - 00:16:46:02 How much of my hands tied and how geared towards an exit is this?

00:16:46:05 - 00:16:47:03 Yeah, absolutely.

00:16:47:03 - 00:16:48:10 And I think that this is

00:16:48:10 - 00:16:50:23 especially if you're going into this with any investors as well.

00:16:50:23 - 00:16:54:25 I think this is something that they will particularly have a keen eye on.

00:16:54:27 - 00:16:57:02 You know, it's one eye on the end

00:16:57:02 - 00:16:58:25 even from the start, which I think is smart.

00:16:58:25 - 00:17:01:11 You know, this whole thing is a quite a methodical process.

00:17:01:11 - 00:17:03:21 I think these kind of first three points that were going through these

00:17:03:21 - 00:17:06:21 first three documents are kind of building us up to the spy.

00:17:06:29 - 00:17:08:15 And that's a smart way of thinking about it.

00:17:08:15 - 00:17:11:23 But I think you're always this lives in parallel, in tandem with.

00:17:11:23 - 00:17:15:19 So the FPA ultimately is you point of, you know, the transaction

00:17:15:24 - 00:17:19:04 and the FHA governs what happens after the transaction.

00:17:19:04 - 00:17:21:15 You know, we're all those that are still on the cap table.

00:17:21:15 - 00:17:25:09 We're bound by these rules. Now. This is how we must interact.

00:17:25:12 - 00:17:26:26 Absolutely.

00:17:26:26 - 00:17:27:03 Okay.

00:17:27:03 - 00:17:30:21 Final point on shareholders agreement is deadlock resolution.

00:17:30:23 - 00:17:33:21 So it's important to review your mechanisms for resolving disputes

00:17:33:21 - 00:17:37:21 among shareholders in a mediations force buyouts.

00:17:37:24 - 00:17:39:30 These are things that hopefully will not happen

00:17:39:30 - 00:17:42:25 but failed to prepare, prepared to fail, as they say.

00:17:42:25 - 00:17:47:00 And it's great to have those provisions put in at this stage.

00:17:47:02 - 00:17:49:14 Yeah, I mean, you often see the chair

00:17:49:14 - 00:17:52:14 getting the casting vote right.

00:17:52:19 - 00:17:55:06 If there's a deadlock, if there isn't a consensus or

00:17:55:06 - 00:17:58:31 if there isn't a majority, then you know, chairs, chairs, rules.

00:17:59:01 - 00:18:03:08 You sometimes see a scenario, though, where certainly experienced

00:18:03:11 - 00:18:07:17 founders and owners have given themselves that kind of golden chair

00:18:07:20 - 00:18:12:19 to resolve deadlocks, which isn't a terrible idea,

00:18:12:21 - 00:18:14:28 but it depends on your own appetite

00:18:14:28 - 00:18:18:01 for whether you want and also whether the seller is staying around.

00:18:18:04 - 00:18:19:11 If they are, you

00:18:19:11 - 00:18:22:17 probably want to revoke that golden chair and move it more in your favor.

00:18:22:17 - 00:18:25:15 Giving you hopefully will be the majority owner by this point.

00:18:25:15 - 00:18:28:33 Yeah, I can certainly see a slip up there if that wasn't taken care of.

00:18:29:07 - 00:18:33:31 it's, you know, shares share class's voting rights.

00:18:34:00 - 00:18:37:09 They are alchemical and actually,

00:18:37:12 - 00:18:39:29 you know, to the victor, the spoils there, frankly.

00:18:39:29 - 00:18:42:13 I'm so sorry. Go ahead.

00:18:42:13 - 00:18:45:05 I'm not going to say that sounds like it would be a great topic for

00:18:45:05 - 00:18:48:24 if we were going to do a deep dive on any one of these any one of these topics.

00:18:48:24 - 00:18:51:29 I think it's how alchemical and so important, perhaps it's something

00:18:51:29 - 00:18:54:29 we could delve into if we bring up one of those

00:18:54:30 - 00:18:56:10 very clued up M&A.

00:18:56:10 - 00:18:58:25 Yeah, M&A lawyer experts he was talking about earlier,

00:18:58:25 - 00:19:01:31 it'd be lovely to have them speak from experience around

00:19:02:00 - 00:19:05:00 particular esoteric deal structures,

00:19:05:05 - 00:19:07:14 you know, where you are doing things with,

00:19:07:14 - 00:19:11:04 you know, sophisticated call options and

00:19:11:06 - 00:19:12:21 certain changes of share class.

00:19:12:21 - 00:19:15:27 We might come up to that in a little while with with articles and,

00:19:15:32 - 00:19:16:21 and call options.

00:19:16:21 - 00:19:19:30 But before that, we need to get into the meat and bones of the space.

00:19:19:30 - 00:19:23:03 So the share purchase agreement is the kind of key

00:19:23:05 - 00:19:26:27 objective and culmination of this acquisition, right?

00:19:26:28 - 00:19:32:23 This is defining the price mechanisms and any adjustments to that price.

00:19:32:26 - 00:19:34:27 It's talking about whether the price is fixed

00:19:34:27 - 00:19:38:17 or whether there are any post-closing adjustments

00:19:38:20 - 00:19:43:06 this talks in detail about the structure of any earnout and will go into sort

00:19:43:06 - 00:19:48:17 of formulaic measures of how the earnout would qualify

00:19:48:19 - 00:19:51:09 here we go into great detail

00:19:51:09 - 00:19:54:17 about the warranties and the covenants and the representations.

00:19:54:19 - 00:19:57:03 We're scrutinizing the statements.

00:19:57:03 - 00:20:00:20 So at this point, the sellers are actually warranting

00:20:00:20 - 00:20:04:10 they are making legally binding assertions of what they know

00:20:04:10 - 00:20:08:17 to be true about the company, and that is where they remain on the hook.

00:20:08:17 - 00:20:13:01 So again, is it effective breach of contract if they are, you know,

00:20:13:08 - 00:20:16:21 attesting to something that they know to be

00:20:16:24 - 00:20:19:12 false or improper or irregular.

00:20:19:12 - 00:20:22:30 So here, you know, you are really getting assurances

00:20:22:30 - 00:20:26:01 from them with legal consequences and financial consequences for them

00:20:26:08 - 00:20:29:24 in the event that, you know, it's turned out to be

00:20:29:27 - 00:20:30:27 a lie.

00:20:30:27 - 00:20:33:25 So you want to make sure that you warranties

00:20:33:25 - 00:20:37:18 and covenants are watertight indemnities as well.

00:20:37:18 - 00:20:40:30 So there normally is a kind of aggregate materiality

00:20:40:30 - 00:20:45:06 threshold of in the event that post deal we find these liabilities

00:20:45:06 - 00:20:51:00 have an aggregate value of buy, which is like lost business or,

00:20:51:03 - 00:20:53:11 you know, warranty claims on products or,

00:20:53:11 - 00:20:58:01 you know, things that might end up with a net burden on the buyer.

00:20:58:04 - 00:21:01:30 If they reach a certain aggregate materiality that value, you could

00:21:01:30 - 00:21:06:22 probably under certain conditions go back to the seller and claw back.

00:21:06:29 - 00:21:10:19 Now, if you've got deferred consideration, you're clawing back from the deferred.

00:21:10:27 - 00:21:13:18 If you've got earnout, you're clawing back from the earnout.

00:21:13:18 - 00:21:16:18 So these indemnities and liabilities, that's

00:21:16:18 - 00:21:19:20 ultimately what the deferred consideration is.

00:21:19:20 - 00:21:22:09 Therefore a pot of money to make sure everything is okay.

00:21:22:09 - 00:21:25:10 And if it is an okay I'm taking from that, rather

00:21:25:10 - 00:21:29:00 than having to prop the business up with new capital coming in, makes sense.

00:21:29:02 - 00:21:32:06 Yeah, it makes total sense and totally see why it's important to

00:21:32:14 - 00:21:34:05 to outline this at this stage.

00:21:34:05 - 00:21:35:23 Yeah, exactly.

00:21:35:23 - 00:21:39:04 And this is why SBA is go to, you know, significant depth

00:21:39:07 - 00:21:42:11 just going through one at the moment that's run to 80 pages

00:21:42:11 - 00:21:45:02 so far before the schedules and the annexes.

00:21:45:02 - 00:21:49:07 So yeah, not for the not for the faint hearted.

00:21:49:10 - 00:21:49:22 So then

00:21:49:22 - 00:21:53:12 we're into completion and post completion obligations.

00:21:53:16 - 00:21:58:07 So what are the steps for handover from the seller to the buyer?

00:21:58:10 - 00:22:00:25 What's going to happen with working capital adjustment?

00:22:00:25 - 00:22:03:30 So this is where you've kind of taken what you put in the heads of terms

00:22:03:30 - 00:22:06:30 around expecting working capital to remain in the business

00:22:06:31 - 00:22:10:18 and your formula and calculating how that's achieved.

00:22:10:24 - 00:22:13:24 So we're looking at what the regular kind of quarterly working

00:22:13:24 - 00:22:17:01 capital requirements are of the business and adding, you know,

00:22:17:03 - 00:22:20:03 some sort of variable contingency to that.

00:22:20:10 - 00:22:22:26 What are the seller's obligations post close?

00:22:22:26 - 00:22:25:05 So how long have they got to stay around for?

00:22:25:05 - 00:22:28:28 You know, what kind of customers, if they got a walk through, what kind of

00:22:28:31 - 00:22:31:17 documents have they got to offer up?

00:22:31:17 - 00:22:34:04 You know, you even include things like the keys to the building in here.

00:22:34:04 - 00:22:37:02 I mean, these are all the things that must be forthcoming.

00:22:37:02 - 00:22:40:23 We talked about domains being in personal ownership and vibe

00:22:40:28 - 00:22:45:16 and all these things that need to be offered up and provided on completion.

00:22:45:18 - 00:22:48:11 So yeah, it's a thorough document.

00:22:48:11 - 00:22:51:02 80 pages is is quite a beast.

00:22:51:02 - 00:22:54:02 Have you seen any, any larger than that?

00:22:54:02 - 00:22:56:18 I have, yeah.

00:22:56:18 - 00:22:58:13 I mean I can see why it would run up to that amount.

00:22:58:13 - 00:23:00:01 And this is absolutely the point at which,

00:23:00:01 - 00:23:02:28 you know, we were talking about some people try to DIY this process.

00:23:02:28 - 00:23:05:28 I can't see that you could adequately get

00:23:05:28 - 00:23:08:28 through those 80 pages without the help of some legal representation.

00:23:08:28 - 00:23:12:04 Well, I think that the

00:23:12:07 - 00:23:14:11 opinion differs on that one.

00:23:14:11 - 00:23:18:17 There's a camp of those that feel that low quantum small value deals

00:23:18:19 - 00:23:23:18 don't meet the complexity of an 80 page API in that it can be achieved with,

00:23:23:21 - 00:23:27:14 if you like, warranting that everything in the data room was was valid

00:23:27:17 - 00:23:32:21 and that that is effectively appended to the regular statements

00:23:32:21 - 00:23:36:30 around the kind of the deal structure,

00:23:36:33 - 00:23:39:06 the warrants and obligations.

00:23:39:06 - 00:23:42:29 And you know, you can you can actually produce a distilled version of this in

00:23:42:31 - 00:23:46:13 a small number of pages with schedules annexed,

00:23:46:16 - 00:23:50:16 but you probably wouldn't go for that kind of

00:23:50:19 - 00:23:54:15 expedited approach for high value, high complexity transactions.

00:23:54:15 - 00:23:56:12 But if it's all cash upfront

00:23:56:12 - 00:23:59:10 and the business is doing half a million and you're paying three, three X

00:23:59:10 - 00:24:02:14 and it's here's 1.5 million and digital obligations

00:24:02:14 - 00:24:06:15 on both sides, you could do that in, you know, sub ten pages.

00:24:06:18 - 00:24:09:29 Interesting.

00:24:09:31 - 00:24:10:25 Okay.

00:24:10:25 - 00:24:16:28 I think that leads us onto our next topic, which is Articles of Association.

00:24:16:31 - 00:24:20:03 So Authors Association kind of outline the fundamental rulebook

00:24:20:03 - 00:24:24:10 for our company operates and the five key points to look for here.

00:24:24:13 - 00:24:26:01 First of all, share classes and rights.

00:24:26:01 - 00:24:29:11 So it's important to check if there are different classes of shares,

00:24:29:11 - 00:24:32:21 like a class AA or Class B and what rights they may carry.

00:24:32:21 - 00:24:35:08 So now just one class have extra voting power.

00:24:35:08 - 00:24:37:30 Does it have priority on dividends? You need to make sure

00:24:37:30 - 00:24:43:01 each class is clearly defined so you know who controls what.

00:24:43:04 - 00:24:45:15 Next up is director appointment and removal.

00:24:45:15 - 00:24:47:30 So obviously incredibly important.

00:24:47:30 - 00:24:50:06 Look at how directors get appointed, how they get removed.

00:24:50:06 - 00:24:53:06 Is there a specific voting majority needed?

00:24:53:07 - 00:24:57:19 Are there clauses letting shareholders appoint a director directly?

00:24:57:26 - 00:24:59:07 It's a bit of a tongue twister.

00:24:59:07 - 00:25:01:16 Understanding these rules will help you manage

00:25:01:16 - 00:25:03:31 your leadership transition smoothly.

00:25:03:31 - 00:25:09:00 You know, super important for managing your team, your directors, your board,

00:25:09:03 - 00:25:09:22 very important.

00:25:09:22 - 00:25:13:02 Get clear early on share transfer rules.

00:25:13:02 - 00:25:16:20 So we did touch on this earlier, but it's normally an equal and opposite.

00:25:16:20 - 00:25:20:18 So it appears in the shareholders agreement, but it also needs to have some

00:25:20:21 - 00:25:24:11 correlation with an equal clause set in the articles of association.

00:25:24:11 - 00:25:28:04 So this is not unusual to see it sort of duplicated here.

00:25:28:07 - 00:25:30:32 Yes, perhaps in a bit more depth in the articles

00:25:30:32 - 00:25:35:08 of association and more about the mechanics. Yes.

00:25:35:10 - 00:25:36:19 So, yes, share transfer rules.

00:25:36:19 - 00:25:39:11 So confirm any restrictions on selling shares.

00:25:39:11 - 00:25:42:13 So, you know, again, as we mentioned before, preemption rights that require

00:25:42:13 - 00:25:45:25 existing shareholders to get first refusal in check

00:25:45:25 - 00:25:50:08 if the company if you need the company's permission to transfer shares.

00:25:50:10 - 00:25:54:17 This is particularly important when you know if someone decides to sell.

00:25:54:17 - 00:25:57:24 You don't want any surprises at this point in time.

00:25:57:26 - 00:26:00:21 You don't want any unknown quantities on your cap table.

00:26:00:21 - 00:26:01:18 Right.

00:26:01:18 - 00:26:03:18 So often this is tying the hands to say, look,

00:26:03:18 - 00:26:07:14 we are a small group of owners of this company.

00:26:07:17 - 00:26:10:04 If you if you want to sell, you sell to us first.

00:26:10:04 - 00:26:11:26 You don't sell to anonymous third party.

00:26:11:26 - 00:26:14:31 And if you are going to sell to a third party, the board has to approve it.

00:26:14:31 - 00:26:16:24 The majority of shareholders have to approve it

00:26:16:24 - 00:26:19:18 and they have to comply with, you know, X, Y or Z.

00:26:19:18 - 00:26:22:26 So this is perfectly normal and and good practice.

00:26:22:26 - 00:26:24:09 And it surprises me actually,

00:26:24:09 - 00:26:28:02 that model articles kind of it's very mute on a lot of this,

00:26:28:05 - 00:26:31:19 more like reading what you get in the UK when you just incorporate a company

00:26:31:22 - 00:26:33:00 riddled with health.

00:26:33:00 - 00:26:34:15 Really. That's super interesting.

00:26:34:15 - 00:26:37:01 Yeah, I would have thought this would be, you know, fairly standard stuff.

00:26:37:01 - 00:26:40:04 It's super important.

00:26:40:07 - 00:26:40:18 Okay.

00:26:40:18 - 00:26:41:06 Well that does lead us

00:26:41:06 - 00:26:44:15 nicely into my point four, which is decision making processes.

00:26:44:15 - 00:26:49:01 So you need to know what voting thresholds are required for major decisions is

00:26:49:04 - 00:26:49:33 really important.

00:26:49:33 - 00:26:53:31 So, you know, selling substantial assets, changing the business model,

00:26:54:00 - 00:26:57:02 if certain resolutions need a super majority, you want to know

00:26:57:02 - 00:27:01:11 that before you try and pass them, obviously.

00:27:01:14 - 00:27:03:33 So, you know, decision making processes and as they pertain

00:27:03:33 - 00:27:05:01 to all these other things that we've gone through,

00:27:05:01 - 00:27:08:00 share transfer rules and classes and rights and so on,

00:27:08:00 - 00:27:10:20 incredibly important to get right in your articles of association

00:27:10:20 - 00:27:12:19 and inheriting a lot from the Companies Act.

00:27:12:19 - 00:27:14:17 So there are certain like special resolutions

00:27:14:17 - 00:27:17:25 where you'll doing really key things to the business

00:27:17:28 - 00:27:21:03 that would require a 75% threshold to pass.

00:27:21:06 - 00:27:22:30 But you can actually change

00:27:22:30 - 00:27:26:16 elements of that and you can create additional types of condition

00:27:26:16 - 00:27:29:01 that need a certain voting threshold in order to pass

00:27:29:01 - 00:27:31:20 when you list them out in your articles like this.

00:27:31:20 - 00:27:34:20 So yeah, this is where the rulebook piece really comes into its own.

00:27:34:28 - 00:27:38:29 So what can I do as a board without asking the directors?

00:27:38:32 - 00:27:41:05 Sorry, without asking the shareholders.

00:27:41:07 - 00:27:43:33 So yeah, you could get quite granular here if you chose to

00:27:43:33 - 00:27:47:25 and go back to the point about the SBA with these kind of smaller quantum deals.

00:27:47:25 - 00:27:51:15 And for, you know, these mid-market businesses, perhaps not as much detail.

00:27:51:15 - 00:27:53:06 I'm guessing the kind of larger the company is,

00:27:53:06 - 00:27:55:12 the more indexed we need to go with this stuff.

00:27:55:12 - 00:27:57:21 Yeah, but also remember, if you take an external capital,

00:27:57:21 - 00:28:03:13 so say you're a traditional search fund and you've got to represent the the rights

00:28:03:16 - 00:28:07:18 and respect the interests of your investors,

00:28:07:21 - 00:28:11:11 they may want you to consult them

00:28:11:11 - 00:28:14:16 or require their vote on certain matters.

00:28:14:16 - 00:28:17:16 So some of those things may be inserted here.

00:28:17:18 - 00:28:20:00 Sure. Okay. Yeah. Good point.

00:28:20:00 - 00:28:22:18 Okay. And point five amendment procedures.

00:28:22:18 - 00:28:27:02 So check out changes to the articles themselves can be made.

00:28:27:05 - 00:28:30:08 Do you need a unanimous consent or just a special resolution?

00:28:30:08 - 00:28:32:18 Again, that's 75% approval.

00:28:32:18 - 00:28:35:06 I'm the more you understand the amendment process,

00:28:35:06 - 00:28:38:06 the easier it is to adapt the company's rules if needed.

00:28:38:07 - 00:28:39:23 So again,

00:28:39:25 - 00:28:42:06 knowledge can be dangerous.

00:28:42:06 - 00:28:44:16 Yes. And, you know, sometimes,

00:28:44:16 - 00:28:46:01 you know, changing the rules is not gonna be possible.

00:28:46:01 - 00:28:47:19 Like you said, if you are beholden to an investor

00:28:47:19 - 00:28:50:09 and this stuff is kind of cost and set in stone.

00:28:50:09 - 00:28:51:14 But, you know,

00:28:51:14 - 00:28:52:29 if there are some rule changes,

00:28:52:29 - 00:28:55:05 there needs to be rules about how you change the rules.

00:28:55:05 - 00:28:59:16 Well, because the articles is such a powerful instrument that if it is bent

00:28:59:16 - 00:29:03:22 to the will of a particular party, it can grossly disadvantage others.

00:29:03:24 - 00:29:07:05 So what you don't want is people to be bandying around changes to the Articles

00:29:07:06 - 00:29:08:14 Association willy nilly

00:29:08:14 - 00:29:12:06 because it can actually be quite pointed and quite to the detriment.

00:29:12:06 - 00:29:16:27 So you you need to, as a as a investor

00:29:16:30 - 00:29:19:14 or as a shareholder, you need to make sure

00:29:19:14 - 00:29:26:11 that that is cast iron and can't actually just be undermined on a whim.

00:29:26:14 - 00:29:28:16 Yeah, I can certainly see how

00:29:28:16 - 00:29:32:11 in the wrong hands could be a very powerful tool.

00:29:32:14 - 00:29:35:14 Well, there's, you know, there's prejudices that go on

00:29:35:19 - 00:29:38:29 within businesses where, you know,

00:29:38:32 - 00:29:41:31 some folks think they're clever and do things to the detriment

00:29:41:31 - 00:29:46:29 and lock out certain investors or, you know, you get factions forming.

00:29:46:32 - 00:29:50:18 You know, you don't I'm on the side of simplicity,

00:29:50:18 - 00:29:53:21 but you need to make sure that you're proof in so much as you know,

00:29:53:25 - 00:29:56:02 it's not a low threshold for things like this to pass.

00:29:56:02 - 00:29:59:31 You need absolute consensus amongst, you know, multiple parties.

00:30:00:00 - 00:30:03:17 So yeah, it's a it's as I say, it can be quite esoteric.

00:30:03:17 - 00:30:08:26 You can get very deep into the detail within Articles Association and

00:30:08:29 - 00:30:15:05 you can use it almost as a as a pointed weapon should you choose. But

00:30:15:08 - 00:30:18:05 I'd like to think we've all got better things to do with that time.

00:30:18:05 - 00:30:19:25 Hopefully.

00:30:19:25 - 00:30:23:31 So let's talk about call options, because I've been talking about esoteric

00:30:24:00 - 00:30:27:00 steel structures and you know, one of those is to come in

00:30:27:00 - 00:30:30:17 for a very much a minority position in a company

00:30:30:17 - 00:30:33:32 that you may want to acquire in the future.

00:30:34:01 - 00:30:37:04 And there's a there's a process called to work

00:30:37:04 - 00:30:41:07 in, buy out arrangement at Weibo, which is,

00:30:41:09 - 00:30:44:07 you know, popular amongst some of the acquisition

00:30:44:07 - 00:30:47:07 entrepreneur communities like Jeremy Harbor's Club

00:30:47:12 - 00:30:49:28 and the Weibo gives

00:30:49:28 - 00:30:54:02 you often a sort of a minority interest in the company

00:30:54:02 - 00:30:56:01 in return for the services that you have delivered it.

00:30:56:01 - 00:30:58:04 So services for equity.

00:30:58:04 - 00:31:02:23 But at that point, some savvy acquirers are using call options to say,

00:31:02:23 - 00:31:07:32 look at a particular point in the future that we are going to reach together.

00:31:07:32 - 00:31:10:23 I'm going to help you to grow your business to a certain

00:31:10:23 - 00:31:14:20 threshold at which point we can trigger a sale.

00:31:14:23 - 00:31:16:06 That call option

00:31:16:06 - 00:31:19:09 is a sort of a predetermined outcome whereby that individual

00:31:19:09 - 00:31:23:20 that's coming in to help and grow the business can become the acquirer

00:31:23:23 - 00:31:29:06 at a moment in time that the has met the seller's requirements, I guess

00:31:29:08 - 00:31:30:13 because they wouldn't sign a call option

00:31:30:13 - 00:31:33:01 if they didn't agree that that was achievable or interesting.

00:31:33:01 - 00:31:36:25 But so the call option is like a future option contract.

00:31:36:25 - 00:31:40:24 But with an option on the buyer to opt to buy.

00:31:40:27 - 00:31:45:11 So it's not an obligation and it basically means that,

00:31:45:14 - 00:31:49:03 you know, they can say no if things haven't gone their way,

00:31:49:06 - 00:31:53:12 but you can have them trigger a certain point based on their conditions.

00:31:53:15 - 00:31:56:32 So like what is the triggering event?

00:31:57:01 - 00:32:00:28 Is it going to be like on achieving a certain revenue

00:32:00:28 - 00:32:03:33 or profitability, or is it a time based trigger or

00:32:03:33 - 00:32:08:25 is it on the retirement of an individual or possibly the death of an individual?

00:32:08:25 - 00:32:10:29 And those kind of things

00:32:10:29 - 00:32:14:19 can can be, you know, baked in, if you like, to a call option,

00:32:14:22 - 00:32:17:02 valuation mechanism, How are you going to value the business

00:32:17:02 - 00:32:18:31 when the call option is triggered?

00:32:18:31 - 00:32:21:22 You know, is it going to be a simple multiple of EBITDA

00:32:21:22 - 00:32:24:29 or are you going to have a third party qualified accountant actually calculate

00:32:24:29 - 00:32:25:14 what you what

00:32:25:14 - 00:32:26:15 your net profit

00:32:26:15 - 00:32:30:05 before taxes, for example, and say that's the formula we're going to take?

00:32:30:08 - 00:32:34:32 So that needs to go in the the exercise period is quite key.

00:32:34:32 - 00:32:39:04 So so across how many years could I pull the trigger and what happens

00:32:39:07 - 00:32:40:10 if I don't like.

00:32:40:10 - 00:32:42:22 Do they just revert to does it just expire?

00:32:42:22 - 00:32:44:29 Often that's the norm.

00:32:44:32 - 00:32:47:10 We we sometimes talk about payment terms in here.

00:32:47:10 - 00:32:51:24 So, you know, at the point it's exercised, how many days do I have to deliver you

00:32:51:24 - 00:32:54:25 the consideration in order for the contract to have been completed

00:32:54:25 - 00:32:58:11 and those shares to actually have been purchased,

00:32:58:14 - 00:33:01:29 You can end up doing that Sometimes that share purchase agreement,

00:33:01:29 - 00:33:04:29 you know, called option can have a lien over the

00:33:04:29 - 00:33:07:26 the equity in a company without requiring an SBI.

00:33:07:26 - 00:33:11:25 So this is sometimes a way I mean it's always a good idea to have an API

00:33:11:26 - 00:33:15:00 that is set in waiting to be executed

00:33:15:06 - 00:33:20:06 sure but but a call option is effectively a contract to sell

00:33:20:08 - 00:33:24:24 if the if the option holder chooses to exercise it.

00:33:24:26 - 00:33:27:11 And then, you know, in this situation,

00:33:27:11 - 00:33:31:18 what might the transfer restrictions be on the call option itself?

00:33:31:26 - 00:33:35:07 So the call option actually has a financial value realistically.

00:33:35:07 - 00:33:36:27 And, you know, imagine in the public markets,

00:33:36:27 - 00:33:41:05 we're trading options on commodities or on shares all the time.

00:33:41:07 - 00:33:44:17 So it same is true in the private market.

00:33:44:17 - 00:33:48:19 Like am I as an option holder able to sell that option to say, for example,

00:33:48:19 - 00:33:50:11 a mid-market private equity company?

00:33:50:11 - 00:33:53:17 Could I ostensibly go out to lots of little companies,

00:33:53:22 - 00:33:56:27 get them all under cold call options, put that into a holdco,

00:33:56:27 - 00:33:59:27 if you will, where I'm owning 10% of ten companies.

00:33:59:32 - 00:34:03:28 But my call option gives me 100% rights if I choose to exercise it and sell

00:34:03:28 - 00:34:08:26 that as a ready to execute package to allow a mid-market private equity buyer

00:34:08:29 - 00:34:09:27 interest in.

00:34:09:27 - 00:34:12:04 Yeah, we see that now.

00:34:12:04 - 00:34:14:08 Yeah. Have you ever seen I've seen it done.

00:34:14:08 - 00:34:17:06 I know a number of acquirers that are down the road with that at the moment.

00:34:17:06 - 00:34:20:32 Very savvy chaps and Jeff as is who are Yeah.

00:34:21:00 - 00:34:25:18 Ready to execute a virtual roll up once the they hit a certain threshold.

00:34:25:21 - 00:34:31:32 So yeah it's a useful tool but again what are these esoteric scenarios

00:34:32:00 - 00:34:37:01 and the same could be said of share buyback situations.

00:34:37:08 - 00:34:43:23 So it's important to bear in mind that when a company buys back, it shares

00:34:43:26 - 00:34:45:04 it's using

00:34:45:04 - 00:34:47:33 capital that the company has an entitlement to

00:34:47:33 - 00:34:50:18 or access to the

00:34:50:18 - 00:34:52:33 if the shares are canceled, post buyback.

00:34:52:33 - 00:34:54:18 It's an artificial and alternative

00:34:54:18 - 00:34:58:17 way of increasing the percentage ownership of the remaining shareholders.

00:34:58:20 - 00:35:01:12 So say I only own 10% and the company buybacks

00:35:01:12 - 00:35:04:32 that goes back to the 90 for everybody else, those get canceled.

00:35:04:32 - 00:35:08:00 My share, my 10% something becomes 100% right.

00:35:08:06 - 00:35:13:22 So it's often used or occasionally used, but when it is used,

00:35:13:22 - 00:35:17:19 it's often to use the company's funds to buy

00:35:17:22 - 00:35:21:02 the seller out. Yes.

00:35:21:05 - 00:35:23:27 So generally done, if a company's got sort of sufficient cash

00:35:23:27 - 00:35:27:13 in the streets reserves and looking to consolidate ownership.

00:35:27:15 - 00:35:30:15 LP That's a really great point because it can only be done

00:35:30:15 - 00:35:32:28 if they've got sufficient distributable profits.

00:35:32:28 - 00:35:37:05 That is normally the the trigger, like if, if they've got on the balance sheet,

00:35:37:06 - 00:35:40:19 you know, half a million of distributable profits that it's been accrued over time.

00:35:40:27 - 00:35:44:26 And the consider action on the kind of upfront is half a million.

00:35:44:32 - 00:35:48:13 But you could use those distributable profits to to buy out the seller.

00:35:48:13 - 00:35:50:13 So really good point.

00:35:50:16 - 00:35:52:00 Interesting.

00:35:52:00 - 00:35:52:09 Okay.

00:35:52:09 - 00:35:54:32 So five points on share buyback contracts is something

00:35:54:32 - 00:35:58:09 that I've I've been looking into recently and I didn't know much about before.

00:35:58:09 - 00:36:00:30 I really appreciate that rundown from you there.

00:36:00:30 - 00:36:03:04 So number one is regulatory compliance.

00:36:03:04 - 00:36:07:00 So you need to make sure that your buyback meets all legal requirements.

00:36:07:03 - 00:36:08:25 That usually includes shareholder

00:36:08:25 - 00:36:12:25 approval, sometimes via a special resolution and adheres

00:36:12:25 - 00:36:17:21 to the company's articles of association and relevant shareholders agreements.

00:36:17:24 - 00:36:20:10 Everything that we touched on earlier,

00:36:20:10 - 00:36:25:01 you know, this again, we start to see how the documents that we begin this process

00:36:25:01 - 00:36:28:10 would start to feed into every step of the journey that we've touched on.

00:36:28:10 - 00:36:32:31 Since there's method in the madness, there is method in the madness,

00:36:33:00 - 00:36:33:26 as we just spoke about.

00:36:33:26 - 00:36:35:22 So funding insolvency considerations.

00:36:35:22 - 00:36:40:12 So the company has distributable reserves to finance the buyback

00:36:40:15 - 00:36:44:19 If it oversees the coffers, you do risk insolvency issues.

00:36:44:22 - 00:36:48:17 So ensure that's a healthy financial barrier left post transaction.

00:36:48:24 - 00:36:49:27 Well that also

00:36:49:27 - 00:36:51:33 it would get you struck off as a director if you put your

00:36:51:33 - 00:36:54:06 your company in that situation. So.

00:36:54:06 - 00:36:55:30 Right. Yeah, exactly.

00:36:55:30 - 00:36:56:05 Yeah.

00:36:56:05 - 00:36:57:05 Don't spend every single

00:36:57:05 - 00:37:00:28 penny you have on share buybacks and then not have any rebalancing.

00:37:01:02 - 00:37:04:28 Yeah that would be a for each of the companies actually. Yeah.

00:37:04:31 - 00:37:06:10 Pricing and payment terms.

00:37:06:10 - 00:37:08:09 So how are you setting that share price?

00:37:08:09 - 00:37:11:19 Is it a fixed formula valuation at the time of buyback?

00:37:11:22 - 00:37:15:23 You need to clarify who calculates that and how the payment is scheduled,

00:37:15:25 - 00:37:19:09 you know, lump sum installments, etc.

00:37:19:12 - 00:37:21:17 could help you negate this issue

00:37:21:17 - 00:37:24:17 of leaving the coffers empty post buyback.

00:37:24:23 - 00:37:29:06 But really important point there is, you know, how is that share price calculated?

00:37:29:08 - 00:37:32:14 Is there a fixed formula just a multiple of EBITDA

00:37:32:15 - 00:37:35:30 or are you having an independent valuation

00:37:35:33 - 00:37:39:08 inputs set that in stone way before this happens?

00:37:39:11 - 00:37:40:04 Yep. Agreed.

00:37:40:04 - 00:37:44:22 And also is is that buyback all upfront or is there some deferred consideration

00:37:44:22 - 00:37:46:19 because you can have that situation as well.

00:37:46:19 - 00:37:47:22 Like yeah, yeah.

00:37:47:22 - 00:37:50:27 Going to the point about that available distributable profits.

00:37:50:27 - 00:37:51:15 Well that doesn't,

00:37:51:15 - 00:37:54:24 it doesn't have to cover the entire value of the transaction,

00:37:54:24 - 00:37:58:21 it can cover the upfront and then the company can pay out of its profits

00:37:58:24 - 00:38:02:05 subsequent years for the balance. Absolutely.

00:38:02:07 - 00:38:04:33 And something you touched on in your in your kind of a rundown

00:38:04:33 - 00:38:08:25 at the start of this is the impact on the shareholding structure.

00:38:08:28 - 00:38:13:03 So, you know, removing shares from circulation because you have voting power

00:38:13:06 - 00:38:14:16 among remaining shareholders.

00:38:14:16 - 00:38:17:17 If one holder is selling a large chunk, you might see a noticeable reshuffle

00:38:17:17 - 00:38:20:17 in control and decision making dynamics.

00:38:20:18 - 00:38:25:11 You know, if your shares are tied to voting rights, then, you know,

00:38:25:12 - 00:38:28:25 company buying back all the shares is going to have an impact on the voting.

00:38:28:25 - 00:38:32:24 The board and how things are done is normally a moment in which you then

00:38:32:24 - 00:38:36:21 revisit the shareholders agreement and update and renew.

00:38:36:23 - 00:38:39:22 And sometimes in association with the articles,

00:38:39:22 - 00:38:43:19 you you might issue different share classes at that point.

00:38:43:19 - 00:38:45:24 So actually just going through one at the moment

00:38:45:24 - 00:38:49:10 where we have a look at all of those documents.

00:38:49:13 - 00:38:50:13 So this is a question

00:38:50:13 - 00:38:54:01 for me to you because I've not been through this particular process before.

00:38:54:04 - 00:38:58:12 If you you know it would you need the votes

00:38:58:12 - 00:39:02:24 from your shareholders to allow you to, you know,

00:39:02:27 - 00:39:04:33 bring a share buyback contract to fruition.

00:39:04:33 - 00:39:08:00 And we should have some issues with that because they would maybe lose voting power

00:39:08:00 - 00:39:10:01 in the process of you buying back the shares.

00:39:10:01 - 00:39:14:27 Well, I mean, they're all assuming they're all in the same class of share.

00:39:14:30 - 00:39:17:05 They're all getting the right to sell.

00:39:17:05 - 00:39:17:19 Sure.

00:39:17:19 - 00:39:22:04 So, yeah, but but yes, they all need to Turkeys need to vote for Christmas.

00:39:22:04 - 00:39:22:12 Right.

00:39:22:12 - 00:39:26:06 The that there needs to be a resolution passed to approve it,

00:39:26:06 - 00:39:30:27 to use the funds from the company in order to buy out the the shareholders

00:39:30:30 - 00:39:34:28 and some folks don't want to step off yet so you may have some

00:39:34:28 - 00:39:39:00 that don't take up that option and remain on the table.

00:39:39:03 - 00:39:41:24 I imagine you would drag along would probably apply here as well.

00:39:41:24 - 00:39:46:15 So if the company is buying now, you know, 75% of its investors

00:39:46:18 - 00:39:51:10 or shareholders rather than everybody else would be obliged.

00:39:51:13 - 00:39:55:28 But normally these are kind of minority situations where the companies,

00:39:56:00 - 00:39:59:00 majority shareholders are saying, we want these guys to go,

00:39:59:06 - 00:40:01:19 so we're going to do a buyback from the companies to ship it.

00:40:01:19 - 00:40:04:05 We'll profits and pay these ones off.

00:40:04:05 - 00:40:08:16 So, yeah, sometimes a contentious sometimes there are shareholders that say,

00:40:08:17 - 00:40:11:21 no, not now, this is up to the right, I don't want to go.

00:40:11:24 - 00:40:13:07 But yeah, often

00:40:13:07 - 00:40:16:10 it's am I going to turn down a payday Sure.

00:40:16:12 - 00:40:16:20 Okay.

00:40:16:20 - 00:40:19:19 Which is the hard thing to do for any of us.

00:40:19:19 - 00:40:19:30 Okay.

00:40:19:30 - 00:40:21:32 And then my final point on a final topic.

00:40:21:32 - 00:40:24:08 The one person who cannot be forgotten in

00:40:24:08 - 00:40:27:01 in any of these proceedings is the taxman.

00:40:27:01 - 00:40:28:28 He won't let you forget him.

00:40:28:28 - 00:40:30:30 He won't. So tax implications.

00:40:30:30 - 00:40:34:00 You need to consider how the transaction is taxed both for the company

00:40:34:00 - 00:40:37:23 and for the center shareholder so it can be treated like capital gains.

00:40:37:23 - 00:40:40:06 Sometimes it can be seen as a dividend.

00:40:40:06 - 00:40:44:01 You need to check your regulations to avoid a nasty tax surprise.

00:40:44:01 - 00:40:46:24 You want it to be treated as capital gains.

00:40:46:24 - 00:40:48:22 Okay.

00:40:48:22 - 00:40:51:29 That would be the this is not this is not financial advice.

00:40:51:32 - 00:40:57:16 The UK law would be UK policy would be more advantageous.

00:40:57:18 - 00:40:58:09 Okay.

00:40:58:09 - 00:41:00:29 So even with the capital gains hike that we've seen recently,

00:41:00:29 - 00:41:02:12 it would still be a better option.

00:41:02:12 - 00:41:06:26 And then there's a dividend just about just about although I'm sure Ms..

00:41:06:26 - 00:41:12:20 REEVES Rachel from Customer Services is keen to bring parity at some point soon

00:41:12:22 - 00:41:15:00 because she's chasing this elusive cost of capital.

00:41:15:00 - 00:41:19:20 And every time she speaks, the nation's debt becomes less affordable.

00:41:19:23 - 00:41:22:05 So I'm sure she'll pull that one out of a bag at some point.

00:41:22:05 - 00:41:23:23 How's that for a circular conversation?

00:41:23:23 - 00:41:25:20 We started on a gripe about the Labor government

00:41:25:20 - 00:41:30:27 and we've ended on a graph about the Labor government. You can allow me.

00:41:30:30 - 00:41:31:13 Excellent.

00:41:31:13 - 00:41:32:24 Okay, well,

00:41:32:24 - 00:41:35:28 I think we got to wrap that up there, but I think would be a good time, Gareth,

00:41:35:28 - 00:41:41:15 for you to talk once again about our acquisition incubator. yes.

00:41:41:18 - 00:41:45:21 Well, we've been rather spoiled by applications.

00:41:45:21 - 00:41:51:12 We have the six coveted spaces that we've got on the acquisition incubator.

00:41:51:14 - 00:41:53:19 Applications are still open.

00:41:53:19 - 00:41:58:01 We have probably about three x more applications

00:41:58:01 - 00:42:02:13 than there are spaces available, but we must ensure

00:42:02:13 - 00:42:05:23 that we are being super diligent and looking at all options available.

00:42:05:23 - 00:42:08:25 So we'd love to invite any remaining applicants

00:42:08:25 - 00:42:12:18 to apply before close of business on Friday, the 4th of April,

00:42:12:20 - 00:42:15:08 and then we'll be communicating out

00:42:15:08 - 00:42:18:08 in the sort of ten days following that.

00:42:18:12 - 00:42:20:33 What what, what we're going to do

00:42:20:33 - 00:42:25:24 in terms of interviews and and when the kick off date is.

00:42:25:24 - 00:42:30:20 But we would very much like any budding

00:42:30:22 - 00:42:34:01 ambitious entrepreneurs that want that

00:42:34:04 - 00:42:37:32 step up into the world of ETA

00:42:38:00 - 00:42:40:32 to consider applying to acquisition cash incubator.

00:42:40:32 - 00:42:42:03 Dotcom.

00:42:42:03 - 00:42:45:02 Yes, I will put the link in the description of the video.

00:42:45:02 - 00:42:46:11 Please do apply

00:42:46:11 - 00:42:47:20 if this applies to you

00:42:47:20 - 00:42:50:28 and if you know anybody else in your network who would be good at this.

00:42:50:31 - 00:42:52:23 Now, this is perfect for if we're talking about this

00:42:52:23 - 00:42:56:12 and you go on with such and such would be the great pessimists, share it with them,

00:42:56:15 - 00:42:57:22 get the link over to them.

00:42:57:22 - 00:42:58:23 There's applications in

00:42:58:23 - 00:43:02:32 and we will pick from the best of the best the cream of the crop.

00:43:03:01 - 00:43:04:01 Yeah, absolutely.

00:43:04:01 - 00:43:06:15 Looking forward to being able to

00:43:06:15 - 00:43:12:05 share the names of the initial cohort participants. Yes.

00:43:12:08 - 00:43:14:26 Towards the end of April. Exciting stuff.

00:43:14:26 - 00:43:15:02 Okay.

00:43:15:02 - 00:43:18:11 So we're going to hand over to our community now for some questions

00:43:18:11 - 00:43:21:22 and for everyone else, Katherine, to sign a stuff with the most to learn.

00:43:21:24 - 00:43:23:02 Hello. Our catchphrases.

00:43:23:02 - 00:43:25:24 Keep on crunching, folks. Keep on crunching, guys.

00:43:25:24 - 00:43:26:13 What makes you say?