Buy/Sell Case Study
Santa Clara Wealth Management (SCWM) has agreed in principal to be sold to Anne and Barry, two recent graduates of the MBA program at SCU. Anne has a strong background in business development and will lead the firm’s efforts in recruiting new clients and managing client relationships. Barry will be focused on internal operations including investment strategy, vendor relations, and other operations-related matters such as HR, Finance and Accounting, and Compliance.
For the 12-month period preceding the projected closing, the SCWM generated $800,000 in adjusted Free Cash Flow (FCF). Over the last 10 years the company has grown FCF at an average annual rate of 10% per annum, although FCF declined by 5% in 2009 due to the recession. Anne and Barry expect the company to continue to grow FCF by at least 10% per annum. While confident that they can ultimately exceed this rate in the intermediate to long-term, they are concerned about the short term as they transition account relationships and build a new marketing strategy.
They have agreed to a purchase price of $7M, consisting of $2M in cash at the closing and the balance of $5M in a promissory note due to the Seller to be paid out in no more than 5 years. Anne will contribute $1.5M, Barry $0.5M. The partners have agreed to a 50/50 ownership split.
The following terms will need to be negotiated and summarized in a term sheet:
The structure of the $5M promissory note to Seller
A Buy/Sell agreement between the partners
An agreement that addresses the differential capital contributions and the ownership agreement.
Promissory Note (See “Basic Considerations for Notes in Selling Shareholder Agreements”):
Form of Note (e.g., interest only plus balloon, equal quarterly payments of interest and principal, etc.) Payment Schedule
Interest Rate Level
Interest Rate: Fixed or Floating
Priority in Company’s Capital Structure
Security: In the event of default,...
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