• 105 05/21/2020

    ***PDF available for download at the bottom of the post.***

    This section of the stock purchase agreement contains statements of fact and assurances made by the Seller that must be true and correct as of the closing date. In an aggressively summarized format, the Buyer is looking to have the following confirmed: 

    1. That the Seller has the authority to enter into the purchase agreement and sell the securities described, and that the share count and capitalization represented are accurate.
    2. That the Company is duly organized, validly existing and in good standing.
    3. That the financial statements provided are complete and correct and fairly present the financial condition of the Company.
    4. That there are no undisclosed liabilities.
    5. That the company has all required permits and operates within the boundaries of the law.
    6. That taxes have been paid and returns have been filed. 
    7. That Seller has provided information regarding the Company's litigation matters, employee matters, as well as the material contracts of the Company.
    Summarized even further into one sentence: The Buyer needs to know that the Company’s key assets are covered, that it can legally operate and that the Buyer is protected from potential liabilities that might have been the Seller’s responsibility or that grew under Seller’s ownership.
     
    Beyond this summarized format, the Representations and Warranties of the Seller or the Company can cover somewhere between 20 and 50 separate topics.  
     
    Focus of the Article: The type of business being acquired and the industry it operates in will have a big impact on which representations and warranties are of focus. For example, a manufacturer of lead-acid batteries for forklifts will be more focused on compliance with labor and environmental laws and the permits required to operate. In contrast, the acquisition of a business that has developed proprietary technology, say a database to manage hospital patients and predict outcomes, will place an emphasis on representations and warranties surrounding intellectual property.
     
    Stock Purchase Agreement Language: The pages that follow contain hypothetical language detailing the above sequence as it might appear in a stock purchase agreement. DOWNLOAD PDF
     

     

 



  • 104 05/12/2020

    A stock purchase agreement is the primary transaction document for a stock acquisition. The purpose of the stock purchase agreement is to confirm the price paid for the securities sought, to control risk to the degree possible and to provide a roadmap for the hold period. 

    The two most important variables in any investment are price and risk. It is said that the best way to control risk is through price, but that assumes you know precisely what you are buying and how you are protected in the event that there is a misrepresentation about the assets acquired or liabilities assumed. 
     
    For this reason, the bulk of this document deals with identifying variables that could put the investment at risk, and detailing how the parties can protect themselves in the event that they are exposed to loss. Beyond price, parties should be aware of three primary concepts:
    1. Representations and Warranties
    2. Covenants
    3. Indemnification
    As the PDF available for download will explain, these three items focus on the assurances and promises made so that the parties can comfortably enter into a transaction, and the protections available to them in the event of a breach.
     
    PDF Commentary:
     
    The purpose of this document is to provide an outline of the stock purchase agreement with some context to make the document easier to digest. 
     
    On the pages that follow, each primary section of the purchase agreement (referred as an article) will be introduced with simple language (no legalese). Beneath each introduction you will find links that provide additional detail on the article described (this portion of the document is a work in process; more links will be added in the future). 
     
    This approach facilitates an introduction to this document in as few as five pages. It also provides a framework that can be revisited when a particular topic or concept requires review without having to navigate a dense legal document.  
     
     
 



  • 103 05/05/2020

    Interest expense is a period expense, so it appears in each period on your income statement in a financial model. Per most credit agreements, however, interest is only paid on a quarterly basis. Consequently, in a monthly financial model you will have periods with interest expense on the income statement without a corresponding cash outflow for interest paid. (Template available for download at the bottom of this post.)

    To reconcile this timing difference, add a line item titled “Accrued Interest” to you balance sheet under current liabilities. This will pull from the supporting debt schedule, which will be amended as follows. First, add three line items just below the formula for Ending Principal Balance:

    1. Interest Expense
    2. Interest Accrued
    3. Interest Paid

    Interest Expense in a Monthly Financial Model

    Next, calculate interest expense for each period (see image). This will be similar to the approach used to project interest expense in a model with annual periods with two exceptions:

    1. There is no need to take an average of the principal balance.
    2. The interest rate needs to be adjusted to reflect the period of time.

    Interest Expense in a Monthly Financial Model

    Then calculate interest accrued on the line that follows. This is the line item that will link to the balance sheet to project accrued interest. To complete this calculation sum interest expense in the current period with interest accrued in the previous period, and then subtract interest paid in the current period (see image).

    Interest Expense in a Monthly Financial Model

    Finally, in the last step related to the debt supporting schedule, we will calculate interest paid using the =IF() and =MOD() functions. The =MOD() function is a great way to confirm if the month is divisible by three, which makes it easy to identify a quarter (=MOD() video explanation). When the formula identifies a quarter end period it will return the sum of the previous three months of interest expense (see image). 

    Interest Expense in a Monthly Financial Model

    Interest expense will link to the income statement in precisely the same way it does in an annual model, and now the Interest Accrued line item can link to Accrued Interest on the Balance sheet. 

    Interest Expense in a Monthly Financial Model

    The final step is to add a line item to the cash flow statement under changes in working capital. Title it “Accrued Interest” and subtract the current period from the prior period to reflect a cash outflow when the current balance declines from one period to the next. 

    Interest Expense in a Monthly Financial Model

    You may notice that the cash outflow on the cash flow statement is equivalent to -$25,000 in period 3/31/2021, which does not match interest paid of $37,500 on the debt schedule. This is due to the fact that $12,500 of interest expense is included in net income, the first line on the cash flow statement. 

    Download: Link to Monthly Three Statement Model Template

    Note: FASB requires that this sum be included in cash flow from operations. It should never be included under cash flow from financing activities. 

 




 



Models are:
 
A) really boring
B) pretty sweet
C) super important
D) somewhat easy
E) kind of hard
F) fun
G) all of the above

 

 


*Answers a, b, c, d, e, f and g are all correct.