M+A

THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM

PCOBOOKKEEPERS

DUE DILIGENCE

CONQUERING FINANCIAL AND LEGAL OBSTACLES IN A PURCHASE / SALE OF

A PCO BUSINESS

By: Daniel S. Gordon, CPAJohn P. Corrigan, CPA, Esq.


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Introduction


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Chronology of a Successful

Deal

Request for Information / Acquisition

Questionnaire

Due Diligence - Buyer

Due Diligence - Seller


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Financing the Deal

Purchase / Sale

Agreement

Details not Addressed in the LOI

Closing the Deal

What’s Next?


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Chronology of a Successful Deal


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Negotiating Price and other items of importance

Confidentiality Agreement / Info Request

Letter of Intent /Due Diligence

Financing The Deal

Purchase / Sale Agreement

Other Considerations

Closing the Deal


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Prior to beginning the Information Request

The buyer and seller should promise in writing to keep confidential the fact that negotiations are proceeding, and promise not to disclose any information learned during the investigation or negotiations. This provides the parties with some protection if the deal falls through.

A Confidentiality Agreement is Standard:


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The Request for Information

The Buyer provides Sellera written questionnaire concerning matters of importance:

• Assets Purchased• Liabilities Assumed• Key Business Points


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Letter of Intent“LOI”

• The buyer outlines the terms and price informally agreed to in a written, nonbinding Letter of Intent (aka Memo of Understanding).

Due Diligence• Each party has limited time (30-60 days) in

which to investigate each other to see whether they wish to proceed or not.

Financing• While sellers prefer cash only deals at closing,

buyers usually propose outside or seller financing. We will explore later


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Purchase Agreement• If there are no nasty surprises uncovered during due

diligence, the parties' respective lawyers hash out the details of the Purchase / Sale Agreement

Other Considerations • Such as HR, Leases, and complying with State Laws, etc.

Closing the Deal• Sign the Purchase/ Sale Agreement and other related

documents and subsequently close the deal by fulfilling any conditions as defined earlier


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Request for Information / Acquisition

Questionnaire


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General Information

Name of Company?

Years in Business?

Operate in the following State (s)?

Describe geographic area?( i.e. Cities, Counties)

Form of Organization?

C Corp

S Corp

Sole ProprietorshipLLC

Year and State Formed?


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Technician Information

Number of Full Time Technicians?

Number of Part Time Technicians?

How Are Technicians Compensated?

is the pay plan?

If Hourly, what are the rates of pay? If Route, what

Hourly

% of RouteBoth


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Non–Technician Information

Number of Sales People?

Number of Office People?

How Are Sales People Paid?

Number of Managers / Supervisors?

How Are Office People Paid?

How are Managers / Supervisors Paid?


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Also attach the following:

Standard Employment Agreement and Company Handbook

Benefit package offered to all employees

List of all employees who have left the company over the past six months

History of Workers Comp and Safety Records


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Other Information

How many advertised phone lines and internet

Any contractual obligations? i.e. Yellow Page Contracts

Is the company obligated under any office leases?

Does seller seek employment with buyer?

payment? If so, is the lease assignable?

domain names does the company own?

If so, for how long and what is the monthly


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Other Information

Is the company currently involved in or does it

If yes, please attach information including insurance coverage

If no, please attach explanation

Has the company filed all tax returns required by

QuickBooks

Yes No

Yes

expect to be involved in any lawsuits?

Software Used:

No

Service ProPestpac

Other (Please List)

Please attach a copy of any customer service

agreements the company uses

Federal, State and Local Authorities?


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OperationalInformation

Revenue:Commercial Recurring

Commercial Non-Recurring

Residential Recurring

Residential Non-Recurring

Termite Jobs

Termite Renewals

Other Services Recurring

Other Services Non-Recurring

Total Revenue

Proj. Current Yr 2012 2011 2010


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CustomerInformation

Weekly PCSemi MPC

EOM PCQuarterly PC

Monthly PC

Other Recurring

# of Accounts Revenue Per Period Annual Revenue

Annual Term RenewalsOther Annual Renewals


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Accounts Receivable:

Accounts Payable:

Number of Vehicles (Attach Schedule) Estimated Value $Equipment (Attach Schedule) Estimated Value $

Current 30 Day 60 Day Over 90 Total

Any Notes Payable Due on Vehicles or Equipment? Please attach schedule.

Asset / LiabilityInformation

Analysis of Write offs


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Due Diligence - Buyer


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Formulating an Offer

Once the seller provides the completed Request for Information / Acquisition Questionnaire and the Confidentiality Agreement, the buyer makes an offer based on the seller’s answers to the questionnaire, subject to due diligence procedures.


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Generally, the buyer uses this due diligence phase to:

Determine (or confirm) the value of the assets including customer list.

Confirm that the seller has proper title to the assets.

Fully understand any liabilities the buyer is assuming if any.

Uncover any impediments to transfer of the assets or the transaction in general.

Plan how to integrate the assets into the buyer’s business.


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In order make these determinations, the buyer will want to see

Leases

Contracts

Loan Agreements

Financial Statements

Tax Returns


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Buyer will want to see any management reports used:• Sales reports• Inventory records• Detailed lists of assets• Aged receivables and payables • Payroll and Benefits records


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Due Diligence - Seller


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If you are selling to one of the larger players in the industry you have a good idea of who they are and their ability to close the deal.

However, if you are doing a deal with a smaller player you'll want to find out the buyer's…

Credit Profile

Management Experience

Reputation

Future Plans

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Seller due diligence, finding out about the buyer -why is it important?• If the seller plans to work for the buyer after the sale• Part of the purchase price will be paid in the future

though a financing arrangement or an earn-out. Even if you plan to collect all your cash at the closing, walk away, and never look back, you should satisfy yourself that there's at least a reasonable likelihood that the buyer will be able to operate the business successfully.


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Financing the Deal


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Types of Financing

All Cash / Equity

Cash Down Pmt. (“CDP”) + Prom. Note

CDP + Prom. Note + Formula Earn-Out

CDP + Equity (restricted stock, options)

Employment Agreement (multi-year)

CDP + Debt Assumption

Escrow Holdback / Guarantees

Combination of Above


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Elements of a Purchase Agreement


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Definitions of Assets Being Acquired

Purchase Price

Liabilities Assumed (if any)

Types of Consideration Received

Restrictive Covenants

Representations and Warranties

Other / Misc.


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Stock Purchase Agreement (“SPA”)

vs.Asset Purchase

Agreement (“APA”)

Is Seller a C-Corp, S-Corp, LLC, partnership or sole proprietorship?

Purchase price must be allocated among various asset types

Seller wants capital gain income (not ordinary income) as lower tax rate

Buyer wants basis step-up in assets acquired to take depreciation/amortization expense


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Stock Purchase vs.

Asset Purchase

Buyer wants immediate tax deduction, not 15 year intangible amortization (IRC Sec. 197)

Buyer wants purchase price allocated to compensation in order to deduct when paid

Seller wants to avoid FICA taxes on sales proceeds being allocated to compensation

Buyer wants to avoid assuming undisclosed liabilities that arises in a stock purchase deal.


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Restrictive

Covenants

Confidentiality and Trade Secrets

Non-competition (geographical radius and period of time)

Non-solicitation (employees, customers, suppliers)

Non-disparagement

Equitable Relief/Injunctions

Joint vs. Several liability for breaches


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Representationsand

Warranties

30 Common Reps and Warranties – all negotiable

Unconditional vs. “Best of Knowledge & Belief”

Joint and Several Reps and Warranties or Just Several

Financial Statements

Pending litigation and/or potential claims

Intellectual Property (trademarks, copyrights, patents)

Tax returns, audits and exposures


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Representationsand

Warranties

Employee Benefits and Payroll Taxes

Undisclosed Liabilities

Title to Assets/Bill of Sale

Contracts

Insurance

M.A.C. clause (no material adverse change in business)


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Details not Addressed in the

LOI


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Is Buyer assuming the office/warehouse lease; landlord consent needed?

Is the landlord one or more owners of real estate used in business?

Is Buyer going to assume all accrued paid time off liability for employees?

Are buyer’s employee benefit plans better or worse?

Are all employees getting re-hired by buyer?

Who is issuing employee termination letters with COBRA notices?


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Governing State Law for interpretation

Venue (location) for disputes

Arbitration vs. Court Action

Award of attorney fees to winner

Rights to assign Agreement

Termination of Agreement prior to Closing


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Method of Giving Notice

Severability

Expenses (including broker fees)

Indemnification / Hold Harmless

Liquidated Damages


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Closing the Deal


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Conditions Precedent Satisfied or Waived

Bill of Sale/Stock Certificates

Assignment Agreement

3rd Party Consents and/or Waivers

Officer Certificate/Attorney Opinion

Escrow Agreement (for holdback)

Shareholder/B.O.D. Resolutions


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Employment Agreements

Promissory Notes

Tax Clearance for Bulk Sales

Swap Signature Pages (for APA or SPA)

Exhibits and Schedules

Bank checks/wire transfer confirms


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How Can We Help?

For over a decade PCO Bookkeepers has been providing comprehensive financial and operational reporting services to PCOs nationwide:

Over that period, we have worked with various companies to analyze enterprise value as well as negotiate and structure appropriate purchase and sale agreements

We are pleased to announce that co-presenter of today’s discussion, John Corrigan has joined PCO Bookkeepers as an advisory consultant to strengthen our M&A capabilities


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Bookkeepers M&A Services include: • “Getting your Feet Wet” – Thinking about buying or selling but don’t know where

to start? We provide individualized consulting services – “the who, what, where, when and how”

• For Sellers – Let us help you refine your thinking as to sell or not to sell - considering all the facts. We can also help with the best way to structure a deal from the sell side

• For Buyers – Found a company to buy? We can help analyze it, perform due diligence and help with the best way to structure the deal from the buy side

Contact us:Dan Gordon, CPA

John P Corrigan, Esq, [email protected]

or Call us at 973-300-0288 x 201

mailto:[email protected]

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