Crain’s Cleveland Business Newspaper Publishes “Factors Beyond Purchase Price” Article by Managing Director Joseph Carson

October 10, 2006

Crain’s Cleveland Business Newspaper featured an article written by Western Reserve Partners Managing Director Joseph Carson in its October 9-15, 2006 issue. The article was titled, “Factors beyond purchase price play major role in biz deals.”

Mr. Carson wrote, “In any transaction, the seller is seeking to maximize value while the buyer is seeking to maximize return on investment.” However, Mr. Carson noted that a variety of “non-purchase price” matters may have a significant impact on the transaction’s overall economics.”

Mr. Carson discussed four main “non-purchase price” matters. “The first issue is the form of the transaction – a stock deal versus an asset deal. Generally speaking, a seller wants to sell stock and a buyer would prefer to buy assets.”

However, Mr. Carson discussed both the legal and economic implications of each structure. “The legal implication is how the company’s existing and contingent liabilities are transferred. Under a stock sale, the buyer steps into the seller’s shoes and assumes all obligations, except any that are expressly excluded. Under an asset transaction, the buyer purchases specific assets and leaves behind with the selling company all corporate obligations, except any that are expressly assumed. The economic effect is the tax impact.” Mr. Carson noted, “An asset sale often results in a higher tax bill for the seller.”

Second, Mr. Carson wrote of risk allocation and indemnification. “If a seller feels the purchase price is not adequate, he or she may try to allocate pre-closing liabilities to the buyer. Conversely, if the buyer thinks he or she is paying too much, there will be little tolerance for such an allocation.”

Mr. Carson then discussed adjustments to working capital and wrote, “To the extent the company has working capital higher than the established target, the purchase price goes up; to the extent working capital is lower, the purchase price goes down.”

Finally, Mr. Carson commented on “soft” issues, which “can range from cultural fit (do you see eye to eye?) to post-closing continuity (maintaining a productive and happy work force as well as customer and supplier relationships).”

Mr. Carson warned, “Don’t ignore these issues; more often than not, deals fall apart or have post-closing difficulties because of the intangibles, not the dollar and cents. ‘What’s the purchase price?’ is important to ask when buying or selling a business. But a host of other factors can, and usually do, have an impact on the deal’s bottom line.”