Note that these approaches are not exclusive. Many deals use a combination of the approaches to structure a deal acceptable to both sides. Understanding the mechanisms in your deal will enable you to set expectations for potential cash outflows from your borrower after closing. Considerations for Loan Documentation A closing checklist for acquisition financing should include extra items beyond the usual loan document package. The buyer/borrower is entering into a purchase agreement and related agreements. As just discussed, those agreements may contain representations and warranties, indemnification rights, rights to escrow monies and other benefits in favor of the buyer. Although the lender is not a party to the purchase agreement, a collateral assignment of the purchase agreement and related documents gives you an interest in those benefits. Ensure the seller consents to the collateral assignment so you can enforce the rights directly against the seller. If the deal includes a seller note, the lender will require a subordination agreement. This agreement creates a direct contractual relationship between the lender and the seller, establishing the priority of their respective claims against the buyer, the conditions under which the seller can receive payments, and what actions, if any, the seller can take to enforce its note prior to the lender being paid in full. Subordination agreements for seller notes are often heavily in the lender’s favor. When a private equity firm is involved, it will often include subordinated debt as part of the capital it provides for the acquisition. Unlike a seller note, the private equity firm usually takes a second lien and is more likely to negotiate the subordination agreement’s restrictions on payments, enforcement actions and bankruptcy implications. Experienced counsel plays an important role in protecting the lender’s position without driving away the investor. Loan agreements typically include a default for a change of control. This provision protects against unwanted changes in the ownership of the borrower. In an acquisition, the lender should tailor the change of control provision based on the post-closing capital structure. For example, the buyer may plan to issue a small amount of equity to key members of the management team for retention purposes. The change of control provision should include a carveout for that equity to avoid an unintended default. While lenders are used to conducting Uniform Commercial Code (UCC), lien and litigation searches on their borrowers, acquisition finance requires searches on the seller as well. For any liens discovered, satisfactory payoff letters or releases should be provided by the seller’s lenders to confirm you, as the new lender, will have a first-priority lien on the acquired assets. After the Closing Negotiating and closing an acquisition can be a long and stressful process. Once the closing occurs, the parties are ready to move on. Before moving on, however, schedule some key dates for follow-up. If the purchase agreement includes a working capital adjustment, calendar that date to check on the final calculation and ensure there is no dispute with the seller. Around a month after closing, conduct post-closing UCC searches to confirm the liens on the seller were properly released and that your filing is in the expected priority position. Finally, if part of the purchase price was put in an escrow, set a calendar reminder to confirm the escrow was closed and disbursed without issue. While acquisitions bring additional parties and complexity to a financing transaction, understanding the additional diligence to review and documentation to include can make for a smooth and successful transaction. Brian Devling represents lenders in the origination and workout of middle-market commercial finance transactions. Applying a resourceful and pragmatic approach to collaborative planning, he constructs strong foundations for consistently risk-averse and cost-efficient outcomes. Brian’s primary focus is representing asset-based lenders in structuring, negotiating, documenting and maintaining credit facilities. He can be reached at (816) 292-8122 or bdevling@spencerfane.com. An owner looking to sell their company has two basic options: sell the equity or sell the assets. The Show-Me Banker Magazine | 13
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