The Digital Media M&A Marketplace: Thinking about a company sale some perspectives from legal counsel

Overview of Private Company M&A Sale Process Develop consensus among key managers and key stockholders that potential sale should be pursued (and within what valuation ranges). Select investment banker, and (negotiate and) enter into engagement letter Work with investment banker to develop and execute sale and marketing strategy and process Confidentiality agreements and due diligence Negotiate and execute LOI (almost always) Negotiate, draft and sign definitive acquisition agreement and ancillary agreements (e.g. employment agreements) Close transaction and now the hard work starts (integration and business success on the new platform)!

Thinking about selling a privately-held business? Talk to investment bankers early and often even before committing to sale process Don t delay it can be a lengthy process (6+ months) But don t rush build/confirm consensus among key managers and stockholders that the sale process should be pursued What are intentions of key managers (and key non-management employees, if any) regarding post-sale employment? Will key stockholders support the deal and at what valuation? If seller is venture funded, understanding the liquidation waterfall (liquidation preferences) and blocking/consent rights is critical Engage the right investment banker Market expertise and contacts Genuine time and attention to your deal Use the foxhole test Understand scope and terms of engagement letter

Confidentiality Agreements To state the obvious confidentiality is crucial with respect to (1) company confidential and proprietary information and (2) existence of sale process Concerns about: (1) workforce, (2) customers, (3) competitors and (4) marketplace generally Absolutely critical to get signed agreements from prospective bidders before confidential information is shared and due diligence is provided Investment banker will handle, but advisable to review text of proposed confidentiality agreement with legal counsel No false comfort breaches often are difficult to discover and even more difficult to prove and redress

Objectives of sale process Identify the objectives of your sale process and formulate the sale strategy and process around them Maximize proceeds? Best fit / utilize synergies? Strategic vs. financial buyers Price disparity? Autonomy and pursuit of existing growth strategy Focus on financial performance Consider whether auction-style process makes sense given objectives and all surrounding circumstances (Q: is your business a hot property?)

Due Diligence (and more about confidentiality) Early in process, identify key due diligence issues and develop proactive plan to resolve Some due diligence issues may require considerable negotiations and/or time to fix Some due diligence issues may affect deal structure/terms Get internal clean-up done early Particularly if prospective buyer is strategic (possible competitor), consider staged due diligence production (i.e., most sensitive information gets disclosed late in due diligence process) Utilize virtual or electronic data rooms Reduce workforce visibility into diligence process Tighter control over sensitive documents

Letters of Intent Various pro s and con s for both sellers and buyers, but usually, parties will negotiate and sign LOI LOI typically covers: Identities of parties to deal Description of what is being acquired Key economic terms Non-economic terms considered essential to deal No-shop agreement (duration is key negotiated point) As typically drafted, LOI is non-binding as to deal terms, but binding as to no shop, expense allocation and other process-related terms Tactical question: what terms get negotiated at LOI stage and what terms get left for definitive documents?

Basic M&A deal structures -- what drives choice among merger, stock sale and asset sale structures? Necessity sale of division or business line where there is no entity to sell must be an asset sale Tax considerations critical to deal structure Asset sale structure gives buyer stepped-up basis in acquired assets, but threatens double taxation to selling corporation and its stockholders (but NOLs, S corp. or LLC status) Stock sale (or reverse triangular merger) structure gives sellers the opportunity for single level tax at LT capital gains rate Tax-free reorganization further constrictions on deal structure Liability considerations asset sale structure enables buyer to leave unwanted/unknown liabilities behind Transferability of key assets (contracts, etc.) third-party consent problem often avoided with reverse triangular merger or stock sale (but some contracts could have change of control provisions)

Employment/Employee Considerations Non-competes and non-solicits almost invariably will be required from seller and key managers/employees Buyer has legitimate right and expectation to protect the goodwill of the acquired business Duration of restrictive covenants can be relatively long in sale of business context Which employees will be retained post-closing? Employment agreements for key managers Key deal point: how will managers and key employees be incentivized post-closing? If there is an earn-out, how is earn-out impacted?

Earn-outs Often used to bridge disagreement over seller s valuation (e.g., seller s business is growth story / lack of track record, etc.) Essentially, additional purchase price is made contingent on the achievement of agreed-upon performance metrics or milestones (which parties see as the value drivers of the business) by the acquired business Earn-out metrics typically tied to P&L but where on P&L? Sellers prefer revenue-based earn-outs less likely to be affected by buyer s decisions affecting the management of the business Buyers prefer net earnings based earn-outs reflect true contribution to overall business Parties frequently agree on earn-out based on EBIT or EBITDA The extent of the seller s ability to control the strategic direction and management of the business during the earn-out period is critical (particularly where earn-out metric is down the P&L) Is earn-out aligned with long-term growth objectives?

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