EXECUTION OF TERM SHEET
An executed term sheet would likely include an exclusivity obligation of the Target as well as a commitment of Estancia to move forward expeditiously with its confirmatory detailed diligence process and the drafting and negotiation of definitive agreements. The economic terms included in a term sheet may be specific or may be a range based on further work or other variables. Specific economic terms would not be legally binding upon Estancia until definitive agreements are executed.
CONFIRMATORY DETAILED DILIGENCE
If a term sheet is executed, a full confirmatory diligence process involving Estancia and its advisors will be commenced. This process is structured around an extensive diligence checklist and involves a series of in person meetings with key personnel as well as the review of a wide range of organization and financial information, agreements, policies, plans, regulatory filings and other documents.
DEFINITIVE INVESTMENT DOCUMENTS
A definitive purchase or investment agreement, along with any related operating and employment agreements will be drafted and negotiated in parallel with the Confirmatory Detailed Diligence work. If the Target management team members are not the principal equity owners of the Target, there will likely be separate negotiations and advisors for each purchase or investment agreement and operating and employment agreements. Negotiation of employment and equity incentive/ownership arrangements may occur with the key managers as a group, or it may break into smaller one-on-one negotiations involving different advisors for different team members. Because these businesses are very “people intensive” and usually not “hard asset intensive,” it is usually the case that more time is spent creating and negotiating the employment agreements and incentive and equity ownership arrangements than is spent negotiating the terms of the purchase or investment. This is consistent with the key need to align the interests of Target management with Estancia. Economic sharing of the equity value created through the Target’s growth and success is critical.
Related operating and employment agreements (to become effective only upon the closing of the purchase or investment) will be executed at the time definitive agreements are signed. It is imperative that all Target management arrangements be fully agreed before the transaction is announced and the client consent process begins. Estancia will participate as appropriate in the client consent process with Target management to show its commitment to Target’s business and client base.
The closing will occur after the client consent process is successfully completed and any other closing conditions are satisfied. At this time, any adjustment related to the consent process or to other matters will occur and consideration for the purchase or investment will be paid to the sellers or the Target. The agreed development plans to grow Target’s business will begin to be implemented. If the purchase agreement included an “earnout” or similar contingent payment arrangement to the seller(s) based on results following the closing, those payments will be made if and as earned.