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MPL General Counsel Corner – Trust, but Verify

You figured out what you want and how much it’s worth, now what?  Are you still fearful of the commitment?  A letter of intent (“LOI“) might be a good next step for you to consider in the acquisition/sale process.  However, what goes into an LOI? Typically, the LOI is drafted by the buyer’s counsel and addressed to the seller.  It covers a variety of topics which can include the following:

  • Price
  • Assets acquired and excluded;
  • Liabilities assumed and excluded;
  • Items that need further investigation;
  • Conditions that need to be met prior to closing; and
  • Obligations of both parties after the closing

Importantly, a well written LOI provides for deal process stability and commitment, without the full obligation of a purchase agreement. Lastly, an LOI is generally non-binding.  Still fearful of the commitment?  Maybe some of the articles below can help:

Essentially the LOI gives you the ability to “trust, but verify” (Ronald Reagan).  As always, your professional business advisors (attorney, accountant, financial advisor, etc.) can certainly be a great place to also ask more questions if you think the LOI is the right fit for your transaction.

Here are a few other things that may be of interest:

As always, please don’t hesitate to email myself (jsanders@mpl-law.com), Andy Miller (amiller@mpl-law.com), Christian Miller (cmiller@mpl-law.com), Erik Spurlin (espurlin@mpl-law.com) or anyone in our office with questions or comments.  

Please see all of our prior updates at this link or if you would like to be added to our email list, please click here.  

MPL General Counsel Corner – Price is What You Pay, Value is What You Get

Happy Easter, Happy Passover and Happy Sunday to everyone.  The next in our M&A process series is valuation.  If you are the seller, do you know what your business is worth?  If you are the buyer, do you know what you are willing to pay?  Business valuation is tough enough in the public spectrum and those companies provide you with information.  In the private arena, it can feel like the wild west.  However, there are professionals in this space that can certainly provide valuable insight.  Below are a few of the methods that are typically employed:

  1. Asset Method – a simple, yet very objective method where you take the difference between the asset value of a company and its liabilities; this method is good if the true value lies in the assets and not so much in their income generating capabilities (a good example of this would be a purchase of a business because of the equipment, land and/or real estate)
  2. Income Method – in this method, the value of the company is based on the present value of its discounted future cash flows (i.e., what you think the company can give you in cash over a certain number of years discounted back to today’s dollars; this method is often used for high growth and/or consistent cash flow businesses)
  3. Market Method – the value of the business is driven by the value paid for comparable companies; multiples (price/sales, price/ebitda) from these transactions are calculated and then applied to your business financials; if you ever talk with someone from private equity, you will hear some version of this method discussed;

Typically, a combination of the methods above will be used by valuation professionals to help you get a sense of the value.  Below are some articles that may provide more insight:

I would highly recommend that you engage with a professional (CPA, certified business valuation expert, business attorney, business financial advisor) to help you get a sense for the value of a business.

“What a company is worth depends on who wants to buy it.”
                                              Michael Price, value investor

Here are a few Helpful Resource Pages:

As always, please don’t hesitate to email me (James Sanders) (jsanders@mpl-law.com), Andy Miller (amiller@mpl-law.com), Christian Miller (cmiller@mpl-law.com), Erik Spurlin (espurlin@mpl-law.com) or anyone in our office with questions or comments.  

Please see all of our prior updates at this link or if you would like to be added to our email list, please click here.

Learn More About the Merge & Acquisition Process

 

What Do I Need to Provide in My Conditional Use Application?

Attorney Andy Miller and I have assisted many clients through the Conditional Use process. It differs from municipality to municipality, but one question keeps popping up. What information, or what level of information, needs to be presented at the Conditional Use stage (prior to any land development process)? Many times it depends on the municipal support or opposition to an application, the public sentiment surrounding the project, or the budget constraints of the project. But many times, it’s our best guess what will be adequate to get the job done and create an adequate public record to withstand any appeal. We tend to err on the side of caution and a recent Commonwealth Court case from a warehouse project provides insight on just how high this threshold may be.

In Mushroom Hill, LLC v. Swatara Twp. Bd. of Commissioners, 2020 WL 678408, slip op. (Pa. Commw. Ct. 2021), Mushroom Hill, LLC (“Mushroom Hill”) submitted a conditional use application to the Swatara Township (the “Township”) Board of Commissioners (the “Board”) to build three warehouses in the Commercial Zoning District. The Board denied Mushroom Hill’s conditional use application on the basis that Mushroom Hill “failed to meet its burden to show that the project would meet all of the Ordinance’s Conditional Use Standards for a warehouse.” Id. at 2 The trial court reversed the Board’s decision, but ultimately the Pennsylvania Commonwealth Court reversed the trial court’s decision (ultimately agreeing with the Board’s original denial). Id. at 13. Where did Mushroom Hill go wrong?

The Township requires the following information for this type of development, “a detailed description of the proposed use with regard to eight enumerated topics: the types of materials to be stored, the general scale of the operation, environmental impacts, site planning, effect on surrounding residential neighborhoods, public health and safety, potential disturbance of slopes and other natural features of the land, and hours of operation (the “Conditional Use Standards”). Id. at 1. To meet this criteria, Mushroom Hill provided a three-page narrative along with the detailed testimony and reports of three witnesses. Id. Why wasn’t this enough?

“First, the applicant must persuade the local governing body [that] the proposed use complies with the requirements in the ordinance for such a conditional use” at the time of submission. Id. at 4. “An applicant is not required to present every detail of the design of the proposed development at the conditional use stage, but merely expressing an intention or promise to comply with all zoning requirements is insufficient to show entitlement to a conditional use.” Id. “If applicants were automatically entitled to conditional use approval based solely on a promise of future compliance, ‘it would make the approval process meaningless.'” In re Thompson, 896 A.2d 659, 680 (Pa. Cmwlth. 2006). “Moreover, compliance at the time of submission is required even though the conditional use inquiry involves only ‘the use of the land, as opposed to the particular design details of the development.'” Joseph v. N. Whitehall Twp. Bd. of Supervisors, 16 A.3d 1209, 1215 (Pa. Cmwlth. 2011).

Based on this standard, Mushroom Hill was required to provide a detailed description of what types of material would be stored in the warehouse. Rather than providing a generic list of materials, Mushroom Hill explained that no tenant has been identified yet, but that Mushroom Hill promised to comply with the Conditional Use Standards. As stated above, the Conditional Use threshold requires more than a promise of compliance. An ordinance may call for developers to provide detail in their applications even if the proposal is at a relatively early stage where full specifications are not yet required. Mushroom Hill, LLC v. Swatara Twp. Bd. of Commissioners, at 6. When it came to environmental impact, Mushroom Hill similarly fell short. Mushroom Hill promised compliance with various noise, light and sewer regulations, but was not able to specifically respond to concerns about diesel exhaust, carbon monoxide, nitrogen, etc. Again, the Board found that Mushroom Hill did not provide adequate information for this factor. Finally, concerning impact to the character of the surrounding community, Mushroom Hill did not meet their threshold.  Specifically, Mushroom Hill did not have any testimony to speak to environmental damage, property value, noise, fumes, etc. If a promise for compliance is not sufficient at the Conditional Use level, what is an example of acceptable testimony?

In Geiselman v. Hellam Twp. Bd. of Supervisors, the applicant submitted a conditional use application to build a winery. Geiselman v. Hellam Twp. Bd. of Supervisors, 266 A.3d 1212 (Pa. Commw. Ct. 2021). In support of the application, the applicant submitted a written plan with

“a detailed description of proposed winery events, sanitation provisions, [a] plan for noise control, an explanation of how amplified sound [would] be addressed, an explanation of how noise complaints [would] be addressed, and provisions for the control of lighting.” On weekdays, the hours of operation would be from noon until 8:00 or 9:00 p.m., with the closing extended to 10:00 p.m. on Fridays and Saturdays. Sunday hours would be from noon until 5:00 p.m. All outdoor winery events would end by 10:00 p.m. and indoor ones by 11:00 p.m.”

Id. at 4.

This conditional use application was approved by Hellam Township and the Board specifically commended the applicant’s written submission. The Mushroom Hill panel also cited Williams Holding Group, LLC v. Bd. of Supervisors of W. Hanover Twp., 101 A.3d 1202 (Pa. Commw. 2014), where the applicant secured DEP permits for a stormwater facility prior to a conditional use application.

The Conditional Use Application threshold is difficult to precisely pin down, but it is clear from the caselaw that a promise to comply with Conditional Use Standards risks being insufficient. These cases show that a comprehensive narrative (coupled with competent expert witness testimony) is instrumental in meeting the conditional use application threshold.

The Mushroom Hill decision is an unpublished decision so it is not binding on lower courts. The decision will also likely be appealed. We think the outcome is extreme nevertheless and establishes a nearly impossible burden to meet. The decision reinforces why we prefer the conservative approach to what is needed for a conditional use.

DECOMMISSIONING LEGISLATION UPDATE: On April 12, 2022, Senate Bill 284 (providing for decommissioning of solar energy facilities) passed the Pennsylvania Senate with a vote of 35 to 14. It now moves to the Pennsylvania House of Representatives. For a summary of this bill, click here. We will keep you all updated.

If you have other specific questions about conditional use applications, renewable energy, or anything related or unrelated, please don’t hesitate to call our firm at (717-845-1524) or email Andy Miller (amiller@mpl-law.com) or Cory Dillinger (cdillinger@mpl-law.com) with any questions or comments.

MPL General Counsel Corner – The Big Party is Coming Up; Are You Ready?

After working on numerous deals, both for my own businesses and for my clients, one of the biggest hurdles is getting ready to either buy or sell.  Outside of annual tax returns and payroll records, many times I am confronted with a hodgepodge of financial, operating and governing documents for companies that are looking to acquire another business or getting ready to sell.  These three categories are what I call the “Big Three” of asks whether it is from a lender, a buyer or whoever is on the other side of the transaction.

Below are examples of what I am talking about:

  • Financial Documents (at least three historical years and the year to date)
    • Annual, Quarterly and Monthly P&L, Balance Sheet and Cash Flow Statements
    • Monthly bank statements and reconciliations
    • Accounts Receivable, Accounts Payable and Inventory
    • Client List w/ at least the revenue amount
    • Vendor List w/ the annual spend
    • Loans outstanding w/ lender information
    • Tangible and Intangible Asset List
  • Operating Documents
    • Key contracts (typically where you have a commitment of at least a year)
    • Business locations w/ current leases
    • Employee lists w/ pay, executed agreements and benefits included
    • Any Company employee handbooks or operating manuals
  • Governing Documents
    • Formation documents
    • Annual and special meeting minutes
    • Company ownership w/ cap table
    • Fictitious name filings
    • Any foreign entity registrations in other states

These are just a few of the items that need to be prepared if you are looking to sell or you should be prepared to look for if you are buying a business.  Also, if you are on the buy side and looking to finance the acquisition, you should be prepared to provide as much detail about your financial background as possible.

Here are a few articles if you would like some other perspectives:

If this seems overwhelming, I can assure you that working with professional business advisors (attorneys, accountants, financial advisors, business brokers) to get prepared will pay off when the “Big Party” starts and you ultimately execute on the transaction.

“Before anything else, preparation is the key to success.”
                                                       Alexander Graham Bell

As always, please don’t hesitate to email myself (jsanders@mpl-law.com), Andy Miller (amiller@mpl-law.com), Christian Miller (cmiller@mpl-law.com), Erik Spurlin (espurlin@mpl-law.com) or anyone in our office with questions or comments.  

Please see all of our prior updates at this link or if you would like to be added to our email list, please click here.  

MPL General Counsel Corner – M&A is like getting married – you better be committed

If you haven’t noticed, the M&A world continues its “red hot” status.  I recently attended a few economic presentations which tells me this trend will continue at least through the end of this year.  Anything beyond that is a mixed bag of “no slowdown in sight” to the next “Big Depression”.  I hope it’s the former, but time will tell.

I thought it would be a good idea to take a step back and look at the M&A process.  Over the next several weeks, I will be discussing the high-level components of a typical Buy/Sell process from both the Seller’s and Purchaser’s perspectives.   If you or your firm focus on any of the steps below, please feel free to share your articles or blogs and I will try to include it on my weekly email.  Below are the topics:

  1. Buy/Sell Plan – Whether you are looking to buy or sell, you should formulate a plan.  If you are the buyer, identity why you are doing an acquisition and what the goals will be.  If you are the Seller, see if your business is ready to be sold, list out likely acquirors and think through your post-sale plans.
  2. Valuation – If you are the buyer, get a good understanding of your spending parameters and what your business can handle.  If you are the Seller, engaging a skilled business valuation expert can help you understand what the market is saying about your business.
  3. Negotiations/LOI – Once you have a sense of your spending ability or the value of your business, see if there is interest in the market.  If there is interest and you find that Seller or Buyer, begin negotiations with a goal of getting to a signed Letter of Intent (“LOI”).
  4. Due Diligence – Once that LOI is signed, its time to get into the details.  What are the key decision factors and hurdles that you want to learn about if you are the Buyer.  If you are the Seller, can you provide that due diligence information and what can you commit to in a purchase agreement.
  5. Purchase/Sales Agreement – If due diligence goes as planned, the next step is executing the Purchase/Sales Agreement.  This critical component formalizes the key terms agreed to in the LOI and provides the roadmap for the closing.
  6. Closing/Post Deal Commitments – The purchase/sale is finalized and the post-deal work begins.  Trust me, this is where you truly find out how well you conducted all the pre-closing steps.

At the end of the day, think of the M&A process much in the same way you think about getting married.  Successful deals, like marriages, are ones where there is true commitment from both sides.  I think Warren Buffet said it best:

“As in the case with marriage, business acquisitions often deliver surprise after the ‘I do’s’”

Here are a few other things that may be of interest:

As always, please don’t hesitate to email myself (jsanders@mpl-law.com), Andy Miller (amiller@mpl-law.com), Christian Miller (cmiller@mpl-law.com), Erik Spurlin (espurlin@mpl-law.com) or anyone in our office with questions or comments.