Buffalo Grove, IL asked in Mergers & Acquisitions for Illinois

Q: Equity Escrow works in M&A

I am trying to educate myself how Equity Escrow works in M&A, who can help me on this... During M&A transaction, Buyer will acquire 80% of valuation and pay for 50% equity thru Cash + 3 Yr promissory note but remaining 30% of shares will be held in Escrow for next 3 years until promissory note is paid in full and at end of 3rd year 30% of remaining shares will be also bought by same Buyer and paid. As a Seller how can i protect my Escrow Shares, what will happen to appreciation and depreciation over a period of time? will i involve bank or Law firm for Escrow shares? Is there any cons?

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1 Lawyer Answer
Jonathan R. Roth
Jonathan R. Roth

A: First, hire a local experienced business attorney to assist you. This is a complex transaction and the terms of the deal need to be detailed closely.

If you are selling shares held by you or the companies treasury shares, then you need an independent escrow of the shares. If the company is a LLC or Sub-S corporation then there is an issue of the distribution of income or if a C-Corp the use of dividends as well. I would provide that a percentage of the distributions in cash to the Buyer be paid against then note. Likewise, you do not indicate who will be running the company and on what terms, if it is you then I would insist on an employment agreement. If you are retaining 20% of the shares are you protected from dilution or from the 80% owner using his, her or its ownership to dilute your shares or force your termination for no valid reason?

These are just a few of the issues to discuss and resolve and I were you I would retain a good CPA and attorney locally to assist you in this transaction.

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