EP32 - Anatomy of an ESOP Transaction - recorded negotiation case study with Miguel Paredes (trustee) and Peter Aliferis (advisor)

Thanks for tuning in on the ESOP Guy and today we are continuing on this journey to an ESOP. So this podcast is for those people that are thinking they might want to consider an ESOP for a strategy in their business to either use it for succession planning or exit planning or even to try to grow their company. So today's episode is entitled Anatomy of a Live ESOP Transaction. We're going to mix up a little and work through the case study, a case study on a simple ESOP transaction and to really illustrate the steps and relevant terminology in the process. The value of doing this is really going to be to walk through the rationale behind each of the areas that are pertinent for both sides of the transaction. Because we are doing that on this podcast, we're gonna have a trustee and a, and an advisor, his advisor to help us in the process. We'll be able to get a sense for both sides of the transaction and what each side is thinking as we go through the offer and the counter offer. So it really will illustrate the process of negotiation as we walk through um a live ESOP transaction. So to do that today, I have, I have with me both Peter Aliferis of Pendo Advisors and Miguel Perrede of of Prudent fiduciary. Peter is going to represent the advisor to the trustee. Peter is uh representing Pendo Advisors, which is a boutique corporate finance advisory firm focused on providing institutional quality business valuations and investment banking solutions. Pendo's professionals are focused on providing valuation and transaction solutions to private and family owned businesses, employee stock ownership plans, and asset managers, including private equity firms, hedge funds, and family offices. Peter is a finance professional with experience and fairness and solvency opinions, ESOP advisory services, mergers and acquisitions, valuations for estate planning and financial reporting purposes. And in addition to that, leveraged buyouts, management buyout, transaction and private placements. So, on the trustee side, Miguel Perredez is going to represent the trustee. He lives and works out of Los Angeles, California. His organization provides fiduciary advisory services with a focus on ESOP trustee services throughout the United States. Miguel's experience is extensive. He's served as the supervisory at the supervisory level with the Department of Labor and Employee Benefits Security Administration. His team includes attorneys, CPAs, evaluation experts, and really some of the best folks in the business. And again, he represents prudent fiduciary. Um, so on our side, I will represent the sell side financial advisory for the selling shareholders. And so with that, Peter and Miguel, thank you so much for joining us today. And helping out being a valuable resource and champion of the ESOP process. Hey Phil, thank you very much. So really, this is the first time we've had two separate people on the podcast interview process, so I'm, I'm excited to see how that turns out. Um, today, we're going to do a case study as I, I, I'd set up in the introduction um of an S corporation that has 10 shareholders and 200 employees. The shareholders in this case would like a fair market value for the company. They're looking for liquidity. But want to maintain the culture of their company and the jobs of their employees. So they are not considering selling it to a strategic um seller, they're, they're actually considering going towards an ESOP. They like the idea of an ESOP because it will help to maintain the legacy of what they've built from a long term perspective, as well as the future ESOP being a tax exempt entity. As the sell side advisor with the selling shareholders, we have interviewed multiple trustees in this case study and as part of our fiduciary responsibility. From that process, we engaged Miguel Perredez, and he has engaged Peter Aliferis as advisor. We provided a management presentation on the company which includes providing the items from Peter's checklist to be reviewed in due diligence. They have conducted due diligence on the company and worked through that process. So with that, I'm gonna let Peter and Miguel explain the process of going through their due diligence before we get into the uh offer and the counteroffer. Excellent Peter, if you don't mind me starting off here, I probably want to start just by indicating how it how it was that I would have selected you, Peter, as the valuation adviser. You know, we vetted 45 different valuation firms across the country, as you know, Peter, we did this with you, we put you through a pretty vigorous process where we sent you a questionnaire about 100 questions asking all about your experience, your expertise, your training, certifications. The industries you're familiar with, uh, through that, we've worked with about 25 different valuation firms in transactions such as these. And we've whittled it down to about 10 or 12 firms that we that are both highly qualified based on our diligence process and that we've had experience in the live transaction that are delivered at a high level. Peter, we've worked together several times and needless to say, you're certainly on that list. And we would work with you multiple times unless you were highly qualified and delivered at a high level and so here we would have selected you, you, we would have sent you a request for proposal asked about your experience with with the value businesses that are similar to the subject company here. And and would have made sure that you were independent, that you hadn't worked done any evaluation work for the company or any of the related parties, and that's how we would have come to a decision to hire you. So that's that's how we found ourselves where we are now and and then we would get into the diligence of course for the subject company. So Peter, maybe you could describe that a little bit. Yes, thank you so much, Miguel, and Phil, thank you for having us on. You know, once we get hired as a financial adviser to the ESO Truste, Phil and his company have been working on behalf as a cell site adviser and basically have most likely put together kind of a manager presentation. They prepared a data room with all the relevant information. And when we get engaged and they send off. Of our information request list we get access to that data room. We start downloading the information and combing through everything, and then we ultimately have a management interview and the diligence, the key focus through the diligence process before the management interview and even thereafter as we're negotiating the transaction. Our historical financial results and normalization adjustments, we want to make sure you know what the trend analysis is historically, if there's any significant issues we should be aware of a balance sheet, income statement, or cash flow statement. We want to look at the normalization adjustments to make sure that they are reasonable and in some cases. What are the things we have to do to test those normalization adjustments? We want to have a good understanding of the company overview, not just the financial aspects, but the operational aspects, right? What is the backlog? Associated with the company, what's the competitive position of the company within the industry? What's the outlook? What are the company's specific risk factors, such as any customer concentration, who are the key members of management, what is their experience if there's any potential liabilities such as environmental litigation or any. Liabilities that we should be aware of. We need to have a good understanding of the business and you know what exactly is it that they do, what's the strategy for the company going forward and how is key member management how are the key members of prepared to execute on that perspective strategy. Through this process in due diligence, Phil's group will put together some projections. The company will put together some projections, and Phil's group will present us with an overall management presentation talking about the basis for these projections. And as part of our due diligence, we need to question. What the basis is for those projections, we sit down on behalf of the trustee and we interview management and we say, OK, we've talked about the company overview. We've talked about how the company has performed over the last 5 years and specifically over the latest 12 months, but we need to get a good understanding of the projections. What's the basis and how did you put these projections together, you know, what are the key drivers of revenue? What are the key drivers profit. If I could jump in really quick because I'm glad you mentioned projections because when we have the discussion with management, you know that that really is a key indicator of value, right, you know, many times your evaluation relies heavily on some sort of discounted cash flow analysis. And that makes sense, right, because what is what is the ESOP getting as a buyer? They're not getting past financial performance, they're getting the future, the future financial performance, but you know, nobody has a crystal ball, and we need to understand the past historical performance in terms of revenue trends, growth rates, profitability levels. And then, and then with that historical information, really understand the projections. OK, well who put them together and what was that methodology, right? What was the thought process behind that? And get comfortable that they are reasonable and attainable. And again, you know, at that time, nobody has a crystal ball, but we just want to get a comfort level that those future financial projections make sense and aren't wildly optimistic and, and if we're we're not quite comfortable then. Peter, you can maybe talk about the ways that you can risk adjust those projections, etc. but that's a key point we definitely want to understand one leading up to that to the projections, the nature of the financial information that we're being provided, is it reliable is it is it timely or are we working with the old information we can't do that. We need to make sure we have the latest financial information. That uh that we, it's reliable and we could, we could rely on the quality of that of those financials and then look to the projections. But yeah, I just wanted to chime in there, Peter, because that is really a key, uh, one of the key things that we get comfortable with. I totally agree, and a lot of the stuff comes through the due diligence management interview when we're there face to face with key members of management and They're telling us what they're basing their projections on. It's all a function of what their strategy is and how they expect to execute on that strategy going forward, and their strategy is quantified in the projections they're giving us. So we have to pretty much ask them the hard questions. What's the basis for this revenue growth? For example, if you've grown revenue over the last 5 years at a compound that annual growth rate of 5%, but yet you're telling us you're going to be growing 20% over the next 5 to 10 years, what's the basis for that? Changed in your industry. What has changed, you know, is there a comparative advantage that you have compared to the other competitors? Has pricing changed so dramatically? Have you come up with a brand new product? Are you entering just a brand new market where you're going to be realizing substantial growth? You talk about the gross profit drivers, you know, well, gross profit margin historically was 15%, but we're going to be at 30% and growing to 50% going forward. Well, what's the basis for that? So then you just talk about the fixed cost component, the EIA and the free cash flows, and a lot of times we feel, you know, there have been times where management provides the answers, and there have been times where management says, well, you know, we have to revisit these projections, and that's our job. That's why we should as financial adviser to the trustee, we have to delve into everything and just as part of our overall due diligence, ask the questions to get appropriate numbers. Now, you know, once management has Pretty much provided us the appropriate explanations. We review everything and like Miguel said, we take into account the risk associated with the company achieving a certain level of free cash flows going forward. There's a variety of ways to do that. One of the things is obviously you build that into your discount rate given the company specific premium. Is the company in a competitive industry? Does the company have good key members of management? Are there significant customer concentration issues? Is there a lot of risk in meeting these aggressive projections that needs to be priced into your discount rate? One of the other things you may look at is possibly discounting the projections a little bit to something that's a little bit more normalized. It's not just one or the other. It's kind of looking at everything taken as a whole and specific to each situation. There's other things that you take into account that aren't projected related. It's balance sheet related and like Miguel said, going back, the quality of the financials perceive, you know, what are the projections based on aside from the operational thoughts of key members of management, the historical financials? Are they audited financials? Are they internal financials? Well, they never did an audit. They don't have a review. Do we need an independent quality of earnings to just give us a better comfort level for the historical financials that are being utilized as a basis and the normalization adjustments. So, looking at everything taken as a whole, that some of the things, one of the many things we look at during due diligence. Yeah, and Peter, if I could just really quickly interject that, you know, and I guess just to recap before we move on to the the specific transaction terms that we're going to talk about here, you know, we just as Peter described, you know, we'll ask the questions, request the information, financial, operational, legal, you know, look at the corporate documents, key contracts, and it's really a robust diligence process and it does have to be well documented, you know, at the end of the day. You know, we need to come in, we roll up our sleeves, learn everything we can about the business. And so that, you know, Peter can go through his evaluation analysis and that we peer review as a trustee organization and that we're all on the same page and very comfortable that that we have a good understanding of the company. We have a good understanding of the drivers of value, the strengths, the, you know, maybe the weaknesses, the opportunities, the risks. And so that when we're entering the negotiation phase as a trustee represented at ESOP, we are well informed of value. We understand the business intimately, and we can negotiate from a very informed perspective and and and you know, we certainly would not enter into any negotiation until we've had all our questions answered and understand. The drivers of value in the business and understand the value of the business. And so that's where Peter would have his, you know, his draft valuation to us with providing us with the, you know, a reasonable range of value which we then take into the negotiation phase. Great, great. One thing that I just, one thing I just want to finish up with here as we conduct our due diligence and we enter the negotiation phase of the of the transaction, you know, we're always conducting due diligence through the negotiation phase because just because we presented our findings to Miguel and his committee yesterday and we start negotiation tomorrow, if this transaction closes in 3 months, a lot can change from an operational and financial wherewithal from the Company, so we're always wanting to make sure that things really haven't changed substantially because if we're negotiating in 6 weeks from now they lose a major customer or a pandemic occurs or just something happens that triggers a change in value, that's something that is taken into account in the overall negotiation. Excellent point. Yeah, so going, jumping in on the the sell side advisory portion of this is we've worked so diligently with the selling shareholders. To get them ready for this process, and I think that is very important because as they, as Peter and Miguel went into the details of their due diligence process, um, it would be very, very, um frustrating for someone to jump into that and, and not be represented well. So your cell side advisor needs to make sure that they've pretty much done all the work that Peter is going to do prior to the even entering into the the due diligence or even entering into the interview process with the trustee. So in this case study, we've done that, the selling shareholders are, are ready for this process of due diligence, which part of it is, you know, hey guys, we're gonna, we're gonna get asked a lot of questions and so with all that, Peter and Miguel have kind of gotten through that stage and we're gonna now move into a negotiation of the actual transaction. And so to do that, I'm gonna just go through some, some points of areas which uh which would start off the negotiation. So the, in this case, the sales site advisor, which is our side would um would recommend and make an offer to the trustee for the sale of the business and we're going to start off with a valuation um of $22,500,000. Uh, we're gonna look at a structure of the being 20% of the sale to the ESOP with that would represent 4.5 million of the 22.5 and an 80% redemption of the remaining shares of 18 million. Um, we're looking at a bank financing versus seller financing of 8.5 million for bank financing, seller financing them taking back a note of 14 million. We're looking at also warrants of 30% on a fully diluted basis with an interest rate of 3% and an internal rate of return of 15%. We're also negotiating for our 15% management incentive plan and retention and performances SARS that are split between 7.5% for each of retention and performance SARS. From an event protection clawback, we're, we're offering no event protection and no deal structure. Um, we will entertain a governance for a new independent board member. Um, we would look at an ESOP loan of 30 years and no working capital adjustment. So that's a quick summary of the points that we're making an offer in this negotiation. So with that, um, we would send that over in writing to Miguel, and then Miguel would work with Peter to come back as a, as a counteroffer. Yeah, that's exactly right, Philip. And so when we are viewing an offer for shareholders to sell stock to the EA at that point when we're ready to respond, we will have gone through our diligence process. We will have worked with Peter and analyzed the valuation and gotten comfortable with the valuation conclusion that he's presented to us so that we can respond. you know, so here in this in this example, if we're receiving an offer of 225 and we would go back with a counter offer of 17.5, it's probably likely that at that point, based on that we would have received a value indication from Peter probably say for example, probably maybe given us a range of 18 million to 22. Clearly, as the ESO trustee, we want to um you know, negotiate here and get a fair price and ensure that we've done everything we can to make sure that the ESOP pays no more than a fair price and then that this is a good compliant transaction. And one of the things that I want, I would like to point out is that You know, sometimes it's lost a little bit on the fact that what we're trying to do here is meet the standard of fair market value, which is willing buyer, willing seller, and you know, as a trustee, sure, we're trying to get the best deal we can for the ESOP and we work hard to do that. But there's also, you know, the component that sometimes gets lost. Um, in terms of willing seller, it also has to be a, you know, it's got to make sense for the selling shareholder. In other words, if they've got an indication from you of what this enterprise is worth, then they have an expectation as as the owner of the business of selling their shares, the shareholders here in this case, they want, they want to get the fair price for the shares. Otherwise, why would they go through with it if they feel they're not getting a fair price, so. You know, again, we, it's willing buyer, willing seller on our end we're representing the vigorously, but it, it, we've got to come to a point where it's uh it's it's the, the fair price. Incorporates the seller's desire to get their fair value for the for the business. So sometimes that kind of gets lost in the shuffle, and I wanted to just point that out. So you know we would again negotiate. We would start off typically in this example, given the range that I kind of an example range, of course. They would have started a little bit above the range, we start below the range here, and you know, try to stay on the lower end of our range to the extent that the seller is going to come down here in terms of value. I don't know. Peter, do you have any. And feedback on the specific uh price point, which is of course one of the key, always the key metrics that we're negotiating. Yeah, when we're negotiating here on behalf of the trustee, we're looking to meet a couple of standards here. You know, obviously you have a fair market standard, but I'm also thinking from a DOL standpoint procedural prudence and substantive prudence, you know, obviously we want to make sure that the price is fair within the reasonableness of fairness, but also when we're looking at the transaction taken. A whole, there's a whole, it's not just the price. There's a bunch of other aspects that require us to help negotiate on behalf of the trustees, so we're able to support our fairness opinion and you know, from a procedural prudent standpoint, we want to show that there was a healthy negotiation going back and forth between the buyers and sellers. Now just kind of delving into some of the deal points, Miguel said our response obviously would be at the lower lower end of the range just from a starting point because we're looking to get the best possible deal. Some other aspects is when you're looking at the warrants, you know, obviously the warrants provided recommended by Phil and his group, the cell site advisor is warrant covered. Of 30% on a fully diluted basis, you know, we came back with the warrants on a fully diluted basis at 10%, interest rate at 3% on the seller note on the seller financing, and the total internal rate of return on the seller note of 10%. So warrants are just part of the overall financing mechanism of the seller subordinated note, and we're looking at a targeted internal rate of return, and we feel that 10% is reasonable from a financial adviser to the trustee standpoint trying to get the best possible deal. That's right, Peter. And if I, if I could just comment on warrants because that's, you know, was kind of a heavily debated topic, you know, certainly warrants are very effective financing tools kind of alluded to Peter in terms of it that's exactly what they are financing tool allows. The ESOP to pay a lower coupon rate, that interest rate is 3% very reasonable for subordinated debt that the seller takes back and the risk associated with that debt. And so to provide the seller with the with the market return required the warrants, you know, otherwise without the warrants, you know, they would be looking for a double digit interest rate possibly or you know somewhere around there. And so here it really allows. Uh, the ESOP company, uh, the ESOP to save considerably on the interest rate expense, and the warrant is a is a is a good tool to help with the company's cash flow, the ESO company's cash flow is post-transactions. So I just wanted to to really point that out, that the warrants, you know, again at a reasonable and negotiated in good faith, they're very effective at the end of the day for a successful financing of the transaction. So yeah, we we would start off in 10 and certainly would need the seller to. To move off of that 30% which is pretty rich here in this example, related component in terms of equities and incentive plan from my perspective as a trustee again as long as these terms are reasonable and negotiated in good faith, certainly recognize the importance. Of having an ESOP company with with a good management team in place that's incentivized to continue to drive value and help grow the company and to be profitable once they are an ESOP. So, you know, we would certainly try to ensure that we understand exactly how these Uh, how the, the management of the plan would be implemented in terms of, uh, you know, some retention size versus performance sizes and negotiate all, all those aspects but certainly we'd want. to ensure that it's it's designed in a way that will effectively, you know, push management to perform and help the company perform to achieve certain targets in order to, you know, to reach the goals that would that would grant those those incentives. So, um, that's that's right, Miguel, if I may interject here, you're absolutely correct. The key thing with the warrants, even though it's a financing mechanism. Pretty much aligns aligns everybody on the same page. If the company performs, the warrants have value. If the company doesn't perform, the warrants themselves have minimal, if any, value, and the internal data of return of the note is de minimis. A consistent with the management incentive plan, you know what Phil has provided the first go around here is 7.5% retention stars and 7.5% performance metric. What Miguel basically is pushing, which we would push for also, is in this case pushing back on the management incentive plan and saying 10% instead of 15% on a fully basis and of that 0% is retention stars and 10% is. again, why do we push for performance? We want to make sure that the key members of management are aligned with the ESOP participants here and where we want the company to go. For example, if Peter is the key member of management and you give Peter 7.5% upfront, this is great. I didn't have to do anything for it, right? OK, I get 7.5% whether the company goes up or down, I have something. Sure, if the company does better, it's worth more. But if the company. Kind of goes straight 3% and pays off some debt. I have some significant value. Incorporating performance metrics for the management incentive plan is key because again we want Peter and other key members of management to be aligned with the ESOP with the shareholder, which is the ESOP. So everybody's in the same ship, everybody's thinking along the same lines. We're all here to increase profitability, pay down debt, grow the business, and enhance shareholder value. That's exactly right. Peter and you know, certainly, you know, we, you know, this is this example was the starting off of retention stars in all performance, but we would expect at some point, you know, we we would get comfortable with with some, you know, reasonable level of retention plus performance, but yeah, we definitely want to see that performance stars place you know in place because as you said, to align the incentives. Um, the next item there is that protection. Yes, certainly, where possible, we'd like to get an understanding and nobody has a crystal ball, but you know, we've had Peter, you've had this experience and you know, you have a successful ESOP company doing well, profitable. They they they have value in the marketplace and you may have some third party that recognize the value of a business. And if it's, you know, an ESOP company, this event protection here is, you know, we would just lay out the different expectation we would have in the event of a change of control certainly what we're thinking about is contemplating. cases where there's still material debt on the books related to the ESOP and how you know how that would be treated, how the shares, the unallocated shares would be treated in the event of a sale and again looking out for the participants' best interests. Um, and, you know, obviously, having to balance that with the management, you know, many times in the sale, you know, the management, there's commitments and and things that are asset management kind of balancing that, but that's certainly something that we want to contemplate. Um, and then on the clawback earnout and, um, you know, depending on the, on our diligence process and our assessment of a particular company, maybe our assessment of future projections or of the terms that are that we that seem to be we seem to be gravitating towards, there are times when we would request we pretty much request a clawback in every scenario, but there are times. be certainly more insistent on a clawback and many times if we want that clawback downside protection, you know, whether the seller would want potential upside in case they, they, you know, exceed the expected future financial performance, so. Um, in this case, here in this example, we, we would have felt the need for a clawback and, and uh certainly requested one here in our initial counter. I don't know, Peter, if you want to maybe uh comment briefly on the clawback or now. Yeah, I'm just kind of like what you said, a clawback because obviously we would be asking for this is the reason you come back with a clawback is a lot of times you're looking at the projections and maybe you, you know, some of the times they are reasonable conservatives, some of the times you come back and say, look, these projections are a little bit aggressive, and we talked about before some of the things that you're doing to risk adjust these projections, right on the negotiating side. Another aspect is to come in and ask for a clawback, which is pretty much a contractual arrangement between Buyer and the seller in which a portion of the purchase price is clawed back contingent upon the target upon the target firm achieving, you know, certain financial predefined financial thresholds or operating milestones like we'd say, look, here's the the that over the next 3 years, we define what the clawback and how it's calculated is going to be. We say we're holding you to it. If you surpass, if you miss these expectations, maybe 20% or 25% of the purchase price is going to be clawed back. Whether it's in the form of cash paid back to the company, whether it's in the form of just adjusting the seller subordinated no downside, that's some of the things we push for and vice versa, maybe you come back and the earnout is effectively the reverse, same thought process, an arrangement, contractual arrangement between buyer and seller where where a portion of the purchase prices paid out and did you not a target from achieving certain levels and how do you adjust that either it's a cash payout or just adjustment to the seller note, seller subordinated note. We feel clawbacks are significant. Clawbacks should be utilized, especially in this type of pandemic. We're seeing them. Actually, in all transactions, Miguel, the deals that you and I have closed, clawbacks are very prevalent, and we're seeing ounces become more prevalent also where the sales side advisor would say, OK, we'll agree to your clawback, but we want a reciprocal earnout again, that's part of the overall negotiation. That's exactly right. And um just really quickly want to touch on these other key deal points for turning it back to sale here on corporate governance here on this transaction at the end of the day, post-transaction, the. would be the 100% shareholder of the company, so certainly an appropriate level of independence on the board is is critical in terms of corporate governance, and we would also make sure that the documentation is clear that The independent trustee as representing those shares and the ESOP would be electing the board on an annual basis and voting to elect the board. ESOP loan, you know, again we would probably go back for 20 years based on we would ask that when we provide you with the ESOP loan terms, maybe a benefit analysis benefit level analysis, I try to get an understanding of that and we would like to go to negotiate a smaller term maybe we want. To ensure that more more shares are allocated more quickly depending on how that benefit that benefit level analysis looks. And of course, Peter, the working capital adjustment, you know, your evaluation analysis, assume a certain level of working capital based on what we've seen historically that the company needed. Uh, and, and certainly, um, if you, if the projections are projecting growth, and you know, we would assume some reasonable increase in working capital or to support that growth, but you know, I don't know if you have any Comments on loan you're absolutely correct. The company needs a certain amount of working capital to continue to move forward with its operations, one of the reasons we're looking at historical financials and we want to make sure that the financials. Can be relied upon right is to get a sense of the trend analysis across the board and one of the trends is the company's historical working capital analysis. And in discussing this, the company has been growing over the last 3 to 4 years, you would assume that the company requires more working capital to fund that growth. If the company is expected to grow going forward, more working capital is required. So there's always a negotiation, a definition as to what that working capital is, and then negotiation as to what that working capital will be delivered at closing. And once we agree to a definition and we agree to a number, there's an adjustment there's that peg. So once we agree to that peg 2 or 3 months after the fact, once we finalize the transaction and the balance sheets are reviewed. You know, if there's an adjustment, there could be an adjustment. There could not be an adjustment, and the adjustment could go both ways. One way, if there's excess working capital, then effectively the company, the selling shareholder receives the adjustment in this case in the form of adjusting the seller subordinator know upwards. There's a shortfall in free cash flow of $100 to $200,000. Well, the purchase price gets adjusted downward by adjusting the seller's subordinated note again. Looking at the transaction taken as a whole, this is one of the key negotiating points when looking at the term sheet. Great. So all of those, we went through those in detail and that's great. So I go back to my selling shareholders and kind of go back and I, you know, from this case study, we're pretty close. We're in the ballpark. So we come back and say like we're, we're comfortable with something as, as a $20 million. Sale. Uh, we're comfortable with the, the reduction, um, in the warrants, but we wanna get a little bit higher payment on the warrant. So we go from a 10 to 15%, um, with a targeted internal rate of return of 12%. Um, we're comfortable with the SARS, the change in the SARS, but we wanna, we wanna have some retention SARS. So we, we negotiate um to the 2.5% in addition to um the performance SARS of 10%. Um, we understand the issues related to event protection, so we agree to that. We understand the issues related to the clawback, but we do want to earn out on the other side of it to protect us. So we would have the, uh, the selling shareholders would have the benefit of the upside of the company doing better. Um, the, uh, ESOP loan, we're OK splitting the difference on the 25 years. We, our concern was we didn't want to get the participants too much, too many shares too soon. And then, um, going through the analysis on the working capital. Um, we realized there is some, some strain on working capital with the growth that we have projected, so we're gonna agree to the working capital adjustment. So from the selling shareholders standpoint, we, we will put those terms in, in a, in a sense, you know, settle the deal and say we're, we're good with this is our, our kind of our final offer as we go through it. And then on the trustee side and on the advisor side, on the buy side, in this case study, we're gonna, they're gonna go ahead and accept that because we could go back and forth, you know, we could keep going back and forth, but we're gonna have to finish it with that. So, so with all of that, my, my final comments on our, on my side, I would just kinda have Miguel and, and Peter talk about their final comments is I think that what this negotiation shows is preparation is essential. And you know, some of my takeaways on this is you don't want to get this deep into it when you start the due diligence process, you as a um a company that's going towards NESA, want to feel that you've been, your management presentation and all of the information that you're presenting has done so well. If you If you need to wait a year and put together audited financial statements, if you need to kind of take more time, then that's advisable because as you can see, these are things that once they've get, once they get through their side and there and the way that they're thinking and the rationale, um, it's really important. Um, to make sure that you've got your best case put forward, um, especially with COVID and the, and the issues related to that right now. Um, forecasts definitely are more difficult to, um, to show and say, and have some strength behind them. And so that'll be, that'll be kind of an ongoing issue as we get through this year, um, with the uncertainty related to COVID if that affects your business. So, so those are my final comments. Um, Miguel and Peter, why don't you guys kind of wrap up some thoughts on your side. This is the first, so I think this is a good example. I think in in in a real life example we certainly would probably go at least a total of 56 terms before we actually come to terms. Sometimes it takes a little while to iron out every every aspect of every every term. In the deal, but I think this is a good example of ending up in a reasonable spot based on some expectation and based on what the ESOC trustee can be support based on their diligence. understanding of value, and I think I think you're right. I think that we've found that the best the best transactions we've been involved in is where all the parties have a good understanding of value, reasonable expectation of value in the different terms and they go very smoothly. So having, having a company that understands the process, understands. you know, selling shareholders that really understand value and reasonable about value and the different terms, that certainly helps the process go smoothly, and that's certainly what we're looking for is good solid transactions that are reasonable and well negotiated and fair to the ESOP and to really have an ESOP program that's implemented for the long run. It's going to be successful for the for the ESOP participants. Peter. Yeah, thank you, Miguel. I guess what was noticeable during this transaction, remember in the beginning of the podcast I did mention that you know just because you conducted due diligence and you start the negotiation process doesn't mean that you're not continuing reviewing the numbers throughout the negotiation process. Value didn't necessarily change in the 3 months of negotiation, right, so we kept receiving updated financials to make sure nothing has changed dramatically from an overall operational and financial wherewithal. Look at where we ended up, the warrants were very reasonable and more importantly, the internal data to return. On the seller subordinator note was more reasonable and supportable. Other aspects like the management incentive plan, the amount that we ended up with at 12.5% where a small percentage was retention based to keep two or three key people and have them signed on to Pe agreements as part of the plan, and then the remaining 10% of performance metrics, you know, they're aligned with the ESO. the ESOP, who's the shareholder as the company performed, then the performance arts kicked in and the key members of management realize the value because they contributed to this value. Same thing with the warrants, right? You know, if the company performed, the warrants gain value. The warrants are a financing mechanism, but it is tied to performance. And then some of the other aspects that we wanted, we received that protection. The clawback of the urach was the clawback was definitely a must for us because we looked at the projections and, you know, in hindsight they met those projections. They didn't surpass them substantially, but they met. There was no clawback, no earn out, but in order to, you know, cover ourselves, we just wanted protection on the downside in case they missed projections radically, you know, we looked at the pricing, we priced in the company's specific risk premium associated with the company reaching a certain level of projections. But we felt giving us additional cover was negotiating that clawback. Of course Phil's side wanted that reciprocal earnout, which we're comfortable with. If they surpassed expectations and they got that earnout, everybody benefited. So overall I think um and then of course some of the ESP loan and working capital adjustments is just part of the course. um I think overall it was a very good negotiated transaction. We feel that, you know, the transaction as a whole was fair and we were able to render a fairness opinion, close the transaction, and then move forward by conducting the ongoing ESOP valuation on behalf of the. Great. Well, thank you guys so much. I appreciate your time today. I think that insight into working through a transaction is, is very valuable, especially if, you know, if some of these terminologies that you're hearing for the first time. Today, if you have to go into those in depth, it'll be really helpful for you to listen to this a couple of times. Um, so thank you, Miguel and Peter for your work here today with me and, um, as we close out, I just want to remind you, if you like the podcast, please subscribe and share it with a friend. Have a great day and we look forward to next time.