Kirsten Petras: Hello everyone, and thank you for joining us today for our webinar, Legal Implications of Getting Your Deal Over The Finish Line, the third in our OnPoint series. I'm Kirsten Petras, Executive Sales Director here at Oak Street Funding. And I have the pleasure of leading our sales team as they work with borrowers like yourself to strategically use debt to grow their businesses. Many of our borrowers are utilizing debt to fund various ownership changes, be it an acquisition, a succession or partner buying structure. And given the number of businesses like yours that are changing hands here in the last year, we think that the topic of legal implications to actually get those deals across the finish line is front and center. And so today I'm delighted to have a conversation with our Chief Counsel, Alicia Chandler. And as we answer your questions about protecting yourself via your documents, structures, and agreements, when you both acquire businesses or take on business acquisition loans. As with every webinar, as a courtesy to our attendees, your phone lines have been muted but we do welcome and encourage more questions throughout this next 30 minute time frame. So, please use the Q and A interface there and submit those questions. And for an optimal view of the panelists and the information, you can actually click the top right corner of your screen and select a side by side layout. This meeting is being recorded and within the next couple of business days, you will receive a follow- up email with a link to the webinar and the recording as well as our contact information in case you do want to continue the conversation. As I mentioned, welcome to part three in our OnPoint Series, Legal Implications of Getting Your Deal Over the Finish Line. And as you see here on the next slide, for those of you returning and first saw our options for funding the growth of your business, as well as our two- part underwriting sessions that we hosted, we thought that having Alicia join us today to talk about these legal implications was a nice dovetail into the overall process of actually getting the deals done. And with that, I would like to welcome Alicia Chandler. As you can see, Alicia has spent a number of years as an attorney. She previously was with a local law firm here in Indianapolis, and had the role of our outside counsel at that time. Alicia came in- house here to Oak Street about 10 years ago and by bringing her legal expertise in, and that expertise of M& A structures and documentation has allowed Oak Street's processes to improve, by both reducing turnaround time associated with the legal diligence aspect of underwriting, as well as closing documentation process. Her role in the underwriting process contributes to shoring up structures and collateral positioning, which is essential to the success and strength of an Oak Street funded acquisition, succession or buy- in or partner buy- in, as we serve our insurance, wealth management advisory and CPA businesses. Alicia and her team also assist all the other business lines that Oak Street specializes in lending too. Alicia and her family, including three dogs and a cat, live here in the Indianapolis area but they're not far from her hometown in Cincinnati, Ohio, where she learned to love her Skyline cinnamon flavored chili, for those of you who know what I'm talking about, and actually is an avid fan of the boy band, 98 Degrees. Alicia, is there anything you want to add to that or your personal professional resume?

Alicia Chandler: Kirsten, thank you for introducing me. I guess we figured with the two 10- year- old Shi Tzus and a nine- year- old cat, we'd go ahead and get a Boxer or puppy. With two teens, we just needed some more drama in our lives. So yeah, we're a little busy.

Kirsten Petras: Yeah, you don't have enough hectic- ness going on with two teenagers and all those animals in your house. So... And plus the animals that you work with here in the office, right? I'm sure that we don't always make every day so easy for you but we wanted to really jump in. Those of you familiar with Oak Street, you know our expertise lies in lending to businesses with intangible asset classes and Alicia is a critical part to getting many of those deals done. And I think we should have mentioned that, we do hundreds of acquisition loans a year. Some are$100, 000, some are$ 10 or$ 20 or$ 30,$40 million. And not every single one of them has to have an attorney involved. And so, we think Alicia will bring interesting perspective to the questions you asked as the attorney here for Oak Street. She certainly has the expertise and experience to share and you may glean some information from that today. But I think you'll also understand that by learning a little bit today, we don't want there to be a thought that you have to employ an attorney for every decision that you're making with your business. But as we get into it here, moving to the next slide and answer some of our submitted questions that are focusing on the legal implications, I think we use this word diligence a lot. And as you see here on the slide it says, diligence protects you. Alicia, what does legal diligence entail?

Alicia Chandler: Kirsten, legal diligence, if that's going to entail looking at what exactly are the assets being sold. Is it an asset of the company or is it the company itself? Would be a stock or a membership purchase? Who is selling the asset? Or do you want to make sure that if you're buying from an entity that the entity's in good standing. So, you're going to be looking at the corporate formation documents and the like. And you're going to want to look at the contracts those companies have that they would be assigning over to you, to make sure that they're in good standing as well as the licenses of the individuals that are selling the assets or the business. And so that's... You need to understand those along with the intangible idea of, why is this business or asset being sold. What's the motivation behind the seller.

Kirsten Petras: So when does, as you're talking about looking in a good standing and some of the things that are discoverable to the people listening today, when would you suggest they begin the legal diligence process themselves?

Alicia Chandler: Really the due diligence needs to start before you start talking to the acquisition target. You need to... you can conduct research online yourself. You can Google people, you can search Facebook or LinkedIn. You can pull up their license searches with respect to your department of insurance or FINRA. All of that is publicly available and it can even be as simple as, talking to people in the industry. What is the reputation of the seller? Have they had any issues? Get business references. So it really needs to start before you have those conversations.

Kirsten Petras: I suppose if I'm in the seat of the seller, I can do the same thing for people that are approaching me about buying my business, we certainly find that with these relationship- based businesses. Usually, the preservation and the care of those relationships in the hands of someone else is front and center for a seller, so a buyer can do a little diligence of their own on the seller and vice versa. So, crosstalk listeners here today are aware, of course that businesses like theirs are trading hands constantly. They also probably realize they work in a relatively small world professionally. Unlike themselves, it's not uncommon for a lot of buyers and sellers to already know each other, right? We hear that quite a bit. With the tidbits you just shared about looking online or checking in with the local filings of the businesses that they're looking to acquire, do you have any experience where sellers did or did not take a formalized process because they had such a long standing relationship with either the buyer or the seller? And then, what... was there something that happened as a result of skipping a step?

Alicia Chandler: Yes. We've seen... A lot of times what we hear is," Oh, I'm friends with them or they're my mentor, or I know them well, they wouldn't do anything that would hurt me in the future." So no matter, whether you think it's friendly or not, you really need to take care and do your due diligence. We've seen things such as, we have a mentor- mentee relationship. The mentor, let's call him Guss, he goes to sell it to Betty. Betty trusts him, they've been together for a long time. He sells it to her for... Right away she gets them cash and then turn around and find out that, a lien was out there on the business assets by big bank. And then big bank starts calling Betty and says," Hey, you owe me a$ 100,000. I have a lien on your asset." And that does happen, there are sellers out there and again, it doesn't matter if you think you are friends with someone or not. If you're not conducting your UCC searches to see if there's liens out there, you could get caught in a trap of owing debt for the prior owner on the assets or the membership interest. And sometimes even we have issues where sellers, excuse me, have come back and they've started soliciting the book that they sold to their friend. And then there's a drop in the commissions and revenue and other issues ensue when there's no revenue to repay future debt, whether that be to Oak Street or to another party.

Kirsten Petras: No you bring up a really good point there. But the relationship and the professional friendship doesn't mean that they're withholding information, but maybe unaware of certain things like in your example of the UCC and it's not front and center, they're not in the business of buying and selling businesses. And so something that's just not thought about, ends up becoming quite the headache for someone if it's, if the steps aren't followed thoroughly. So, certainly these are not all unique to just businesses like wealth management firms or CPA firms or insurance agencies that are largely comprised of intangible assets. But in your experience, in your M&A experience, are there differences in how someone should approach buying a business that is comprised of intangible assets?

Alicia Chandler: I do think there are some differences, some unique aspects that you're going to need to pay attention to. And that starts with, it's intangible, you can't touch it, MC Hammer reference. But, the nature of these assets are such that they can go away. If you are not there on the front end, checking on the status of these contracts with carriers or the custodians, making sure you understand whether certain la... or employees have large client relationships that can just walk out the door if you purchase it and you don't have a good working relationship that can leave, that will obviously impact the revenue going forward. If there's just a lot of, in my experience and our experience, touchy- feely that you need to get in there and really assess the relationship with not only the clients but the employees, who are going to be a huge part of that business going forward, and to make sure that you're all on the same page with how you envision treating the clients and taking care of your business.

Kirsten Petras: So, you bring up a really valid point about the, as you called it the touchy- feely part of it, again going back to that example of two parties who know each other really well, it may not even be those two people that trip things up in the future, but rather a key employee who isn't as excited about the new direction of a firm and they may choose to leave. And in doing so maybe with, even without intention clients follow them and therefore that revenue stream follows them. So, understanding that revenue stream is front and center for our collateral structure and how we collateralize our loans, including these intangible assets being made up of that. What are the impacts of how your approach to your legal review of document or buy- sell agreement specifically, how does that impact that? Are there things you're looking for spec... that are different in those documents that maybe if somebody was selling something that had tangibility behind it?

Alicia Chandler: Yes. The one of the main things we focus on is we look for alignment with the seller and the borrower or the buyer, which would potentially be our borrower. We want to make sure that post- close, that seller is fully engaged in an alignment, whether they stay in the business or not with the buyer, that they're not going to have the ability under the document to solicit or compete for the business, the very business that they sold and received a large sum of money for. We also want to make sure that the sellers' employees understand whether they have non- solicit or non- compete provisions within their, whether it be an employment contract or just their various documents that they sign with the seller. We also want to make sure that we conduct, and I think this is more general, but we conduct the UCC searches to make sure we understand if there are any liens out there, whether it be from a bank or tax liens, IRS liens that could be out there that could also cause a hiccup with respect to these businesses moving forward.

Kirsten Petras: So one of the questions we get... we did receive was about UCC liens. So, could you take a moment and just explain a little bit more detail? What is a UCC filing? Why do we file it? And then what do we include in our filing as we're identifying our collateral?

Alicia Chandler: So, UCC stands for Uniform Commercial Code but we can call it a financing statement. Essentially, any lender including ourselves, when we make a loan we take a lien on the entire business that includes all business assets. So, we would file a lien in the state of down file of that company or that individual, if they're a sole prop, and the UCC filing would have in it all business assets, including client lists, commission streams, revenue streams, contract rights, intellectual property, anything else that you can think of with respect to a business and 90% of these are going to be intangible assets. Most of these companies that we work with, a desk or a computer is not really a material asset of the business, it's all wrapped up in the client revenue in the income stream.

Kirsten Petras: So, this is when people say we're trying to take their firstborn probably?

Alicia Chandler: Correct.

Kirsten Petras: So, we... I know that we also, and we'll touch on it in a second, we also have our clients sign a personal guarantee. We talked a little bit about this in our underwriting sessions, but one of the questions that came through from the registrants was about the personal guarantee. And can you a also file a lien on my home or personal assets if a, if my business goes into default? How are those handled?

Alicia Chandler: So, a personal guarantee is a guarantee by you that the loan will be repaid. In and of itself, a guarantee is unsecured and so it is not a mortgage or a deed of trust on your personal home or property. In order to do that, we would have... any lender would have to actually take steps to get additional documents signed. So it is not a lien on your personal home or your personal assets, your dog, your cat, your firstborn. It, the only time it would be secure is if perhaps you had a pledge of stock, but again it's not going to be secured by your home or your personal assets.

Kirsten Petras: So I know we do conventional lending, non- SBA structured lending. It, I believe it's a little bit more common maybe with an SBA loan that there can be a lien placed on somebody's personal home or assets. Is that your experience as well?

Alicia Chandler: Correct. The SBA loans that we've seen included a personal guarantee that is secured by the guarantor's primary residence. Whether it's a first, second, third, fourth lien on their home.

Kirsten Petras: So, what you're com... You're talking from the seat of what our personal guarantee entails in terms of not ultimately being secured, unless crosstalk it's determined for some reason it should be.

Alicia Chandler: Right.

Kirsten Petras: Well, here in a moment we're going to go over a list of what we see as the most common documents in an acquisition package and we'll review on a high level, our own loan documents. But again, recognizing we close hundreds of these loans a year where ownership is changing hands, there are several more that are happening without a lender like ourselves involved. For the deals that we are a part of, do most of the people use attorneys to get their documents produced? I know I said something about, it's not always necessary, but are you finding that people are using attorneys more and more?

Alicia Chandler: And typically with the loans that we do, we do not see attorneys that are in involved or at least they're not, it's not brought to our attention. I think as the deal sizes increase and the complexity increases, that's where you're going to see legal counsel get involved. But I'd say probably 75% of the deals that we see, we don't see attorneys that are involved with working with the documents for the buyer and seller.

Kirsten Petras: Do you have any... Understanding this world's getting more and more specialized, do you have any examples of where maybe someone used an attorney who was really versed in M& A work or someone who... I mean, I personally have a lot of relatives or attorneys. I don't even know that they would do this kind of work, but I think I would call them for some advice on it. Have you seen where something like that maybe actually got in the way of a good experience? Do you attorneys specialize in things, where there could be a good attorney for this versus a not so great attorney for this?

Alicia Chandler: Unfortunately, I do see that quite often. Someone will say," Oh, I called my friend. He does wills and trusts and he looked at my document and he had these thoughts in questions," or they do family law. Tt's... Each attorney typically has something they specialize in or they know more about than other areas of the law. So, I would definitely recommend if you're going to get an attorney using someone that has knowledge of M& A work, whether it's in this specific industry is obviously more helpful, but M& A work in general is a step above and beyond just, if it's some general practitioner that's just done criminal law or wills and trust, I wouldn't do that. I definitely... I'm sticking to the corporate world, I'm not going to get, give any friends advice on criminal matters or family matters. So, it's good to get someone that knows what they're talking about

Kirsten Petras: And do we ever have people reach out to us and we recommend they use a certain attorney?

Alicia Chandler: If I've become aware or we've become aware of attorneys with other deals, we can throw out a few names. But generally speaking, if people talk to friends in the industry they're going to be able to find... Between that and the advisors that we see in the industry or the consultants, they are really good at helping buyers and sellers find attorneys that can help them work through some of these specialty areas that come with the intangible asset transfer.

Kirsten Petras: That's a great point. There's so many consultants in these spaces and they themselves may even have some in- house capabilities of, to help assist with this part of putting the deal together. Well, as you can see we did put a list. It, as we're saying, it should be relatively easy to navigate sometimes although have complexity. If you wouldn't mind taking a second Alicia, kind of touching on these documents here, the names of documents that we have on the slide, maybe give a little insight to what they mean. And then I do have some additional questions that are coming in that I'd like to ask you, but why don't you go ahead and give a little overview of what you have here on the screen?

Alicia Chandler: Sure. On the, it's my left side, we have the acquisition documents. And those are the things that we would expect a buyer and seller to bring to the table, when they're looking to, the buyer's looking to take out a loan with Oak Street for the purpose of the purchase. Within the, whether it's an asset or stock purchase itself, there are a few things that we're going to look at. Obviously, industry specific items are going to be in there, whether it's wealth advisors, CPAs, insurance agents or the like, we want to look and see what's the seller intentions. Are they going to stay on as an employee? Are they going to retire? We're going to look at the non-compete, non- solicit provisions of that document for the seller going forward. We're going to make sure that the assets are free and clear, have all liens and encumbrances and understand what is the financing arrangement? Is it a note or an earn- out payment to the seller over a period of time? Those are some things that we're definitely going to look at along with the bill of sale, which actually transfers the ownership of those assets.

Kirsten Petras: So, one of the questions that came in is, I'm buying a book of business. How long should the seller have a non- compete, non- solicit?

Alicia Chandler: So, before we delve into the time frame I think the important thing to understand is within your particular state, we're talking about a non- solicit and a non- compete. Those are two different things, solicitation of the book versus competing or working in the industry. When you're talking about a non- compete or non- solicit, we have to remember this is not in the employment context. We're talking about it in a purchase context and typically what we've seen is, most states are more open to giving a longer period of time as reasonable when it comes to a purchase context because the sellers just received a large sum of money. And so they've been paid to not solicit or compete for the book that they sold. We here at Oak Street, we like to see five years. Think that's a good period of time within which the buyer/ borrower can get in there and get into that book and form those relationships with the client and make sure that revenue and client retention is sticky and it stays around for the long term.

Kirsten Petras: So, does the seller have to exit the business entirely in a year or within those five years?

Alicia Chandler: So, the FDA I believe requires a one- year exit. What we look at is, truly is what are the intentions of the party and what works best for the transition. Sometimes we have people that just don't want to own a business anymore, but they want to stay on and they want to help transition the clients to the new buyer or our borrower over a period of time. And that works well for them because the revenue continues to grow. Sometimes we have sellers that truly just want to retire and ride off into the concept with their money and that's great. And if it works for the transition, then that works for us as well. So it's very fact specific. We don't have a hard and fast goal when it comes to that.

Kirsten Petras: So, you also have here about promissory notes or earn out agreements. Is there a, is that required to be for lo... For when we're providing the loan, do we have a requirement where that needs to be a certain length of time in terms of repayment or structured for the earn- out?

Alicia Chandler: So, while we prefer that the length of the earn- out or promissory note matches the term of our loan, we've typically seen it. I'd say maybe four or five years, what we're going to look at is the cash flow, whether the payment supports that. And also it goes along with the alignment of the seller and the term of the solicitation or competition, if the seller has skin in the game with some money that's inaudible they're not going to logically, they're not going to take steps to do anything to harm the buyer, because then that will just hurt their repayment stream as well.

Kirsten Petras: So then we also, of course, these kind of work together, right, as a package? So, what do we require as a bank lending for this kind of transaction? What do we require to see in the buy sell- agreement?

Alicia Chandler: So I think we're, typically, we're going to look at again the industry specifics and make sure we understand what assets or assets are being sold. We're going to need a specific description, a pretty specific description whether it's a client list or producer code, or whether it's the ownership, we're going to need to understand exactly what is transferring hands. And we're going to need to understand if there are any outstanding obligations that thugh be satisfied, we're going to make sure that there's indemnification provisions such that if there is an issue, the borrower/ buyer has the ability to go back to the seller and seek reimbursement for any costs that may incur post- close, non- solicit, non- compete, the terms and conditions of the earn- out, if that is one of the pieces, how that will be calculated and how any issues between the parties will be resolved if there is an issue going forward.

Kirsten Petras: Well, and here we just got another question. Do we provide any buy- sell agreement templates or any templates for these documents?

Alicia Chandler: We do not. But I would think again, kind of going back to what we talked about earlier, that if you have a consultant in the industry or other advisors, they typically have forms or you can find forms online, but we found that the consultants have been really good at helping buyers and sellers work together on these purchase documents to get them in good shape.

Kirsten Petras: Well, thanks for your overview on those acquisition documents we tend to see in the acquisition packet. As we move to the other side of the slide here with our loan document, do you want to provide just a brief overview of the purpose of the document?

Alicia Chandler: Sure. So, the master credit agreement is going to govern the global relationship, kind of have the terms and conditions of the loan relationship as well as representations, warranties and covenants and it will set forth all the defaults under the loan facility. The promissory note will have the stock, the amount of the loan and the repayment terms, whether it's five years, 10 years. Guarantee, we already touched on it, it would be the guarantee of say the principal or the owners that are involved. The security agreement is going to be the document that says, you grant Oak Street a lien on all your business assets in exchange for the loan, the collateral assignment or a stock pledge could come into play depending on the loan side and that would be a pledge of your interest or assignment of your interest in the company. The financing statement we touched on as well, that we would file with the state. Subordination agreement is what we require any sellers that have promissory notes or earn-outs to sign, where they subordinate their payment to Oak Street's payment and if there is a default, we have the right to stop payment to the note or the earn- out. And an assignment of purchase document which basically says that Oak Street, or the seller and borrower agree that Oak Street has a right to an assignment of any rights under the purchase document.

Kirsten Petras: So, this is the package of information that people on my team would give their borrowers a little heads up on the actual thickness of what they're about to receive. We really only have about a minute left, if you don't mind me kind of rapid firing some questions to you because we have some unanswered ones here. So we got a question from a person in the position of a seller, why do I have to subordinate my earn- out?

Alicia Chandler: So in our world or in Oak Street's side, it is important again to keep the alignment. We want to make sure that the seller has received a sum of money from Oak Street to enable the purchase to happen and if there is a note, we want to get that subordinated. So if there is a problem, we have the right to stop that payment and make sure that Oak Street gets paid first.

Kirsten Petras: Got it. Real quick and I may take a stab at some of these. We have somebody who's looking for startup financing, as the way we lend in this space, a startup financing is probably not the best fit for us. We're happy to reach out to that individual though and point them in the direction of a couple places where they might find some help there. The big question about, is it best to sell as a C Corp or an S Corp? We work with entities of all shapes and sizes and I would tell you that this type of question is probably best directed to a tax expert. And one of the M& A, even tax attorneys that specialize in that as Alicia was talking about, their specialization in what form it should take, we would suggest you reach out to somebody there for that answer. And then business lines of credit, is it supported with Oak Street and if not do you have any recommendations? We do. While we're talking today about acquisition funding, we do offer funding for other uses including the structure of a line of credit. Alicia, I think as we've approached 30 minutes here, I do want to thank you for joining and from what you shared, the simplicity or complexity may play a role in whether or not somebody hires an M&A attorney to assist in the structuring or at minimum the documentation. There are a plethora of consultants in your spaces out there that do this every day and can be there to help you. Another point, in the buyer's diligence process and our diligence process are not mutually exclusive, but rather they can compliment each other's efforts to ensure the legal implications are identified and structured for the alignment of all parties and their priorities, and ultimately the success of the deal. So, with that I want to thank you. We have a history of running long, we have lots of questions that went unanswered today that we will reach out to those people that submitted them to get them answered. You see our contact information is there and be sure to join us for the next Oak Street Funding OnPoint webinar about the M& A market, if it is heating up or fizzling out, that I'll be a part of that. And we're going to have a panel of M& A experts for that. Alicia, do you have any last words you'd like to share with our, the people that listened to us today?

Alicia Chandler: No, I appreciate it. And again I will just say, please do your due diligence, protect yourselves and it will go a long way. You'll be glad you did

Kirsten Petras: Well, thank you again Alicia for making the time and thank you to those that registered today and have a wonderful afternoon.

Alicia Chandler: Thank you. Appreciate it.