The world of mergers and acquisitions looks a lot different than it did just two years ago.  When credit was easily available to a buyer financing an acquisition, things were easier for sellers.  Now, buyers are looking to sellers to take on more of the risk.

• Promissory notes.  Many buyers are asking sellers to accept part (or even all) of the purchase price as a note.  In other words, the seller gets less cash at closing and only receives payments under the note if the company is able to pay.
• Earn-outs.  An earn-out is a mechanism where a seller receives part of the purchase price over time, depending on how well the business is performing.  Usually, the buyer and seller will agree upon financial measurements that the company has to meet in order for the seller to receive any payment.  Earn-outs can be very complicated and difficult to track and measure after the closing.
• Mezzanine financing.  Because senior debt is not as readily available as it once was, buyers are turning to mezzanine lenders.    Mezzanine capital is generally subordinated to any senior debt but has priority over common equity.  Mezzanine financing generally has a higher interest rate than senior debt.  That may cause the buyer to provide less generous financial terms to the seller.
• Equity rollovers.  The buyer may ask the seller to roll over some of its equity into the new company.  That is, rather than receiving the purchase price that would be attributable to all of the seller's interest in the company, it will receive only a portion of the full purchase price plus some equity interest in the new company.  In an equity rollover, the seller continues to own a portion of the business and bears the risks related to that ownership.

I'm forming a new entity for my business.  What are some of the key documents?

 

The three key documents for a new corporation are:

 

• Articles of incorporation
• Bylaws
• Shareholders' agreement (optional)

The articles of incorporation are filed with the secretary of state of the state in which you are forming your corporation. They contain some basic information about your corporation, such as its formal name, its registered agent for service of process, the number of authorized shares and the rights and preferences of any preferred shares.

 

Most states require a corporation to have bylaws. The bylaws generally set forth the following information: 

 

• the process for holding shareholders' meetings;
• the powers of the board of directors and process for holding board meetings;
• duties of officers and the process for appointment and removal of officers by the board.

A shareholders' agreement is not required by law but is often a good idea. It is an agreement between the shareholders of the company that governs the rights of the shareholders. A shareholders' agreement typically limits if and how a shareholder of the company may transfer his or her shares of stock. It may also contain the following provisions:

 

• Repurchase rights. Repurchase rights typically require the owners or the company to purchase a shareholder's shares in certain circumstances, such as death or permanent disability. A shareholders' agreement also will often require a shareholder to sell his or her shares of stock to the company or the other owners if the shareholder is fired for cause, voluntarily resigns or the breaches the shareholders' agreement.

 

• Preemptive, co-sale, tag-along and other rights. A shareholders' agreement may also provide for preemptive rights, rights of first refusal, tag-along rights/co-sale rights and/or drag-along rights. These concepts are discussed in the below blog post "I'm raising venture capital for my company and I can't understand half the jaron they are using. Can you help?"

 

• Corporate governance. A shareholders' agreement generally governs the manner in which the day-to-day operations of the company will be managed. For example, the agreement may require that significant management decisions require the consent of some or all of the shareholders or the board of directors. A shareholders' agreement may also establish the means by which the directors are to be elected.   

 

• Miscellaneous. Other matters that may be addressed in a shareholders' agreement include restrictions on competition, treatment of confidential information and dissolution of the company.

Many terms of art are used in venture capital transactions that can be difficult to understand. Most of them relate to key issues that may be points of negotiation in your venture capital transaction. Below are a few of the common terms of art used in venture capital transactions and their common meanings:

• Conversion: Conversion refers to the conversion of shares of preferred stock into shares of common stock. Conversion provisions can be optional or mandatory. An optional conversion is when a shareholder has the option to convert its shares of preferred stock to shares of common stock at any time or when certain events happen. A mandatory conversion requires that all shares of preferred stock be converted into shares of common stock upon the occurrence of a certain event, such as consent of the majority of the holders of the preferred stock or a public offering. In a venture capital transaction, the typical negotiation points regarding conversion provisions, in addition to those mentioned under "Anti-dilution", are the events that trigger mandatory conversion, such as a public offering, and the dollar threshold that the event must reach before the conversion is mandatory.
• Anti-dilution: Anti-dilution provisions allow a preferred shareholder to keep the same or a similar ownership percentage in the company when the company sells more stock. This may be accomplished by giving the shareholder preemptive rights (see the definition below). Other terms that you may hear in conjunction with anti-dilution are weighted average and full ratchet. These are two methods for adjusting downward the conversion price per share of stock issued to the preferred shareholder when additional shares of stock are issued to new investors at a price lower than the price the preferred shareholder paid. In other words, if a preferred shareholder purchased its shares for $1.00 per share, and is able to convert its preferred shares into common shares at a deemed $1.00 per common share, the anti-dilution provisions may operate to make that conversion price lower, allowing the preferred shareholder to convert its preferred shares into a larger number of common shares. In a venture capital transaction, a typical negotiation point regarding anti-dilution provisions is whether a weighted average or full ratchet formula is used. A weighted average formula is currently the most common, but there are a number of ways a weighted average formula can be calculated.
• Preemptive rights: Preemptive rights are the rights of a shareholder to purchase its pro rata portion of any new shares of stock issued by the company at the same price and on the same terms as the new shares are being offered to new investors. A preemptive right, if exercised by the shareholder, allows the shareholder to retain its ownership percentage in the company. In a venture capital transaction, the typical negotiation points regarding preemptive rights are (i) who will receive the preemptive rights, such as the venture capital investors, major shareholders or all shareholders and (ii) what issuances are exempt from the preemptive rights.
• Right of first refusal: A right of first refusal gives each shareholder or certain specified shareholders the right to purchase its pro rata portion of shares offered by another shareholder to a third party, on the same terms. The company may have the first right of refusal and the shareholders may have a secondary right of refusal if the company elects not to purchase the shares. In a venture capital transaction, the typical negotiation points regarding rights of first refusal are (i) who is subject to the right of first refusal (i.e., who must offer their shares to the company and/or other shareholders prior to selling to a third party), (ii) who will receive the benefit of the right of first refusal, such as the venture capital investors, major shareholders or all shareholders and (iii) what transfers are exempt from the right of first refusal.
• Tag-along rights/Co-sale rights: Generally, a tag-along right is a protective provision for a minority shareholder. It allows a minority shareholder to sell its pro rata portion of shares of stock along with a selling significant shareholder. This right is often combined with the right of first refusal to allow a shareholder who does not exercise its right of first refusal to sell its pro rata portion with the selling shareholder, on the same terms and conditions. In a venture capital transaction, the typical negotiation points regarding tag-along rights are the same as those for rights of first refusal.
• Drag-along rights: Drag-along rights allows a defined group of shareholders (usually a single shareholder or group of shareholders who own a majority of the company) to require the remaining shareholders to sell their shares of stock in, and/or consent to, a transaction approved by the defined group, such as a sale of the assets of the company or a sale of all of the shares of stock of the company. In a venture capital transaction, the typical negotiation points regarding drag-along rights are (i) who are the shareholders that can initiate the transaction, and (ii) the percentage threshold of such shareholders that must approve (i.e. a majority, two-thirds, etc.).
• Redemption: Redemption happens when the company buys shares back from the investor. Redemption can be mandatory or optional on the part of the company or the shareholders. Generally, the redemption cannot occur before a certain date, such as five years after the first sale of the series of preferred stock, and must be approved by a certain percentage of the shareholders (i.e. a majority, two-thirds, etc.). This is designed the protect the venture capital investors' return on the transaction but also provides the company with some comfort that, absent special circumstances, it will not be required to come up with the cash to redeem prior to the agreed-upon date. There may be more specific negotiated redemption provisions that relate to the occurrence or non-occurrence of certain events by agreed upon dates. For example, if the venture capital is being used primarily to finance a construction project, there may be deadlines that have to be met in order to avoid mandatory redemption. In addition, the company may negotiate provisions that allow the company to redeem at its option after certain time periods have passed or certain events have occurred. In a venture capital transaction, the typical negotiation points regarding redemption provisions are (i) whether and under what circumstances redemption is required or allowed , (ii) the price for which each share is redeemable (e.g., the original purchase price plus accrued dividends or the greater of the original purchase price plus accrued dividends and the fair market value), (iii) the first date on which a redemption may be requested and (iv) the percentage of shareholders that is required to effect a redemption.
• PIK preferred: "PIK" stands for "paid-in-kind". This means that the dividends on PIK preferred are paid in the form of additional shares of preferred stock. In other words, rather than accruing dividends that must be paid in cash now or in the future, the preferred shareholder is deemed to own additional shares. The calculation of the number of PIK preferred shares issued in connection with any particular dividend is a point of negotiation between the parties.

These days, working capital can be one of the most important measures of a company's financial success.  If you're considering buying a company, you should definitely take a close look at its working capital.

Working capital measures cash available for short term operations.  It is calculated by subtracting current liabilities from current assets.  If you are negotiating a purchase agreement with a working capital adjustment, you may negotiate for specific exclusions from the calculation, including deferred tax assets or liabilities or specific assets or liabilities.  But, the basic calculation for financial analysis purposes is current assets minus current liabilities.

In these economic conditions, where most companies' revenues have declined and credit is tight, availability of cash from operations may determine whether a company will make it.  If your company is unable to obtain credit for a while, you want it to be able to continue to operate without needing additional cash from you or another source.  When analyzing the potential buy, you should factor in your plans for growth as well as your cost structure in determining whether the deal makes sense financially.  This will involve some analysis of the direction you plan to take the company as well as your ability to control costs.

Don't forget, the saying "cash is king" has never been more true!

U.S. Secretary of Agriculture Tom Vilsack made a tour through Indiana on June 3, primarily to tout the Obama administration’s plans to rebuild and revitalize rural America.   He made three stops in Indiana: Terre Haute, Indianapolis and Danville.  The most interactive of the stops for Indiana residents was in Danville, where the secretary held a forum (part of USDA's Rural Tour) to collect ideas and comments from local residents on how best to revitalize the rural economy.

Vilsack outlined the goals of the American Reinvestment and Recovery Act – providing  assistance to struggling families; investing in the nation’s transportation system; and building “green collar” jobs.  He acknowledged that families are struggling because of the economic crisis.  In rural areas, Vilsack pointed to a few specific areas of relief provided by the stimulus funds, including infrastructure in watershed areas to reduce flooding and promotion of renewable energy production to revitalize local economies.

Rural community residents, ag organization and business leaders in attendance asked the secretary questions on a variety of topics… the struggle to feed a growing world population, the regulatory environment and wind energy issues were just a few.  Another topic though dominated the conversation and also provide the insight into the administration's priorities in agriculture – structural changes in U.S. agriculture and USDA's plans for assisting small farmers.

This has been a recurring theme for Vilsack following the release of the 2007 Census of Agriculture.  Referencing three different segments of producers ("large" farms that produce 75 percent of the nation's output; mid-sized farms and small farms), the secretary outlined priorities primarily for the latter two groups.

Mid-sized farms, he noted, are decreasing in number because they are either being purchased by larger farming operations or are dissolved because they are no longer able to compete in the industry.  USDA and other federal programs will promote job creation in local areas to provide alternative job opportunities for those farmers.

Small farms, on the other hand, are a growing segment and one that USDA will attempt to help more because of the "job opportunities they create in rural America."  How will USDA help these smaller operators?

1. Expansion  of the beginning farmer program
2. Connecting local consumers and local producers to establish more market opportunities for farm products. 
3. Expanded conservation programs will help farmers more efficiently use their land.
4. Increased focus on biofuels,  expanded trade, and climate friendly programs will also create more opportunities for small farmers.

These comments provide much needed reassurance and promises of support to rural communities hard hit  by the current economic downturn.  At the same time, they also foretell a significant shift in USDA focus and programming away from the largest, most productive farms to smaller farms seeking more localized expansion opportunities.  It is still early in this administration's term and so difficult to predict precise directives or outcomes, but it is clear that Vilsack has yet to waver from this theme and these new priorities.

In technical terms, working capital is the excess of a company's current assets over its current liabilities.  Current assets are generally cash, cash equivalents, inventories and receivables.  Current liabilities are those payable within one year.  Working capital measures a company's operating liquidity, i.e., the cash it makes available for use on a short term basis.

A company can be profitable but still have a working capital deficit, but a company like that won't survive for long without outside help.  As a result, companies generally work hard to manage their working capital.  The goal is to make sure that the company has enough cash to pay operational expenses and to satisfy debt that will soon become due.  Management can do this by managing cash, inventory levels, customer credit policies and short-term financing.  Most companies use a combination of those methods.

At least that is Sen. Bob Corker's (R-Tenn.) take on carbon sequestration (as reported in BNA's Daily Environment Report) who says he finds it hard to believe that the infrastructure necessary to make carbon capture a reality, such as pipelines and right of way access, will ever come to pass.  His remarks are skeptical of the Senate Energy and Natural Resources Committee chairman Jeff Bingaman's (D-N.M.) proposal to add a bill establishing a national carbon capture and sequestration program.  The bill (S. 1013) would establish a national indemnity program through the Department of Energy (DOE) for up to 10 commercial scale carbon capture and sequestration projects. While the Department of the Interior is preparing a report that provides the framework for geological sequestration on public lands, the legislation authorizes DOE and the Environmental Protection Agency and the Department of Transportation to establish a grant program for state agencies.  The secretary of energy could take ownership of, and assume potential liability for, carbon dioxide injection as part of DOE sequestration demonstration projects according to Sen. Lisa Murkowski (R-Ala.). From a legal perspective the risk of loss of carbon capture and the issues surrounding indemnity have been a sticking point for potential projects.  Proponents of projects have been looking for certainty on what programs and agencies will govern the carbon capture programs.  In addition to the indemnity, the bill includes a legal framework for closing down a geological storage site to address these concerns.  Obviously not everyone is sold, as Sen. Corker also inquired "Are we smoking something?" and the Obama administration officials testifying before the committee said that DOE and the Interior Department are not prepared to take a position on the bill at this time.

In the meantime, donkey owners everywhere are tying them to fence posts; just in case.

As expected, the United States Congress passed and the president signed into law, sweeping economic recovery legislation that expands existing, and establishes new, tax incentive programs to promote clean technology, renewable energy and green jobs.  The legislation also provides businesses tax relief in certain areas.

Read the entire alert on tax relief to promote clean technology and renewable energy.

The American Recovery and Reinvestment Act of 2009 includes few provisions that will have an impact on private equity and venture capital funds.  One provision that could affect private equity funds and their portfolio companies is a tax provision that will permit companies to restructure their outstanding troubled debt and defer the tax consequences thereof for five years.  The provision will allow companies to more easily deleverage their balance sheets, and thus should be considered by private equity funds and their portfolio companies which have outstanding debt.

Read the entire article on debt restructuring tax relief.

The American Recovery and Reinvestment Act of 2009 (ARRA) provides involuntarily terminated individuals (and their qualifying dependents) who experience COBRA qualifying events between September 1, 2008 and December 31, 2009 with a 65 percent subsidy on their COBRA premiums.  On March 31, the Treasury Department issued eagerly awaited guidance on the definition of "involuntary termination" for this purpose.

Read the entire alert on involuntary termination guidance for COBRA subsidy.

Some Notices Must Be Given By April 18, 2009

On March 19, 2009, the U.S. Department of Labor issued four new model COBRA notices to implement the COBRA subsidy provisions of the American Recovery and Reinvestment Act of 2009.  These notices must be provided by employers who sponsor group health plans to individuals who become eligible for COBRA between September 1, 2008 and December 31, 2009.  At least one of the notices must be provided by April 18, 2009 (see below).  The notices may be used by any public or private employer that is subject to COBRA (whether through ERISA, the Internal Revenue Code or the Public Health Service Act).

Read the entire alert on COBRA Notices for Subsidy.

Getting work done by independent contractors is very common, especially for those in the agricultural industry.  Whether one is contracting for a small job like painting a barn, or a larger job like building a tool shed or grain storage bin, it is important to understand the liability risks involved with those very common contractual relationships.

In a recent case, the Indiana Court of Appeals highlighted the risk that individuals face in their professional and private lives when contracting for jobs valued at more than $1,000.  The Court of Appeals found that the Indiana Worker's Compensation Act places liability on the person who lets such a contract (the "statutory employer") under certain circumstances.

The Act states that when the statutory employer - a farmer, for example - hires someone to do a job valued at more than $1,000 the statutory employer will have to pay the worker's compensation benefits if (1) there is an injury to the contractor's employee; (2) the contractor does not have worker's compensation insurance; and (3) the person contracting for work to be done has not obtained a certificate on the contractor from the Indiana Workers' Compensation Board.  This is commonly called the "statutory employer's liability."

In the case, a farmer hired a contractor to paint a house and barn.  Although the legislation exempts work done on one's personal residence only, this job involved the house and barn, so the exemption does not apply.  The farmer did not obtain a certificate from the Indiana Worker's Compensation Board showing that the contractor had worker's compensation insurance.  An employee of the contractor was injured on the job and the contractor did not have worker's compensation insurance.  The employee demanded worker's compensation benefits from the farmer.  The farmer sought coverage under his personal liability policy, but that policy excluded benefits that are required to be paid under worker's compensation law.  The insurance company successfully argued that the exclusion, a common exclusion in liability policies including most homeowner's and business liability policies, precluded any coverage to the farmer for the injured person's worker's compensation benefits.  Therefore, the court held the liability insurance policy did not provide coverage for the farmer for any amount he had to pay to the injured worker.

Therefore, to avoid personal and business risk, one must obtain a certificate from the Worker's Compensation Board showing that the contractor has worker's compensation insurance.  A certificate signed by an insurance agent will not be sufficient to mitigate liability in the event that an injury occurs and the contractor does not have worker's compensation insurance.  Also, if you have worker's compensation insurance for your operation, you should check whether that policy may provide coverage for this situation.  Finally, see if you can get contingent worker's compensation coverage on your farm's liability policy.

As we all know, we are in a recession.  In these difficult economic times, everyone is wondering where we can find money to help start or grow our businesses.  It seems that everyone is holding their money close to the vest.  In reality, however, there are many different places where a company can obtain equity or debt financing to help its business.  The key is understanding what type of money is available.

Traditionally, the first place to find money when starting a new business is from family and friends.  Obviously, investments from family and friends are made in large part upon the relationship you have with those individuals, but you need to be careful to comply with federal and state securities laws.  This usually means that you want to make sure you investors are accredited investors and that you conduct your private offering in compliance with an exemption under Regulation D  of the federal securities laws.  There are limits on the number of investors and the amount of financing a company can receive in order to fall within one of the many exemptions.  Family and friends are still providing capital during the recession, however the amounts that can be raised from family and friends have diminished as individual investment and savings accounts took a beating from the drop in the equity markets over the last year.

If you do not have close friends or families with the available cash to invest in your business, "Angel investors" can be and are a still a great source of capital.  Angel investors are high net worth individuals that can provide large tranches of capital through equity or convertible debt investments.  Typically, angel capital is the second round of capital that start-up companies and businesses receive and can provide capital in the range of $500,000 to $2,000,000 depending on the needs of the company and the willingness of the "angels" to invest.  Although angel investors are more selective in these economic times, angels are still investing and are looking for the right opportunities and the right companies.  Once again, when raising money from angels, you need to comply with federal and state securities laws and structure your offering to comply with on the private offering exemptions.

Venture funding is another source of capital that can be very advantageous for start-up companies.  Venture funding comes at a price.  Generally, venture capital firms will require a seat on the board, veto rights on major decisions such as additional financing and sale of the company, and a high return on their invested capital.  There are numerous venture capitalists looking to deploy money right now.  They are more selective in these economic times, but the venture capital firms typically do have the money to invest.  Venture funding is one of the key types of financing that provides the necessary capital infusion to allow a company to take the next step.

Private equity capital is generally available for more mature companies that are looking to expand and grow.  Private equity investments can take a variety of forms and generally involve a buy-out or a purchase of a majority equity interest in a company.  As with venture funding, there are numerous private equity funds with millions of dollars to deploy right now.

Traditional debt financing from institutional banks is available to companies as well.  The credit markets have suffered through the banking crisis and the recession, but the current administration's policies have encouraged banks to loosen the reigns to start lending money again.  It remains to be seen whether that will work.  A bank will generally require security interest the company's assets including inventory, real estate and/or accounts receivables, pledge of stock or a personal guaranty.  Bank financing will also require meeting certain financial covenants.

Indiana Department of Environmental Management, DieselWise Indiana  - Application Deadline is May 15, 2009

The DieselWise program is grant availability for projects designed to significantly reduce diesel emissions across Indiana.  The total estimated funding for this competitive grant opportunity is in excess of $2,000,000.  DieselWise Indiana anticipates awarding cooperative agreements from this announcement ranging from $25,000 to $250,000, subject to availability of funds and the quality of proposals received.  Additional funds may be available in the near future.  Project proposals submitted under this grant announcement may be awarded for funding from these additional funds.  Preference will be given to applicants that are willing to provide a financial match and/or in-kind match, provide actual historic idling hours pre-installation and post installation of idle reduction technologies, along with a commitment to maximize the use of any installed diesel emission reduction technology.  Information can be found at http://www.in.gov/idem.5255.htm

USEPA Small Business Innovation Research Program - Solicitation closes May 20, 2009

The U.S. Environmental Protection Agency’s (EPA) Small Business Innovation Research Program supports small businesses in developing new environmental technologies.  The EPA anticipates the total funding that will be available for Phase I projects issued under this announcement will be $1.8 million. A total of $70,000 is available in funding for each EPA Phase I award. Recipients of Phase I awards will be eligible to compete for a much larger (up to $295,000) two-year Phase II award. Companies with fewer than 500 employees are eligible.  Solicitation closes May 20.

SBIR Phase I green building materials and systems research topics are:

• Building Materials and Site Management
• Energy and Indoor Environmental Quality
• Water Use and Management

HUD Brownfields Economic Development Initiative Funds - Application Deadline June 16, 2009
 
The Department of Housing and Urban Development (HUD) published a notice of availability of $20 million in Brownfields Economic Development Initiative (BEDI) funds (74 FR 20494) on May 4.  David Kaminsky, who works on development grants in HUD's Office of Economic Development, said the funds will be awarded competitively, and individual grants are capped at $2 million. BEDI grant funds are targeted for use in redeveloping brownfield sites as part of larger urban economic development projects, according to HUD. Brownfields are underutilized, abandoned or vacant sites where expansion or redevelopment may be burdened by confirmed or suspected environmental contamination, according to HUD. Kaminsky said BEDI grants must be used in conjunction with a new guaranteed loan under Section 108 of the Housing and Community Development Act. Section 108 is the loan guarantee provision of the Community Block Grant Program administered by HUD. The application deadline is June 16. The funds are coming from fiscal year 2008 and fiscal year 2009 appropriations, according to HUD. See http://www.hud.gov/offices/cpd/economicdevelopment/programs/bedi/funding09/index.cfm.

A venture capital firm usually wants to receive "participating preferred" stock.  The term describes rights that can become important in liquidation and, sometimes, dividends.

If the company liquidates, participating preferred stockholders will have an advantage over common stockholders.  First, the preferred status means that the company must pay a specified amount to the holders of the preferred stock before any holders of common stock receive any money.  That preferred amount (called a liquidation preference) may be measured in relation to the preferred stockholders' initial investment plus accrued and unpaid dividends but may be more than that.  When the preferred stock is participating preferred, the holders of the preferred stock will share the remaining pot of cash along with the common stockholders, in addition to the liquidation preference already received.  This means that less money will be available for the holders of common stock.

Participating preferred stock also sometimes (but less often) participates in dividends.  This participation is in addition to the normal preference for dividends that generally accrue on preferred stock.  If and when the company's board of directors decides that the company will distribute dividends to its stockholders, holders of participating preferred stock have priority over holders of common stock with respect to accrued and unpaid dividends.  Plus, they may also "participate" with the common stockholders in the same manner as they participate with the common stockholders with respect to liquidation.

Venture capital firms generally demand a number of rights to protect their investments.

Venture capitalists usually receive shares of preferred stock when they invest in a company, while the founders and other initial investors hold common stock.  Of course, if you raise successive rounds from venture capital firms, you will likely end up with several different series of preferred stock with different rights and preferences.  Preferred stock has certain advantages over common stock, particularly dividend and liquidation preferences.  This means that if the company decides to distribute dividends to its stockholders, or sell its assets and distribute the proceeds to its stockholders, the holders of preferred stock will have priority over the common stockholders.  They will be entitled to receive some portion (or even all) of the dividend or sale proceeds before any of the common stockholders receive any money at all.

Preferred stock will probably have better voting rights as compared to common stock.  For example, the company will have to get approval from the holders of a certain percentage of the preferred shares to take major corporate actions, such as approval of the annual budget, amendment of articles or bylaws, liquidation of the company, creation of a new class of securities with rights equal to or better than the preferred stock, sale of the company or acquisition of another company.  This structure lets the venture capital firm have a say in decisions that will have a large impact on the company.

The venture capital firm will also likely demand representation on the company's board of directors.  The number of members will vary depending on the current structure of the company and the amount of capital invested by the venture capitalists, but at least one, and often more than one, spot on the board will probably be reserved for members elected or appointed by the venture capital firm.

Also, venture capital investors will want information and reports about the company so it can track its investment.  For example, the company will likely have to deliver its quarterly and annual unaudited financial statements.  Many venture capital firms will demand audited financial statements, which can be a significant expense for the company.  Plus, venture capital investors will expect some other rights, such as the right to force the company to register its common shares with the Securities and Exchange Commission under some circumstances or to participate in any registration initiated by the company (registration rights), the option to purchase shares of stock of the company that other stockholders want to sell (right of first refusal), the right to purchase any new shares issued by the company (preemptive rights) and an adjustment of the conversion to common stock price in the event the company sells stock at a lower valuation (anti-dilution protection).

Looking at all of the ownership and control pieces likely to be obtained by a venture firm, it will probably end up exercising a lot of control over the company.  Such is the price of venture capital.  However a venture capital firm will probably allow the day-to-day operations of the company to continue to be handled by the business people.

Modern agriculture is affected by more than just traditional farm policy - in other words, the statutes and programs that offer financial supports and incentives for production agriculture.  Today, new and changing policies and regulations require different strategic and business planning considerations.  Agriculture policy now is inextricably linked to rural, energy, trade, climate change, nutrition, transportation and infrastructure policies not to mention food safety, financial services and environmental regulations. 
 
This increasingly important set of policy priorities coupled with a new political administration in Washington, D.C. with a strong will to act suggest that the agriculture industry be prepared for something other than the status quo.  In just the last few weeks, several announcements and actions that connect the Environmental Protection Agency (EPA), the US Department of Agriculture (USDA), the Congress, the court system and the agriculture industry support this view. 
 
Consider the following:
 
1.  EPA's greenhouse gas endangerment finding  After a thorough scientific review ordered in 2007 by the U.S. Supreme Court, the EPA issued last week a proposed finding that greenhouse gases contribute to air pollution that may endanger public health or welfare. The gases in question are: carbon dioxide, methane, nitrous oxide, hydro fluorocarbons, per fluorocarbons and sulfur hexafluoride. 
 
As the proposed endangerment finding states, "in both magnitude and probability, climate change is an enormous problem. The greenhouse gases that are responsible for it endanger public health and welfare within the meaning of the Clean Air Act."  The report continues, "the science clearly shows that concentrations of these gases are at unprecedented levels as a result of human emissions, and these high levels are very likely the cause of the increase in average temperatures and other changes in our climate." 

Many industries send out warning signals at the first sign of "over-regulation" and agriculture is no exception.  This specific finding is a slippery slope for agriculture - especially the livestock industry that could be subject to new permit requirements for structure construction or modification and ultimately naturally occurring methane emission fees per animal to the tune of $175 per dairy cow, $87.50 per beef cow and $21.87 per hog (according to the American Farm Bureau Federation).  

In response, Nebraska Senator and former Secretary of Agriculture Mike Johanns has co-sponsored legislation that would protect animal agriculture from any greenhouse gas regulations promulgated by EPA.  Citing the significant economic value his state reaps from commercial red meat production, Johanns suggests this "cow tax" could cost Nebraska's farmers and ranchers tens of thousands of dollars per farm per year.
 
Before the finding takes effect, EPA is required to hold it open for public comment for 60 days and then issue proposed regulations which again would be subject to a public comment period. So EPA’s “deliberative process” could take another two years or more. Meanwhile, last week's announcement will increase pressure on Congress to move ahead on climate change legislation.

2.  Comprehensive climate change legislation  Climate change is near the top of the legislative agenda. In the Senate, Energy and Public Works Committee Chairman Barbara Boxer (D-CA) says she’ll do her best to work with anyone who seeks to move legislation quickly.  The House Energy and Commerce Committee is holding hearings now on a draft released by Chairman Rep. Henry Waxman (D-CA) and Rep. Ed Markey (D-MA) that proposes a mandatory cap-and-trade system to reduce greenhouse gas emissions.

The House Agriculture Committee wants a seat at the table on climate change, too. Committee staffers are currently reviewing stakeholder responses to a 29-question survey regarding the role of agriculture and forestry in a carbon reduction program. The input will be used in “crafting principles that could be part of any subsequent legislation,” explained Ag Committee Chairman Collin Peterson, who says the panel will launch its own hearings on the issue in the next few weeks.

3.  EPA does not appeal court decision on pesticide applications  The U.S. Justice Department recently announced it will not appeal a federal court decision that could eventually require farmers to seek permits from the EPA for all pesticide applications and open the door to citizen lawsuits.  The U.S. Court of Appeals 6th Circuit issued the decision on the case, National Cotton Council vs. EPA, in January, nullifying an earlier EPA ruling that allowed chemical applications to be regulated under existing federal pesticide regulations. Instead, the pesticides applied in or near waterways will now be classified under the Clean Water Act. The change, if allowed to stand, carries significant implications for agriculture as a user of pesticides unable to completely control runoff caused by rainfall. 

A wide range of other beneficial pest control activities could be subjected to lawsuits from activists claiming that the use of pesticides is prohibited under the Clean Water Act unless authorized by permit.  This is of great concern to mosquito control officials and pest managers for forests, recreational waterways, irrigation canals and parks. 

In a March 6, 2009 letter, Agriculture Secretary Tom Vilsack asked EPA Administrator Lisa Jackson to seek a rehearing and request reversal of the 6th Circuit's decision. Senate Agriculture Committee Chairman Tom Harkin, (D-IA) and Ranking Member Saxby Chambliss (R-GA) weighed in with a similar letter.  But those requests were rebuffed, and the EPA has indicated they would be requesting a two-year implementation plan for the ruling. 

4.  EPA seeks public comment on raising the ethanol blend level to E15  EPA's broad reach into agriculture also is evident in its renewable fuel mandate authorities.  EPA is currently seeking public comment on a waiver application submitted by representatives of the ethanol industry to authorize up to 15 percent ethanol blends with gasoline.  The 30-day comment period will run through at least May 20, 2009. By law, the EPA is required to grant or deny the request no later than December 1, 2009.  Since 1978, the limit has been a 10 percent volume ethanol blend (E10) for conventional (non flex-fuel) vehicles.

According to the EPA release, the applicants contend that increasing the blend rate is needed to bring greater investment to next generation biofuels technologies and commercialization.  And the higher blend rate is arguably critical to fulfilling the 2007 Energy Independence and Security Act's renewable fuel mandates.  Opponents (typically environmental and consumer groups and small engine and car manufacturers) counter that the increased blend rate might damage pollution control equipment, reduce air quality, and undermine vehicle and equipment performance and warranties.

5.  New environmental and climate position at USDA   Agriculture Secretary Vilsack announced last week the creation of a new environmental and climate position in his inner office.  Robert Bonnie will serve as Senior Advisor to the USDA Secretary for Environment and Climate.   Referencing that two out of the three key goals of President Obama for USDA are tied to the environment, Vilsack will rely on Bonnie to help guide broad natural resource and climate policy and program decisions.  Bonnie has worked for the Environmental Defense Fund (EDF) for over 14 years with extensive experience in carbon credit programs and conservation initiatives for endangered species.

Independently, each of the above should be important to agriculture, but taken collectively they are evidence of an intensifying regulatory landscape for the industry.  Every part of agriculture - from crop and livestock production, food processing and manufacturing to alternative energy production - is affected by these developments.  Increasingly, EPA will be shaping environmental and climate policy that directly affects agriculture.  Climate change legislation and related programs will be developed and implemented - it's not a matter of if, but when and what form.  Agriculture must communicate with the new political and policy leaders, engage in the policy formation and influence more beneficial rather than harmful outcomes for the industry.
 

The American Recovery and Reinvestment Act of 2009 (ARRA) provides involuntarily terminated individuals (and their qualifying dependents) who experience COBRA qualifying events between September 1, 2008 and December 31, 2009 with a 65 percent subsidy on their COBRA premiums.  On March 31, the Treasury Department issued eagerly awaited guidance on the definition of "involuntary termination" for this purpose.

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Serendipitous timing or well-planned launch, the Energy Systems Network (ESN) launched today at a press conference attended by Governor Daniels. The ESN is an economic development initiative for the clean-technology sector. ESN is the latest economic development initiative under the Central Indiana Corporate Partnership, which also houses Conexus (the manufacturing/logistics initiative) and BioCrossroads (life sciences). The dialogue on clean energy received a boost this week with the introduction of the Waxman-Markey comprehensive energy legislation. Playing off the theme that carbon-capture legislation is coming, even as early as this session, Jim Rogers, Duke Energy President and CEO, highlighted the need for clusters addressing energy technology by saying that groups like the ESN need to connect and convene in order to solve the energy issues facing not only our generation, but generations to come. Highlighting his Princeton, Ind., roots and his grandson at Purdue, Mr. Rogers stated that Indiana has the configuration of technology companies, know-how and passion to turn energy vision to reality. Committing $1M in funds from Duke over three years, Duke is a partner, with IPL and others, in one of the first ESN initiatives announced, the power plug-in initiative, to create a vehicle system connected to the smart grid. Allison Transmission, Cummins and EnerDel lead the contributors to a Hoosier heavy hybrid program for medium and heavy duty trucks. Governor Daniels reminded the audience that there are not enough BTUs from these sources to replace coal, so don't think Indiana is not going to be a player in the energy economy, but that these technologies are an important supplement and a driver of jobs and the economy in Indiana. An all-star board including Mr. Rogers, Mike Hudson of I-Power, President Dr. Cordova of Purdue, Charles Gassenheimer of EnerOne and others joined the Governor and Mr. Rogers at the event. Joe Loughrey, formerly of Cummins, announced that he will chair the ESN.

Most business owners eventually deal with the issue of their company's worth, whether in establishing a strike price for options or in trying to sell or raise money for their companies. Stating the obvious, the value is what a willing buyer would be willing to pay and a willing seller would accept. That said, business owners are often understandably frustrated when they see the lack of objectivity in determining the value of their business. Unfortunately, like valuing baseball cards, valuing a business is less of a science than an art.

This is not to say that valuations do not have mathematical explanations, nor that there are not industry starting points (as discussed below), but all of that is academic without a willing buyer or investor making a real offer. Using the right advisors, particularly valuations experts, can add to your bargaining leverage, ground negotiations on both sides, offer a variety of creative methods and financing options, and introduce new potential investors.

There are several well-accepted methods of valuing a company in both an investment and a capital raise context. Buyers and investors often use one of the following valuation methodologies: (i) a negotiated multiple of EBITDA (earnings before interest, taxes, depreciation and amortization); (ii) a discounted cash flow analysis (which is often used in the leveraged buy-out setting where acquisition debt payments need to be covered from free cash flows); and (iii) market comparables (where comparable businesses are identified and their stated valuations are used as a basis, and differentiating your business may be the primary point of negotiation). A good valuation expert can help identify other valuation methods that would be most favorable to your company.

The different methodologies rarely have the same outcome. The above methods are all attempts to create some kind of baseline which can be useful to both buyers or investors and sellers.