Professional Interpretation

Abstract : Some of the milestone dates in a M&A process that parties needs to be aware of include: When the letter of intent (LOI) is signed; When the due diligence data room is required to be ready; When asset appraisals are completed; Removal of conditions precedent; Removal of financing conditions;

Buyer board approval; and, finally, the closing date - when the deal is executed. The DOCVIT team will discuss how to determine the base date for an equity purchase transaction and closing date.

I. The Base Date

A. What is the base date?

The equity transfer base date is a date for equity valuation. The value of the target company’s equity depends on the value of the assets, debts and expect profits, which is in a constant variation. Therefore a static base date is set for evaluation.

B. How does the base date impact M&A transaction

Target Company can no longer distribute profits from the base date as well it can no longer to transfers assets, include but not limited to intangible asset, fix assert and land titles. Furthermore the both parties enters into the surveillance period which means the buyer company could assign an inspector to the target company. Moreover, the base date is also the date to clarify the obligations. The obligations occurs before the base date should bear by the target company and those happens after should be bear by the buyer company.

C. How does the base date relate to the audit date?

The audit date should be the same with the base date. After the base date for the whole equity transaction is determined, the target company’s asset, debt and running conditions requires to be audited. Simply put, the audit date to audit the target company book value on the base date with an exception of preliminary booking price method. Under the preliminary booking price method, the audit date is actually the preliminary equity transfer base date determined by both parties. The audit report is only to make sure the preliminary booking price. In the actual base date for the whole transaction, parties need to make a virtue balance sheet in order to estimate the value of net assets.

D. How does the base date relate to appraisal base date?

Asset appraisal date the base date to evaluate the target company’s asset, and also the certain date for the appraisal conclusion start to be established.  This date is to lay a foundation for the equity transfer considering of the close connection between the value of equity and the value of asset. This date should be carefully chosen to accelerate the whole M&A process. Also for the same purpose, the appraisal date should be determined approximate to the base date.

The five most common ways to value a business are: asset valuation, historical earnings valuation, future maintainable earnings valuation, relative valuation (comparable company and comparable transactions), discounted cash flow (DCF) valuation.

One thing to be noted in the process of appraisal is that the independent third party would not only depend the appraisal result on the audit report, they could take reference from the audit report but also required to conduct a complete independent assessment so to yield the fair value of the assets.

There are two common practices, when the evaluation value method is adopted, the appraisal base date is also the base date for equity purchase transaction. On the other hand, if both parties has determined the equity purchase date in advance, then the appraisal must adopted the accounting and financial data of the base date.

II. Closing date – which date should be set as closing date?

There are many milestone dates during the M&A process. In most cases, however, the closing date is the key milestone when the sale is consummated and the seller actually receives the agreed upon consideration.