Hirsch/Bedner Associates, a $13-million Santa Monica, Calif., design business, sold itself to a British company in 1989 for $8 million up front, plus the promise of $20 million in cash and in stock from the acquiring company through an earn-out agreement. That agreement tied later payments to Hirsch/ Bedner's success in meeting specified goals over the next few years, explains Watt W. Webb III, Hirsch/Bedner's chief executive.

To secure the deal, Webb made use of a legal document called an unwind agreement, which protects former owners in case any earn-out deal starts to unravel. "Unwinds are a way of hedging a seller's financial risks," explains Gary Mendoza, a principal at the Los Angeles law firm of Riordan & McKinzie.

In Hirsch/Bedner's case, the unwind agreement proved providential. "We easily met our own profitability goals the first year," recalls Webb, "raising net earnings from $800,000 to $1.6 million." But the parent company confessed to Webb that it couldn't meet the earn-out commitment.

According to Mendoza, a well-prepared unwind agreement takes into account several basic issues:

* Repossession of the company. Typically, unwind agreements specify that if an earn-out falls through, the seller will once again take over the stock of the business. "We got our stock back and were able to keep the original $8-million purchase price," Webb reports.

* Restrictions on the buyer's ability to borrow against the value of purchased stock. "This is absolutely essential," Mendoza emphasizes. "If the buyer of Hirsch/Bedner had been able to use its stock as collateral to finance other transactions, the bankers would have had a priority lien on the stock."

* Accounting standards. "Odds are very strong that if an unwind ever gets contested in a court of law, it's going to get contested over accounting matters like the valuation of the stock retransfer," warns Mendoza. "To prevent problems, it's worth involving an accounting firm in planning." Expect to pay up to $100,000 in legal and accounting fees. Webb agrees that this is money well spent. "It's so much cheaper and smarter to think about what can go wrong in advance."

-- Jill Andresky Fraser

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