When closing cash is in doubt

Contracts: KVTT-FM Dallas, KNGY-FM San Francisco, WXCH-FM Hope IN. Just because the buyer in a station transaction says they have, or will have the cash by closing day is no guarantee that they actually will be able to put together the full amount owed. Attorney Erwin Krasnow of Garvey Schubert Barer looks at the ways escrow deposits and other devices are worked into contracts to provide the seller with some protection.

When closing cash is in doubt

By Erwin G. Krasnow (ekrasnow@gsblaw.com)

How do you protect yourself if you doubt whether the buyer has sufficient funds to close the transaction?

Little is gained by including a standard representation and warranty in the acquisition agreement that the buyer is financially qualified.  To get some protection, it is common for sellers to require that the buyer place a sum of money in escrow upon signing the acquisition agreement.  Such an escrow serves as an assured funding mechanism for the payment of "liquidated damages" to the seller in the event that the buyer is unable to close.  ("Liquidated damages" are the amount of damages that a party is required to pay regardless of the actual injury suffered by the non-breaching party.)

Typically, the amount of the escrow deposit (which also quantifies the amount of liquidated damages) is 5% of the purchase price. This is not cast in stone, however. In 2007 and 2008, when Clear Channel sold over 400 small market radio stations, it required buyers to place 10% of the purchase price in escrow and set the amount of liquidated damages at 20% of the purchase price. The rationale for the higher-than-usual escrow deposit and liquidated damages penalty was to make buyers think twice before suffering a stiff financial penalty if they walked from the deal.

The purchase and sale of WXCH-FM, Hope, Indiana, presented an extreme case/ The agreement for Wheel Broadcasting, LLC to sell WXCH to Reising Radio Partners, Inc. for sale of WXCH-FM, Hope, Indiana, included a sure-fire way of making sure that the buyer had the funds to pay the purchase price of $200,000 -- the buyer was required to place the entire $200,000 in an interest-bearing escrow account.

In another unique situation, Flying Bear Media, Inc. structured its sale to Flying Bear Licensing, LLC of KNGY(FM), Alameda, California to require the buyer to place $1 million in escrow.  If the sale failed to close within 60 days of the signing of the APA, the buyer had to choose between forfeiting the $1 million escrow as liquidated damages or escrowing the entire purchase price of $6,550,000 by placing an additional $5,550,000 in escrow.  Thus, if the buyer had a change of heart or did not have sufficient funds to buy the station, seller would pocket $1 million after the passage of 60 days.

Covenant Educational Media, Inc. also took a belt-and-suspenders approach when it entered into an Asset Purchase Agreement with North Texas Public Radio for the sale of KVTT(FM) for $18 million. In addition to the $1 million escrow, Covenant required the buyer “to deposit, or shall cause others to deposit and maintain a cumulative” $17 million cash “in one or more Deposit Accounts pursuant to one or more Deposit Agreement(s)” to be executed by buyer and/or the prospective lenders of buyer. The buyer also is required to provide Covenant with “evidence of such deposits, and the continuance thereof,” throughout the term of the Deposit Account Agreements.

RBR-TVBR note: Now available RBR-TVBR’s ‘2010’ new guide to help chart a course through the treacherous waters of buying, owning and selling radio or television stations.

Click to purchase:  "Profitably Buying and Selling Radio Stations," or 1-800-288-4677, ext. 5022 for $49.95, paperback, $39.95, e-book.

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