PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
MEMORANDUM
TO: File — Nexford Industrial Holdings Inc. / Pinnacle Metal Fabricators LLC Asset Acquisition
FROM: Naomi Petersen and Ryan Kowalski, Calderwood & Harkness LLP
REVIEWED BY: Oliver Mackenzie, Partner, Calderwood & Harkness LLP
DATE: October 24, 2023
RE: Deal Summary Memorandum — Asset Acquisition of Substantially All Assets of Pinnacle Metal Fabricators LLC by Nexford Industrial Holdings Inc.
Matter No.: 1005-00006
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I. Executive Summary
This memorandum is an internal document prepared by Calderwood & Harkness LLP for purposes of summarizing the key deal terms, material diligence findings, identified risk factors, and closing mechanics in connection with the completed asset acquisition of substantially all of the assets of Pinnacle Metal Fabricators LLC by Nexford Industrial Holdings Inc. This memorandum is intended solely for the use of the Calderwood & Harkness LLP deal team and, as appropriate, the client and its private equity sponsor, Bramblewood Capital Partners, LP. This memorandum is protected by the attorney-client privilege and constitutes attorney work product.
Buyer. Nexford Industrial Holdings Inc. ("Nexford" or "NIH") is a Delaware corporation headquartered at 4200 West Lake Shore Drive, Suite 800, Chicago, Illinois 60604. Nexford operates as a diversified manufacturing platform focused on precision metals, engineered components, and specialty fabrication, generating last-twelve-months ("LTM") revenue of approximately $285 million across six operating subsidiaries. Nexford is majority-owned by Bramblewood Capital Partners, LP ("Bramblewood" or "BCP"), a Chicago-based middle-market private equity fund, which holds approximately 78% of Nexford's equity. The Bramblewood deal partner responsible for the Nexford platform is Catherine E. Moreau, who serves as a Board Observer.
Seller. Pinnacle Metal Fabricators LLC ("Pinnacle" or "PMF") is an Indiana limited liability company located at 1127 Industrial Parkway, Hammond, Indiana 46320. Founded in 2006 by Gerald T. Brennan, Pinnacle is a custom metal fabrication business specializing in structural steel, aluminum, and stainless-steel components for commercial construction, infrastructure, and industrial OEM end-markets. As of the twelve months ended June 30, 2023, Pinnacle generated revenue of approximately $18.4 million and Adjusted EBITDA of approximately $3.7 million, representing a 20.1% Adjusted EBITDA margin. Pinnacle employs 74 full-time employees.
Transaction Type. The transaction was structured as an asset purchase, pursuant to which Nexford acquired substantially all of the assets of Pinnacle, subject to the assumption of certain specified liabilities. The definitive Asset Purchase Agreement (the "APA") is governed by New York law.
Purchase Price. The total purchase price for the transaction was $30,000,000, consisting of (i) a closing cash payment of $24,000,000 and (ii) a performance-based earnout of up to $6,000,000, payable in two installments over two twelve-month post-closing measurement periods, contingent on the achievement of specified EBITDA targets. Of the $24,000,000 closing cash payment, $3,000,000 was deposited into an indemnification escrow account held by Commonwealth Escrow Services Inc., resulting in net closing cash to the Seller members of $21,000,000.
Implied Valuation. On total consideration (assuming full earnout achievement), the transaction implies a valuation of approximately 8.1x LTM Adjusted EBITDA ($30,000,000 ÷ $3,700,000). On closing cash consideration alone, the implied valuation is approximately 6.5x LTM Adjusted EBITDA ($24,000,000 ÷ $3,700,000). These multiples are consistent with recent comparable transactions in the specialty metals fabrication sector and reflect the premium associated with Pinnacle's strong margin profile, established customer relationships, and strategic positioning in Midwest infrastructure end-markets.
Timeline and Closing. The engagement was opened and the Letter of Intent was executed on July 11, 2023. The exclusivity period ran from July 11, 2023 through September 15, 2023, a period of approximately 66 days. Due diligence was substantially completed by August 25, 2023. The APA was executed on September 5, 2023. The transaction closed on October 24, 2023, four days after the original target closing date of October 20, 2023, due to a delay in obtaining final title clearance on certain equipment included in the Acquired Assets.
Counsel. Calderwood & Harkness LLP served as buyer's counsel throughout the transaction. Halverson Burke & Crane LLP (Thomas A. Gilroy, lead partner) served as seller's counsel.
Strategic Rationale. The Pinnacle acquisition extends Nexford's manufacturing capabilities into heavy-gauge structural steel and aluminum fabrication for Midwest infrastructure end-markets, a segment that complements Nexford's existing precision metals and engineered components businesses. The acquisition represents the fifth tuck-in acquisition completed by Nexford since Bramblewood's acquisition of the platform in 2019, consistent with Nexford's disciplined buy-and-build strategy.
II. Parties
A. Buyer — Nexford Industrial Holdings Inc.
Nexford Industrial Holdings Inc. is a corporation duly organized and existing under the laws of the State of Delaware. Its Employer Identification Number is 84-3291047. Nexford maintains its principal executive offices at 4200 West Lake Shore Drive, Suite 800, Chicago, Illinois 60604.
Nexford operates as a diversified manufacturing platform focused on precision metals, engineered components, and specialty fabrication. The company generates LTM revenue of approximately $285 million across six operating subsidiaries, each of which serves distinct but complementary end-markets within the broader industrial and manufacturing sectors. Nexford's executive leadership team includes Marcus R. Haverford, Chief Executive Officer; Danielle K. Cho, Chief Financial Officer; and Philip M. Stanhope, General Counsel.
Since Bramblewood Capital Partners' acquisition of the Nexford platform in 2019, the company has pursued a disciplined buy-and-build strategy, completing four tuck-in acquisitions prior to the Pinnacle transaction. These acquisitions have expanded Nexford's geographic footprint, broadened its manufacturing capabilities, and deepened its presence in key end-markets. The Pinnacle acquisition represents the fifth such tuck-in and extends Nexford's capabilities into heavy-gauge structural steel and aluminum fabrication for Midwest infrastructure end-markets, an area of strategic importance given the anticipated increase in infrastructure spending across the region.
B. Seller — Pinnacle Metal Fabricators LLC and Its Members
Pinnacle Metal Fabricators LLC is a limited liability company duly organized and existing under the laws of the State of Indiana. Its Employer Identification Number is 27-1684352. Pinnacle's entity identification number with the Indiana Secretary of State is 2006041500237. Its registered agent is Hoosier Registered Agents Inc., located at 201 South Capitol Avenue, Indianapolis, Indiana 46225.
Pinnacle was founded in 2006 by Gerald T. Brennan, a veteran of the structural metals industry with over 30 years of experience in custom metal fabrication, project management, and client development. Since its founding, Pinnacle has established itself as a reliable provider of custom metal fabrication services, specializing in structural steel, aluminum, and stainless-steel components for commercial construction, infrastructure, and industrial OEM customers. As of the twelve months ended June 30, 2023, Pinnacle generated revenue of approximately $18.4 million and Adjusted EBITDA of approximately $3.7 million, representing a 20.1% Adjusted EBITDA margin. The company employs 74 full-time employees, comprising 42 shop floor personnel, 18 field installation personnel, and 14 office and management staff.
The members of Pinnacle, together with their respective membership interests and roles, are as follows:
Gerald "Gerry" T. Brennan — Managing Member, holding a 65% membership interest. Mr. Brennan is the founder of Pinnacle and has served as its Managing Member since inception. He has over 30 years of experience in the structural metals industry and maintains deep relationships with Pinnacle's key customers. Pursuant to the Transition Services Agreement described in Section VIII below, Mr. Brennan will serve as a transition consultant to Nexford for a period of 12 months following the closing.
Sandra L. Brennan — Member, holding a 20% membership interest. Ms. Brennan is the spouse of Gerald Brennan and has served in a bookkeeping and office administration capacity for Pinnacle. Ms. Brennan was not retained by Nexford following the closing but is subject to certain restrictive covenants as described in Section VIII below.
Derek J. Kopp — Member, holding a 15% membership interest. Mr. Kopp has served as Pinnacle's Vice President of Operations since 2012 and oversees day-to-day shop floor operations, production scheduling, and quality control. Mr. Kopp has been retained by Nexford as Plant Manager pursuant to an employment agreement described in Section VIII below.
C. Sponsor — Bramblewood Capital Partners, LP
Bramblewood Capital Partners, LP is a Delaware limited partnership with its principal office located at 200 South Wacker Drive, Suite 3100, Chicago, Illinois 60606. Bramblewood is a middle-market private equity fund focused on investments in the industrials, business services, and specialty distribution sectors.
Bramblewood's Fund III, with total committed capital of approximately $1.2 billion, is the investment vehicle through which Bramblewood holds its interest in Nexford. The Managing Partner of Bramblewood is Liam S. Ashford. The Deal Partner responsible for the Nexford platform investment is Catherine E. Moreau, who serves as a Board Observer on the Nexford board of directors. Bramblewood acquired Nexford in 2019 for an enterprise value of approximately $190 million and currently holds approximately 78% of Nexford's equity.
Throughout the Pinnacle acquisition process, Ms. Moreau was actively involved in deal evaluation, diligence oversight, and purchase price negotiations. Bramblewood's investment thesis for the Pinnacle acquisition centered on the opportunity to expand Nexford's addressable market into heavy-gauge structural steel and aluminum fabrication for infrastructure end-markets, an area benefiting from favorable secular tailwinds, including anticipated federal and state infrastructure spending programs.
D. Advisors and Counterparties
The following advisors and counterparties were engaged in connection with the transaction:
Buyer's Counsel: Calderwood & Harkness LLP. The deal team consisted of Oliver Mackenzie (Responsible Partner), Harrison Wexford (Billing Partner), Naomi Petersen (Lead Associate), and Ryan Kowalski (Working Associate). The firm's address is 120 South LaSalle Street, Suite 4500, Chicago, Illinois 60603.
Seller's Counsel: Halverson Burke & Crane LLP. The lead partner was Thomas A. Gilroy, with Jessica N. Farrow serving as associate counsel. Halverson Burke & Crane represented the Seller and its members in connection with all aspects of the transaction, including negotiation of the APA, disclosure schedules, ancillary agreements, and closing deliverables.
Buyer's Lender: Greystone National Bank, N.A. The primary contact was Andrew F. Liang, Relationship Manager, who coordinated the lender consent process and the revolver draw at closing.
Escrow Agent: Commonwealth Escrow Services Inc. The primary contact was Margaret H. Velasquez. Commonwealth Escrow Services holds the $3,000,000 indemnification escrow pursuant to the terms of the Escrow Agreement dated October 24, 2023.
Financial Diligence Advisor: Whitfield & Pryor LLP. Robert C. Underhill served as Engagement Partner and oversaw the quality-of-earnings analysis and working capital assessment performed in connection with the transaction.
Environmental Consultant: Clearpath Environmental Advisors Inc. Elena M. Rivas served as Project Manager for the Phase I Environmental Site Assessment of the Pinnacle facility at 1127 Industrial Parkway, Hammond, Indiana.
R&W Insurance Broker: Ashford & Meridian Insurance Brokers LLC. Nathan R. Caldwell served as the primary broker in procuring the representations and warranties insurance policy for the transaction.
R&W Insurance Carrier: Sentinel Specialty Insurance Company. The policy was issued under Policy Number SSI-RW-1032-00004 and provides coverage for breaches of representations and warranties made by the Seller in the APA.
Earnout Dispute Accountant: Calder & Fitch LLP, Indianapolis, Indiana. To be engaged in the event that a dispute arises with respect to the calculation of earnout payments under the APA. Calder & Fitch has been pre-agreed by the parties as the independent accounting firm for purposes of the earnout dispute resolution mechanism.
III. Deal Structure and Purchase Price
A. Transaction Type
The transaction was structured as an asset purchase, pursuant to which Nexford acquired substantially all of the assets of Pinnacle in exchange for the purchase price described below. The transaction was not structured as a purchase of membership interests or other equity interests in Pinnacle. Because the transaction was structured as an asset purchase at the entity level, no Section 338(h)(10) election was required or applicable; Nexford receives a stepped-up tax basis in the acquired assets by operation of the asset purchase structure itself. The APA and all ancillary agreements are governed by and construed in accordance with the laws of the State of New York, without regard to conflicts-of-law principles that would result in the application of the laws of any other jurisdiction.
B. Acquired Assets
Pursuant to Section 2.01 of the APA, Nexford acquired substantially all of the assets of Pinnacle, including, without limitation, the following categories of tangible and intangible assets:
(a) Equipment. All CNC plasma and laser cutting equipment (14 machines in total), together with two overhead bridge cranes, all associated tooling, fixtures, and accessories. These assets constitute the core production equipment of Pinnacle's fabrication operations and were inspected as part of the diligence process.
(b) Rolling Stock. Eight flatbed trucks used for the transportation and delivery of fabricated components, together with three forklifts used in the shop floor and yard operations.
(c) Inventory. All raw materials and work-in-process inventory on hand as of the closing date. The inventory was valued for purposes of the closing working capital adjustment at levels consistent with Pinnacle's historical accounting practices.
(d) Customer Contracts and Backlog. All customer contracts, purchase orders, and associated backlog, which as of the date of signing totaled approximately $7.2 million. This includes, among others, the Master Supply Agreement with Ironclad Bridge & Infrastructure Co. and the Supply Agreement with Calumet Steel Distributors Inc.
(e) Trade Name. The "Pinnacle" trade name and all associated goodwill. While Pinnacle does not own any registered patents or trademarks, the "Pinnacle" trade name is recognized within the Midwest fabrication market and carries commercial value.
(f) Real Property Leasehold Interest. The leasehold interest in the 48,000 square foot fabrication facility located at 1127 Industrial Parkway, Hammond, Indiana 46320, held under a lease with Lakeshore Realty Partners LLC.
(g) Books and Records. All business records, customer lists, vendor lists, production records, quality control documentation, and other books and records related to the operation of the Acquired Business.
(h) Other Assets. All other tangible and intangible assets used in or related to the operation of Pinnacle's business, including permits, licenses, computer systems, and office furniture and equipment.
C. Excluded Assets
Pursuant to Section 2.02 of the APA, the following categories of assets were excluded from the transaction and retained by Pinnacle and its members:
(a) All cash and cash equivalents held by Pinnacle as of the closing date.
(b) All member distributions receivable as of the closing date.
(c) Certain pre-closing tax refunds attributable to periods ending prior to the closing date.
(d) Personal vehicles titled in the names of individual members of Pinnacle, which were personal property of the members and not assets of the business.
(e) Pinnacle's organizational documents, including its operating agreement, certificate of formation, and corporate minute book, which remain the property of the entity.
D. Assumed Liabilities
Pursuant to Section 2.03 of the APA, Nexford assumed the following categories of liabilities in connection with the acquisition:
(a) Trade Payables. Trade accounts payable incurred in the ordinary course of Pinnacle's business, estimated at approximately $1,100,000 as of the closing date. These trade payables represent amounts owed to Pinnacle's suppliers and vendors for materials, services, and other operating expenses.
(b) Accrued Employee Vacation. Accrued but unpaid vacation obligations for Pinnacle employees retained by Nexford, estimated at approximately $186,000 as of the closing date.
(c) Post-Closing Contract Obligations. All obligations arising under the assumed customer contracts, the facility lease, and other assumed contracts, in each case solely to the extent such obligations arise or relate to periods after the closing date.
All other liabilities of Pinnacle, including without limitation any pre-closing tax liabilities, product liability claims arising from pre-closing activities, ERISA or employee benefit obligations not expressly assumed, and any undisclosed liabilities, were retained by Pinnacle and its members as Excluded Liabilities under the APA.
E. Purchase Price Components
The total purchase price for the transaction was structured as follows:
The $3,000,000 indemnification escrow holdback was deducted from the $24,000,000 closing cash payment and deposited with Commonwealth Escrow Services Inc. on the closing date, to be held pursuant to the terms of the Escrow Agreement for the purpose of securing Seller's indemnification obligations under the APA. The escrow is subject to release as described in Section V.C below.
F. Implied Valuation Metrics
Based on the purchase price components and Pinnacle's LTM Adjusted EBITDA of approximately $3,700,000, the transaction implies the following valuation multiples:
These multiples are within the range of comparable transactions observed in the specialty metals fabrication sector, where enterprise value-to-EBITDA multiples for businesses with similar scale, margin profile, and end-market exposure have generally ranged from 6.0x to 9.0x in recent years.
IV. Earnout Mechanics
A. Overview
The APA provides for a contingent earnout payment of up to $6,000,000 in the aggregate, payable in two installments of up to $3,000,000 each, over two twelve-month post-closing measurement periods. The earnout is structured as a performance-based mechanism tied to the EBITDA of the Acquired Business (as defined and calculated in accordance with the methodology set forth in Exhibit C to the APA, the "Acquired Business EBITDA Methodology"). The purpose of the earnout is to bridge the approximately $6 million gap between Nexford's and Pinnacle's respective views of appropriate enterprise value, based on differing expectations regarding Pinnacle's near-term EBITDA growth trajectory. The earnout also serves to align the interests of Gerald Brennan, the principal seller, with the continued success of the business during the post-closing transition period.
The EBITDA definition for purposes of the earnout calculation follows the methodology set forth in Exhibit C to the APA, which is designed to be applied consistently with Pinnacle's historical accounting practices. Importantly, the methodology excludes any corporate-level allocations imposed by Nexford on the Acquired Business, ensuring that the earnout EBITDA calculation reflects the standalone performance of the business rather than any overhead charges attributable to the parent company's operations.
B. Measurement Period 1
The first earnout measurement period covers the twelve-month period ending October 31, 2024. The target EBITDA for this period is $4,200,000, which represents approximately 13.5% growth over Pinnacle's LTM Adjusted EBITDA of $3,700,000. The earnout payment mechanics for this measurement period are as follows:
(i) If Actual EBITDA for the period equals or exceeds the target of $4,200,000, the full earnout payment of $3,000,000 is payable.
(ii) If Actual EBITDA for the period falls between $3,700,000 and $4,200,000, the earnout payment is calculated on a linear pro-rata basis using the following formula:
Earnout Payment = $3,000,000 × ((Actual EBITDA − $3,700,000) ÷ ($4,200,000 − $3,700,000))
(iii) If Actual EBITDA for the period falls below $3,700,000, no earnout payment is due for the period, and the $3,000,000 allocated to this period is forfeited.
The earnout payment for Measurement Period 1, if any, is due within 90 calendar days after the end of the measurement period — i.e., on or before January 29, 2025.
C. Measurement Period 2
The second earnout measurement period covers the twelve-month period ending October 31, 2025. The target EBITDA for this period is $4,800,000, which represents approximately 14.3% growth over the Measurement Period 1 target. The earnout payment mechanics for this measurement period are as follows:
(i) If Actual EBITDA for the period equals or exceeds the target of $4,800,000, the full earnout payment of $3,000,000 is payable.
(ii) If Actual EBITDA for the period falls between $4,200,000 and $4,800,000, the earnout payment is calculated on a linear pro-rata basis using the following formula:
Earnout Payment = $3,000,000 × ((Actual EBITDA − $4,200,000) ÷ ($4,800,000 − $4,200,000))
(iii) If Actual EBITDA for the period falls below $4,200,000, no earnout payment is due for the period, and the $3,000,000 allocated to this period is forfeited.
The earnout payment for Measurement Period 2, if any, is due within 90 calendar days after the end of the measurement period — i.e., on or before January 29, 2026.
D. Earnout Operating Covenants and Structuring Rationale
The APA includes certain operating covenants designed to protect the integrity of the earnout calculation and ensure that the Acquired Business is operated in a manner that provides a reasonable opportunity for the earnout targets to be achieved. Specifically, Nexford has agreed to operate the Acquired Business in good faith, consistent with past practice. Nexford is under no affirmative obligation to maximize the earnout payments, but the APA provides that Nexford may not take any action with the primary purpose of reducing or eliminating earnout payments. This covenant was a key point of negotiation between the parties and reflects a balanced approach that provides the Seller with reasonable protection against buyer manipulation of the earnout metrics while preserving Nexford's managerial discretion to operate the business in accordance with its broader strategic and operational priorities.
The structuring rationale for the earnout is as follows. During the course of negotiations, the parties identified an approximately $6 million gap between Nexford's and Pinnacle's respective views of the appropriate enterprise value for the business. Nexford's valuation was based on a more conservative assessment of Pinnacle's near-term growth prospects, while Pinnacle (and in particular Mr. Brennan) believed that the business was on a trajectory to deliver meaningfully higher EBITDA in the coming years. The earnout was structured to bridge this gap by allowing the Seller to earn additional consideration if the business achieves the growth targets contemplated by the Seller's more optimistic projections. In addition, the earnout serves as a retention and incentive mechanism for Mr. Brennan during the 12-month transition period, as the achievement of the earnout targets is closely tied to the continued customer relationships and operational knowledge that Mr. Brennan brings to the business. Earnout payments, if earned, will be funded from Nexford's operating cash flow.
E. Dispute Resolution
In the event of a dispute regarding the calculation of earnout payments, the APA provides for the following dispute resolution mechanism:
(i) Within 30 calendar days following the delivery of Nexford's earnout calculation statement for the applicable measurement period, the Seller may deliver a written objection notice specifying in reasonable detail the items in dispute and the Seller's proposed alternative calculation.
(ii) Following delivery of the objection notice, the parties shall engage in good-faith negotiations for a period of 30 calendar days in an effort to resolve the dispute.
(iii) If the dispute remains unresolved following the expiration of the 30-day negotiation period, the disputed items shall be submitted to Calder & Fitch LLP, Indianapolis, Indiana, which has been pre-agreed by the parties as the independent accounting firm for purposes of this mechanism. The independent accountant shall determine the disputed items in accordance with the Acquired Business EBITDA Methodology set forth in Exhibit C to the APA.
(iv) The determination of the independent accountant shall be final and binding on the parties, absent manifest error. The fees and expenses of the independent accountant shall be borne by the non-prevailing party, or allocated between the parties in proportion to the extent to which the independent accountant's determination differs from each party's proposed calculation.
V. Indemnification Framework
A. General Indemnification Terms
The indemnification provisions of the APA, set forth in Article IX thereof, provide that each party shall indemnify, defend, and hold harmless the other party and its affiliates, directors, officers, employees, agents, and representatives from and against any losses, damages, liabilities, costs, and expenses (including reasonable attorneys' fees) arising out of or resulting from any breach of the indemnifying party's representations, warranties, covenants, or obligations under the APA, subject to the following limitations:
Cap. The aggregate liability of the Seller (and its members) for indemnification claims under the APA is capped at 30% of the total Purchase Price, or $9,000,000. This cap applies to all claims other than those arising from breaches of Fundamental Representations, tax representations, or fraud, which are subject to separate and broader limitations or none at all.
Basket. Claims are subject to a tipping basket (with full dollar-one recovery once breached) equal to 1% of the total Purchase Price, or $300,000. The tipping structure provides that once the aggregate amount of indemnifiable losses exceeds the $300,000 threshold, the indemnified party is entitled to recover all losses from the first dollar, not merely losses in excess of the basket amount.
Mini-Basket (De Minimis). Individual claims with a value below $25,000 are excluded from the calculation of the basket and are not recoverable under the general indemnification provisions. This de minimis threshold is intended to prevent nuisance claims and to ensure that the indemnification mechanism is reserved for claims of material significance.
B. Survival Periods
The representations, warranties, covenants, and agreements set forth in the APA survive the closing as follows:
General Representations and Warranties. All representations and warranties of the parties (other than Fundamental Representations and tax representations) survive for a period of 18 months from the closing date — i.e., from October 24, 2023 through April 24, 2025. Following the expiration of this survival period, no claims may be asserted for breaches of general representations and warranties, except with respect to claims for which written notice has been duly delivered prior to expiration.
Fundamental Representations. Representations and warranties relating to organization, authority, title to assets, and brokers (the "Fundamental Representations") survive for a period of 36 months from the closing date — i.e., through October 24, 2026. The extended survival period for Fundamental Representations reflects the heightened importance of these representations to the integrity of the transaction and the buyer's title to the acquired assets.
Tax Representations. Representations and warranties relating to tax matters survive until 60 days after the expiration of the applicable statute of limitations (including any extensions thereof) with respect to the underlying tax matter. This approach ensures that Nexford retains the ability to seek indemnification for tax-related breaches for so long as the relevant tax authorities retain the ability to assess additional taxes.
Fraud Claims. Claims based on fraud survive indefinitely and are not subject to any cap, basket, or other limitation. This carve-out reflects the fundamental principle that no party should be permitted to benefit from or shield itself behind a contractual limitation where its conduct rises to the level of intentional fraud.
C. Indemnification Escrow
An escrow in the amount of $3,000,000 was established at closing and deposited with Commonwealth Escrow Services Inc. pursuant to the terms of the Escrow Agreement dated October 24, 2023. The escrow serves as the primary source of recovery for indemnification claims asserted by Nexford against the Seller and its members under the APA.
The escrow is subject to release to the Seller members, net of any amounts subject to pending or unresolved indemnification claims, on or after April 24, 2025, which is 18 months following the closing date and coincides with the expiration of the general representation and warranty survival period. Any amounts subject to pending claims at the time of the scheduled release will remain in escrow until such claims are resolved, at which point the applicable portion of the escrow will be released to the Seller members or disbursed to Nexford, as applicable.
D. Representations and Warranties Insurance
In addition to the contractual indemnification and escrow arrangements described above, Nexford procured a representations and warranties insurance policy (the "R&W Policy") to provide an additional layer of protection against losses arising from breaches of the Seller's representations and warranties in the APA. The key terms of the R&W Policy are as follows:
Carrier: Sentinel Specialty Insurance Company
Policy Number: SSI-RW-1032-00004
Policy Limit: $9,000,000, which equals the indemnification cap under the APA
Retention: $750,000, which serves as the self-insured retention under the policy and is satisfied first from the indemnification escrow before coverage under the R&W Policy is triggered. This means that for any covered claim, Nexford must first recover up to $750,000 from the escrow (or directly from the Seller) before the R&W Policy responds.
Premium: Approximately $225,000, representing a rate of approximately 2.5% on the $9,000,000 policy limit. The premium was borne entirely by Nexford as the insured party.
Broker: Ashford & Meridian Insurance Brokers LLC (Nathan R. Caldwell, lead broker)
The R&W Policy provides Nexford with full recourse up to the $9,000,000 cap for covered representation and warranty breaches, even in circumstances where the Seller's ability or willingness to satisfy indemnification claims may be limited. By providing the R&W Policy, the transaction structure effectively limits the Seller's practical exposure to the $3,000,000 escrow amount while ensuring that Nexford has access to the full $9,000,000 indemnification cap through the combination of the escrow and the insurance policy.
VI. Financing
A. Sources of Closing Funds
The $24,000,000 closing cash payment was funded from two sources:
No equity contribution from Bramblewood Capital Partners or any other investor was required or made in connection with the closing. The funding structure was designed to preserve Nexford's balance sheet flexibility while maintaining adequate revolver availability for ongoing working capital and operational needs.
B. Credit Facility Details
Nexford is party to a Senior Secured Revolving Credit Facility with Greystone National Bank, N.A. (as Administrative Agent and sole lender), pursuant to a Credit Agreement originally dated March 15, 2021, as amended and restated on February 10, 2023 (the "Credit Agreement"). The key terms of the facility are as follows:
Facility Size: $75,000,000 senior secured revolving credit facility.
Prior Outstanding Balance: As of the date immediately preceding the closing, the outstanding balance on the revolving credit facility was $32,000,000.
Closing Draw: $20,000,000, drawn on the closing date to fund a portion of the closing cash payment.
Pro Forma Revolver Availability: Following the closing draw, Nexford's pro forma revolver availability is calculated as follows: $75,000,000 (total facility) − $32,000,000 (prior outstanding) − $20,000,000 (closing draw) = $23,000,000. This level of availability provides Nexford with adequate liquidity for ongoing working capital requirements, capital expenditures, and potential future acquisitions.
C. Lender Consent
Section 7.04 of the Credit Agreement requires Nexford to obtain the prior written consent of Greystone National Bank, N.A. (as Administrative Agent) for acquisitions with an aggregate consideration exceeding $5,000,000. Because the total consideration for the Pinnacle transaction (including the maximum earnout) is $30,000,000, the lender consent requirement was triggered.
Nexford submitted its consent request to Greystone on September 21, 2023, accompanied by a summary of the transaction terms, the proposed sources and uses of funds, and pro forma financial projections reflecting the impact of the acquisition on Nexford's consolidated financial position. Consent was received from Greystone National Bank, N.A. on October 6, 2023, addressed to Nexford Industrial Holdings Inc., attention Danielle K. Cho, Chief Financial Officer. The primary contact at Greystone for purposes of the consent process and the closing draw was Andrew F. Liang, Relationship Manager. A copy of the lender consent letter is included as Appendix F to this memorandum.
D. Earnout Funding
The earnout payments, if earned, are expected to be funded from Nexford's operating cash flow. Based on current projections and the anticipated cash flow generation of the Acquired Business, management does not anticipate that any additional draw on the revolving credit facility will be required to fund earnout payments. However, in the event that an additional draw is needed, the $23,000,000 of pro forma revolver availability would be sufficient to fund the maximum aggregate earnout obligation of $6,000,000.
VII. Material Diligence Findings
A. Financial Due Diligence
Financial due diligence was performed by Whitfield & Pryor LLP, with Robert C. Underhill serving as Engagement Partner. The scope of the financial diligence engagement included a quality-of-earnings analysis, a working capital analysis, a review of Pinnacle's financial statements and accounting practices, and an assessment of the company's revenue quality and customer composition.
The quality-of-earnings analysis confirmed Pinnacle's LTM revenue of approximately $18.4 million and LTM Adjusted EBITDA of approximately $3.7 million, resulting in an Adjusted EBITDA margin of approximately 20.1%. In the course of the analysis, Whitfield & Pryor identified and adjusted for certain owner-related personal expenses that had been run through the business, including personal automobile expenses, certain family members' health insurance premiums, and other non-recurring or non-business items. These adjustments were reflected in the derivation of the Adjusted EBITDA figure used for valuation and earnout target-setting purposes.
Pinnacle's customer backlog of approximately $7.2 million as of the signing date provided meaningful near-term revenue visibility and supported the reasonableness of the EBITDA projections underlying the earnout targets. The backlog was concentrated across a diversified base of project-based and recurring customers, with the Ironclad Bridge & Infrastructure Co. relationship representing a significant but not dominant share (discussed further in Section VII.C below).
The working capital analysis confirmed that Pinnacle's normalized working capital levels were consistent with the working capital targets and adjustment mechanisms set forth in the APA. No material working capital deficiencies or anomalies were identified. A copy of the Whitfield & Pryor Quality of Earnings Report is included as Appendix G to this memorandum.
B. Environmental Due Diligence
A Phase I Environmental Site Assessment of the Pinnacle fabrication facility at 1127 Industrial Parkway, Hammond, Indiana 46320 was conducted by Clearpath Environmental Advisors Inc., with Elena M. Rivas serving as Project Manager. The Phase I ESA was conducted in accordance with ASTM Standard E1527-21.
The assessment did not identify any recognized environmental conditions ("RECs") that would require remediation or that would otherwise give rise to material environmental liability. The facility's operations involve standard metal cutting, welding, and finishing processes, which are consistent with light industrial and fabrication use. A review of the historical use of the property confirmed that the site has been used for industrial and fabrication purposes for an extended period and that there is no history of underground storage tanks, hazardous material releases, or other environmental incidents at the site.
Clearpath did note certain de minimis business environmental risks associated with the facility's operations, including the management and disposal of used cutting fluids and the adequacy of welding fume ventilation systems. However, the assessment confirmed that Pinnacle's practices in these areas are in compliance with all applicable federal, state, and local environmental regulations, and Clearpath did not recommend any further investigation or remediation. A copy of the Clearpath Environmental Advisors Phase I ESA Report is included as Appendix H to this memorandum.
C. Customer Concentration Risk
Financial diligence confirmed that Ironclad Bridge & Infrastructure Co. ("Ironclad") is Pinnacle's largest customer, representing approximately 28% of LTM revenue, or approximately $5.2 million. This level of customer concentration represents a material risk factor, as discussed further in Section XI below. The relationship between Pinnacle and Ironclad is governed by a Master Supply Agreement with a three-year term extending through June 2025. The Master Supply Agreement contains an assignment clause requiring the consent of Ironclad in the event of a change of control or assignment of the agreement. The required consent was obtained from Ironclad prior to closing.
The customer concentration risk associated with Ironclad is mitigated by several factors:
(i) Ironclad has been a customer of Pinnacle since 2011, representing a strong, long-standing commercial relationship of over twelve years. The depth and longevity of this relationship provides a degree of stability and predictability that is not fully captured by the concentration percentage alone.
(ii) Pinnacle possesses specialized capabilities in heavy-gauge structural steel fabrication for infrastructure projects, a niche in which there are a limited number of qualified suppliers in the Midwest region. This specialization creates meaningful switching costs for Ironclad and other infrastructure customers.
(iii) Gerald Brennan's 12-month transition engagement pursuant to the Transition Services Agreement is specifically designed to ensure continuity in customer relationships, with a particular focus on the Ironclad relationship, during the post-closing integration period.
(iv) Pinnacle's customer backlog reflects a growing contribution from non-Ironclad customers, including commercial construction contractors, industrial OEM customers, and other infrastructure end-market participants, which is expected to reduce the concentration over time.
The remaining customer base is diversified across a range of commercial construction, industrial OEM, and infrastructure end-markets, with no single customer other than Ironclad representing more than 8% of LTM revenue.
D. Material Contracts Review
In connection with the diligence process, Calderwood & Harkness reviewed all material contracts of Pinnacle that were to be assumed by Nexford as part of the Acquired Assets. The three most significant assumed contracts are summarized below:
1. Facility Lease. The fabrication facility at 1127 Industrial Parkway, Hammond, Indiana 46320 is leased from Lakeshore Realty Partners LLC (the "Landlord"). The lease covers approximately 48,000 square feet of fabrication and office space and has a 10-year term expiring on December 31, 2028. The base rent is $16.50 per square foot per year, or $792,000 per year ($66,000 per month). The lease is structured on a triple-net (NNN) basis, meaning that the tenant is responsible for property taxes, insurance, and maintenance costs in addition to base rent. The lease required the Landlord's consent to assignment, which was obtained prior to closing. Notably, the lease does not contain a documented renewal option, which is identified as an open item in Section XI below.
2. Master Supply Agreement with Ironclad Bridge & Infrastructure Co. As described in Section VII.C above, this agreement governs Pinnacle's relationship with its largest customer. The agreement has a three-year term extending through June 2025 and provides for the supply of structural steel and aluminum fabricated components for Ironclad's bridge and infrastructure projects. The agreement required consent to assignment, which was obtained prior to closing. Revenue attributable to this agreement represents approximately 28% of Pinnacle's LTM revenue.
3. Supply Agreement with Calumet Steel Distributors Inc. Calumet Steel Distributors Inc. is Pinnacle's primary supplier of raw materials, including structural steel, aluminum sheet and plate, and stainless-steel alloys. The supply agreement provides for an annual volume commitment of approximately $4.8 million and has a two-year term extending through March 2025. The agreement is on standard commercial terms and did not require consent to assignment in connection with the asset purchase.
No change-of-control termination rights were identified in any of the assumed contracts that would be triggered by the asset purchase structure (as opposed to an equity transfer) and that were not addressed by the consent process described above.
E. Legal and Regulatory Matters
The diligence review did not identify any pending or threatened litigation involving Pinnacle or any of its members in their capacity as members. A search of federal and state court dockets in Indiana and Illinois did not reveal any current or recent proceedings.
No filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR") was required in connection with the transaction. The aggregate purchase price falls below the applicable HSR threshold for 2023, which is $111.4 million. Accordingly, no pre-closing waiting period or antitrust review was required.
With respect to Indiana bulk sales law, it is noted that Indiana has not enacted Article 6 of the Uniform Commercial Code, and accordingly there is no statutory bulk sales notice or compliance requirement applicable to the transaction. Notwithstanding the absence of a bulk sales statute, the parties obtained an affidavit from the Seller certifying that there are no undisclosed creditors of Pinnacle whose interests would be adversely affected by the asset transfer. This affidavit provides additional comfort to Nexford regarding the absence of undisclosed liabilities and creditor claims.
With respect to Indiana sales tax, the casual sale of business assets in connection with the sale of a going concern is exempt from Indiana sales tax under Indiana Code § 6-2.5-5-8. Nexford will file Form ST-108E with the Indiana Department of Revenue to claim this exemption.
F. Intellectual Property
The "Pinnacle" trade name was acquired as part of the Acquired Assets. The trade name has been used by the business since its founding in 2006 and is recognized within the Midwest fabrication market. Pinnacle does not own any registered patents or trademarks, and no patent or trademark applications were pending as of the closing date. The trade name is the primary intellectual property asset associated with the business.
The diligence review did not identify any IP infringement claims, whether pending, threatened, or reasonably anticipated, involving Pinnacle or its operations. No third-party intellectual property licenses are material to the operation of the business.
VIII. Employment and Transition
A. Gerald T. Brennan — Transition Services Agreement
Pursuant to a Transition Services Agreement (the "TSA") dated as of October 24, 2023, Gerald T. Brennan will serve as a transition consultant to Nexford for a period of 12 months commencing on the closing date and expiring on October 24, 2024. The key terms of the TSA are as follows:
Compensation. Mr. Brennan will receive compensation of $18,000 per month, representing an annualized amount of $216,000. This compensation reflects the value of Mr. Brennan's customer relationships, institutional knowledge, and operational expertise during the transition period.
Scope of Services. The scope of Mr. Brennan's transition services includes customer relationship management (with a particular focus on the Ironclad Bridge & Infrastructure Co. relationship), operational knowledge transfer to Nexford's management team, employee mentoring and training, and general advisory support as reasonably requested by Nexford.
Restrictive Covenants. Mr. Brennan is subject to restrictive covenants contained in both the TSA and a separate Non-Competition and Non-Solicitation Agreement executed at closing. The restrictive covenants include:
(i) A non-competition covenant for a period of three years from the closing date, prohibiting Mr. Brennan from engaging in any business competitive with the Acquired Business within a 150-mile radius of Hammond, Indiana. This non-compete expires on October 24, 2026.
(ii) A non-solicitation covenant for a period of three years from the closing date, prohibiting Mr. Brennan from soliciting or hiring employees of the Acquired Business or soliciting customers of the Acquired Business. This non-solicit also expires on October 24, 2026.
B. Sandra L. Brennan
Sandra L. Brennan was not retained by Nexford following the closing. Ms. Brennan's responsibilities relating to bookkeeping and office administration will be absorbed by Nexford's shared services organization. Ms. Brennan executed a separate Non-Competition and Non-Solicitation Agreement at closing, pursuant to which she is subject to a two-year non-solicitation covenant prohibiting her from soliciting employees or customers of the Acquired Business for a period of two years from the closing date (expiring October 24, 2025).
C. Derek J. Kopp — Employment Agreement
Derek J. Kopp has been retained by Nexford as Plant Manager of the Acquired Business pursuant to an Employment Agreement dated as of October 24, 2023. The key terms of the Employment Agreement are as follows:
Base Salary. $145,000 per year.
Bonus Eligibility. Mr. Kopp is eligible to participate in Nexford's annual bonus plan, with bonus targets and criteria to be determined by Nexford in its discretion, consistent with the plan's general terms as applied to similarly situated employees.
Restrictive Covenants. Mr. Kopp is subject to an 18-month non-compete covenant and an 18-month non-solicit covenant, each running from the date of termination of employment. These covenants are contained in the Employment Agreement and were negotiated in conjunction with the overall transaction.
D. Workforce Retention
Of Pinnacle's 74 full-time employees, 71 were retained by Nexford following the closing. The three positions that were not retained were administrative positions determined to be redundant with Nexford's existing shared services capabilities. All 42 shop floor employees and all 18 field installation employees were retained, ensuring continuity of the Acquired Business's core production and service delivery capabilities. The 11 retained office and management employees were also transitioned to Nexford employment.
All retained employees were transitioned to Nexford's benefits platform and payroll system effective as of the closing date. Nexford's human resources team coordinated with Pinnacle's management in advance of the closing to facilitate a smooth transition, including the enrollment of retained employees in Nexford's health insurance, retirement, and other benefit programs.
IX. Tax Considerations and Purchase Price Allocation
A. Structure
As noted in Section III.A above, the transaction was structured as an asset purchase, which provides Nexford with a stepped-up tax basis in the acquired assets equal to the purchase price allocated to each asset category. Because the transaction is an asset purchase rather than an acquisition of membership interests or other equity in Pinnacle, no Section 338(h)(10) election is required or applicable. Pinnacle, as a pass-through entity for federal income tax purposes, will recognize gain on the sale of assets at the member level. Each member's allocable share of the gain will be determined in accordance with Pinnacle's operating agreement and applicable provisions of the Internal Revenue Code.
B. Sales and Use Tax
The casual sale of business assets in connection with the sale of a going concern is exempt from Indiana sales and use tax pursuant to Indiana Code § 6-2.5-5-8. To claim this exemption, Nexford is required to file Form ST-108E (Exemption Certificate for Sales of a Going Concern) with the Indiana Department of Revenue. This filing is identified as a post-closing open item in Section XI below.
C. Purchase Price Allocation