SHOS Sears Hometown and Outlet Stores Inc

On August 27, 2019, Sears Hometown and Outlet Stores, Inc. (the “Company”), Franchise Group Newco S, LLC (“Purchaser”), an indirect wholly owned subsidiary of Liberty Tax, Inc. (“Parent”), and, solely for purposes of a performance and payment guarantee on behalf of Purchaser, Parent, entered into an Equity and Asset Purchase Agreement (the “Purchase Agreement”). The Purchase Agreement provides for the sale (the “Outlet Sale”) by the Company to Purchaser of the Company’s Sears Outlet and Buddy’s Home Furnishing Stores businesses (together, the “Outlet Segment”), including substantially all of the assets and liabilities comprising the Outlet Segment. The Outlet Sale is being effected pursuant to the previously-announced Agreement and Plan of Merger, dated as of June 1, 2019, among the Company, Transform Holdco LLC (“Transform”) (a privately held affiliate of ESL Investments, Inc. (together with its investment affiliates, including Edward S. Lampert, “ESL”)) and a wholly owned subsidiary of Transform (“Merger Sub”) (the “Merger Agreement”), which provides for the merger (the “Merger”) of Merger Sub with and into the Company on the terms and subject to the conditions set forth in the Merger Agreement, and which affords the Company the opportunity to market and sell the Outlet Segment to a third party. Concurrently with the entry into the Purchase Agreement, the Company, Transform and Merger Sub entered into a letter agreement (the “Letter Agreement”), which provides that the Merger will, subject to the satisfaction of certain conditions, close (the “Merger Closing”) substantially concurrently with the closing of the Outlet Sale (the “Outlet Closing” and together with the Merger Closing, the “Closings”) and also addresses certain other matters relating to the terms of the Merger Agreement.

The Merger Agreement provides that, at the completion of the Merger, each outstanding share of the Company’s common stock, par value $0.01 per share (the “Company Common Shares”) (other than Company Common Shares (i) owned by ESL or Transform, (ii) held in treasury by the Company or owned by any subsidiary of the Company or (iii) held by stockholders who shall have demanded properly in writing appraisal for such shares in accordance with Section 262 of the Delaware General Corporation Law (the “DGCL”)) will be cancelled and automatically converted into the right to receive an amount in cash equal to $2.25, without interest, subject to an upward adjustment in the event a sale of the Outlet Segment that complies with the requirements of the Merger Agreement (including that such sale must result in at least $97,500,000 of net proceeds (the “Minimum Sale Proceeds”) to the Company) is successfully completed (the “Merger Consideration”). In such circumstance, the base merger consideration of $2.25 per Company Common Share will be increased by an amount equal to (i) the amount by which the net proceeds of the sale exceed the Minimum Sales Proceeds divided by (ii) the aggregate number of Company Common Shares and unvested Company restricted stock units issued and outstanding as of the Merger Closing (which number is currently expected to be 23,483,750).

The Purchase Agreement provides that Purchaser will pay aggregate consideration (the “Purchase Price”) for the Outlet Segment of $121,000,000 in cash, subject to a customary working capital adjustment, plus an additional amount of up to $11,900,000 (the “Cap”) to reimburse the Company for certain costs it incurs in connection with the Outlet Sale (“Outlet Sale Costs”) and certain employee payments and insurance costs incurred by the Company in connection with the Merger (“Merger Costs”) that, if not reimbursed by Purchaser, would otherwise reduce the calculation under the Merger Agreement of net proceeds received by the Company as a result of the Outlet Sale. In the event that the Outlet Sale is consummated, it is currently estimated to result in net proceeds to the Company of approximately $121,000,000 and a corresponding increase in the per share Merger Consideration payable pursuant to the Merger Agreement of approximately $1.00, to approximately $3.25. The actual adjustment, if any, to the Merger Consideration is subject to the occurrence of the consummation of the Outlet Sale and to the actual amount of net proceeds received by the Company from such sale as calculated in accordance with the Merger Agreement, which may be lower than the current estimate of approximately $121,000,000 as a result of any downward working capital adjustment to the Purchase Price or if the Company’s actual Outlet Sale Costs together with the actual Merger Costs exceed the Cap. The Purchase Agreement

1

provides that any Merger Costs (less certain amounts in respect of guaranteed minimum annual incentive plan bonuses) paid to the Company by Purchaser as part of the Purchase Price will be refunded to Purchaser in the event that the Merger Agreement is validly terminated. The Merger Consideration, including as it may be adjusted in the event that the Outlet Sale is completed, is payable only upon the completion of the Merger. The Company’s Current Report on Form 8-K filed on June 3, 2019 contains further information regarding the Merger Agreement, including the conditions to the Merger Closing contained therein.

The Purchase Agreement contains customary representations, warranties and covenants, including the agreement of the Company to conduct the business of the Outlet Segment in the ordinary course between the execution of the Purchase Agreement and the Outlet Closing. The Purchase Agreement provides that, except in the case of fraud or under certain ancillary agreements entered into in connection with the Outlet Sale, the Company will have no liability after the Outlet Closing with respect to any of its representations or warranties, or covenants to be performed prior to the Outlet Closing. The employees of the Company that are primarily dedicated to the Outlet Segment are expected to transfer with the Outlet Segment in connection with the Outlet Sale, as are Will Powell, Chief Executive Officer of the Company, E.J. Bird, Chief Financial Officer of the Company, and Michael A. Gray, Chief Operating Officer of the Company.

Purchaser has delivered to the Company an executed debt commitment letter that provides Purchaser with debt financing for the Outlet Sale in an amount equal to $105,000,000. In addition, Parent has received a commitment from an affiliate of Vintage Capital Management, LLC, to provide Parent with up to $40,000,000 of equity financing for the Outlet Sale. The receipt of such debt or other financing is not a condition to the obligation of Purchaser to close the Outlet Sale. Parent has guaranteed Purchaser’s performance of its obligations under the Purchase Agreement, including its payment obligations, which guarantee terminates at the Outlet Closing. In addition, Purchaser and Transform have entered into an agreement pursuant to which, among other things, Transform has agreed, subject to the occurrence of the Outlet Closing, to the assignment to Purchaser of certain agreements between Transform and the Company to the extent they relate to the Outlet Segment and to certain modifications to the terms of such agreements.

Entry into the Purchase Agreement and the Outlet Sale have been approved unanimously by the Boards of Directors of both Parent and the Company, and have also been approved by the Special Committee of the Company’s Board of Directors. The consummation of the Outlet Sale is subject to customary closing conditions, including the release of all liens under the Company’s credit agreements in respect of the assets and entities to be transferred to Purchaser in the Transactions. Pursuant to the terms of the Purchase Agreement and the Letter Agreement, the concurrent Closings will not occur prior to October 11, 2019. In addition, Transform has the right under the Letter Agreement to defer the Merger Closing by up to 7 business days upon written notice to the Company (the “Closing Extension Right”), in which case the Company shall exercise its right under the Purchase Agreement to defer the Outlet Closing by the same number of business days. The Closings are expected to occur in October 2019, subject in each case to the satisfaction of the conditions thereto.

In connection with the execution of the Merger Agreement, ESL previously executed and delivered to the Company an irrevocable written consent (the “Original Written Consent”) in respect of approximately 58.3% of the outstanding Company Common Shares that, among other things, approved a sale of the Outlet Segment in accordance with the terms of the Merger Agreement to the extent such sale constitutes a sale of substantially all of the Company’s property and assets and is subject to the stockholder approval requirements of Section 271(a) of the DGCL (a “Section 271 Sale”). In connection with the Company’s entry into the Purchase Agreement, ESL executed and delivered to the Company an irrevocable written consent (the “Outlet Written Consent”) in respect of approximately 55.2% of the outstanding Company Common Shares confirming ESL’s approval of an Outlet Sale consummated in all material respects in accordance with the terms set forth in the Purchase Agreement, to the extent such sale constitutes a 271 Sale.

The Purchase Agreement contains specified termination rights, including the right of each party to terminate the Purchase Agreement if the Outlet Sale has not been consummated by October 23, 2019 (extendable by up to 7 business days in connection with Transform’s exercise of the Closing Extension Right and/or up to 15 additional days in certain other circumstances) (the “Outlet Closing Deadline”). The Company’s right under the Merger Agreement to complete a sale of the Outlet Segment terminates upon the Outlet Closing Deadline, and accordingly, the Company is obligated by the Merger Agreement to exercise its right to terminate the Purchase Agreement if the Outlet Sale has not been consummated by the Outlet Closing Deadline.

Pursuant to the Purchase Agreement, at the Outlet Closing, the Company and Purchaser will enter into a customary transition services agreement pursuant to which the Company and its affiliates will provide to Purchaser and its affiliates, and Purchaser and its affiliates will provide to the Company and its affiliates, certain transition, migration and separation services mutually agreed upon by the Company and Purchaser, or as requested to be received by the Company or Purchaser and that were previously provided by the Company or its affiliates to the Outlet Segment or by the Outlet Segment to the Company or its affiliates (other than to subsidiaries of the Company acquired by Purchaser in connection with the Outlet Sale), as applicable, in the 6 months prior to the Outlet Closing. Such services will generally be provided for a period of 6 months following the Outlet Closing, which term may be extended for 3 months by the service recipient, subject to certain conditions. The service recipient will pay the service provider the agreed upon fees and costs set forth in the Purchase Agreement.

The foregoing summary of the Letter Agreement, the Purchase Agreement, the Outlet Sale, the Original Written Consent, the Outlet Written Consent, the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Letter Agreement which is attached hereto as Exhibit 2.3 and incorporated herein by reference, the Purchase Agreement which is attached hereto as Exhibit 2.4 and incorporated herein by reference and the Outlet Written Consent which is attached hereto as Exhibit 2.5 and incorporated herein by reference, as well as the full text of the Original Written Consent and the Merger Agreement which were filed as exhibits to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on June 3, 2019.

The Purchase Agreement and the Letter Agreement have been included to provide investors and security holders with information regarding their terms. They are not intended to provide any other factual information about the Company or the Outlet Segment or to modify or supplement any factual disclosures about the Company in its public reports filed with the SEC. The representations, warranties and covenants contained in the Purchase Agreement and the Letter Agreement were made only for purposes of the Purchase Agreement and the Letter Agreement, respectively, and as of specific dates, were solely for the benefit of the parties to the Purchase Agreement and the Letter Agreement, as applicable, and may be subject to important qualifications and limitations agreed upon by the contracting parties, including, in the case of the Purchase Agreement, being qualified by disclosure schedules containing information that modifies, qualifies or creates exceptions to such representations and warranties. The representations and warranties may have been made for the purposes of allocating contractual risk between the parties to the Purchase Agreement or the Letter Agreement instead of establishing these matters as facts, and may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to investors.