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Closing the Deal
You've made it through the LOI, the bulk of the due diligence process, and you've negotiated the final sales and purchase agreement. What's the next step to actually get the deal closed and get money in the bank so that you can move on to the next stage for yourself, your team, and the company?
The Anatomy of an M&A Deal Closing
Buying and selling a business isn't like one-click Amazon checkout. An M&A closing is probably the most complex and time-consuming type of sales transaction there is.
Even after you've hashed out and negotiated the final, definitive purchase and sales agreement, there may still be things to work out.
You can have a closing simultaneous with signing the purchase agreement, but in the vast majority of mergers and acquisitions deals, the closing is a multistep process
- Closing conditions
- Signing final agreements and documents transferring ownership
- Final financial adjustments
- Transfer of funds, disbursements, and paying taxes
- Integration
- Solving post-closing issues
Once all closing conditions are met, the actual closing can be scheduled. Key factors at this stage can include regulatory and shareholder approval.
Closing Preparations
The deal isn't closed until everyone has signed every document and funds are transferred.
You can expect your lawyers to take the lead here in reviewing the closing documents and overseeing the required signatures and compilation of signed paperwork.
Although your legal team will go through every detail, with so much on the line, it's in your best interest to read every word of the documents, no matter how tempting it is to gloss over the legal terms and fine print and simply take the final documents as “standard.” If something is inaccurate, be sure you have it corrected before signing, no matter how much pressure you are under. Failure to do this can prove to be extremely expensive, whether due to representations and warranties, financial adjustments, or changes in earnout provisions.
The final documents that constitute the closing will include the actual transfers of ownership of stock, intellectual property, corporate assets, accounts receivable, and any other related assets. This is when you should also be signing employee contracts, noncompetes, and so on.
Closing Times and Locations
Where closings take place can vary. If your office is down the street from your acquirer, then it is possible you'll go to their offices and sit in a conference room to tackle the stacks of paper that need to be signed.
But often, you may be on the other side of the country or even the world. It may not be practical or possible to get everyone together at the same time. Ever since COVID-19, virtual closings have become more common. Virtual notaries and digital signatures are the norm for just about everything today.
Speed to Closing
Speed to closing is one of the top concerns for sellers in M&A. The faster you can close, the less risk of the buyer backing out. It also reduces the risk of occurrence of any material events that could devalue your company or the stock you are promised.
Because time is so important, choosing a buyer who is capable of and committed to closing quickly is often more important than the top-line price being offered.
Buyers know that seller fatigue from drawn-out closings can often pressure sellers into giving up more concessions and negotiating points to speed up the closing process. It isn't uncommon for sellers to give up double digits in price discounts to just get the deal done.
The following are the four most common negotiation points that often hold up deals and derail closings:
- Disagreements over working capital funding
- Disagreeing over the length of management team commitments
- Negotiating noncompete clauses for management teams
- Inability to agree on reps, warranties, and covenants
Unfortunately, over 50 percent of all deals can still fall through before closing, even after purchase agreements are signed.
The faster you can resolve these negotiation points and get closing conditions crossed off the list, the better.
Accounting and Taxes
Taxes are unavoidable. It's not how much you make on the top line, but how much you get to keep when it comes to the financial part of exiting your business. Key factors here include the following.
Understanding the Difference among Types of Sales
Different types of transaction structures can mean proceeds have different classifications of income for tax purposes and ongoing corporate taxes for all entities involved. Is it a stock or asset purchase? Will you be paid in cash or stock? Will the buyer be financing its purchase? The type of business entity being acquired and how it has elected to be taxed to date can also make a sizable difference. Be sure you understand these nuances of the deal and how these structures can help, or they will yield far less than hoped. Of course, different structures can also help the buyer optimize different bases for its own future tax gains or losses. Your interests are usually at odds here.
Rights to Pre-closing Tax Prep and Filings
The purchase agreement should lay out who has the right to prepare and file taxes for the pre-closing period, as well as who will be responsible for or have control over managing any post-closing tax audits for this period. The more control you have as the seller, the less you'll pay in taxes, and the lower your risk of losing more in future audits.
Tax Indemnifications
Buyers will want you to indemnify them from any unexpected tax liabilities that can arise after the closing. If you are footing the bill, then they will have little motivation to fight any audit issues. Have your lawyers carve out as many exceptions to these indemnifications as possible.
Tax Reform and Changes
Don't overlook the potential for tax reform and changes before the closing. This can be especially important around times of crisis and new transfers of government with new, incoming presidents and political parties coming to power. Big changes can occur in taxes on foreign income and assets, as well as changes in corporate tax rates, personal income tax brackets, and tax credits. These can all have a substantial impact on the net deal. Look forward and keep likely changes in mind.
Understanding Personal Tax Liabilities
A huge windfall from the sale of a business can create a lottery-sized personal tax bill. Although the money for your pocket may not be the main driver, it pays to understand the tax consequences and what they mean for you personally. After all, you are using up a lot of time and energy on a transaction like this. It should be worth your while. If you dismiss this factor, you will probably be incredibly shocked at what taxes will take out.
Secure yourself a great CPA and tax strategist to help you assess your liability and the money moves you can make to minimize your tax bills and maximize your net gains for the long term.
Post-closing Financial Adjustments
Even after all the negotiations over price, the price paid is still subject to accounting adjustments. The adjustments can be due to changes between the agreement date and actual closing and after the closing.
The vast majority of M&A deals include post-closing purchase price adjustment provisions. More than half can include adjustments based on more than one metric, such as the following:
- Differences in company value, finances, and earnings before closing
- Net earnings from earnouts and performance-based payouts
- Adjustments in working capital figures
- Escrow releases for indemnification, reps, warranties, and so on
If there is a negative change, you as the seller may have to wire funds back to an account of the buyer's choosing.
Any dispute resolution needs should follow the clauses in the purchase agreement and may require an independent accounting firm to be involved.
Closing Checklist
There are a lot of documents and action steps needed for getting your transaction closed, and you'll need to coordinate these with your legal, financial, and management teams. These include the following items:
- Final purchase agreement
- Escrow agreement
- Transaction services agreements
- Bill of sale
- Assumption and assignment agreements
- IP assignments
- Lien and title searches for real property
- Transfer of deeds for real property
- Seller resolutions to authorize the transaction
- Buyer resolutions authorizing the transaction
- Disclosures
- Government approvals
- Third-party approvals and consents
- Judgment and lien searches
- Resignations of officers and directors
- Preparation of seller share certificate transfers
- Preparation of flow of funds memorandum
- Transfer of purchase price to seller's bank account
- Creation and distribution of press release announcing the transaction
Wrapping Things Up
After all of the rush and stress, the actual closing and seeing the funds show up in your account can often feel very anticlimactic.
Make sure you plan for some well-deserved downtime after the transaction is complete. You'll need it. Any partner and kids you have will definitely deserve your extra quality time after this sprint.
If you will be involved in the transition of your company and integration after the closing, you'll need to regroup and refocus on the next stretch of the journey. Be sure all members of your existing team who are making the crossover with you are on the same page. Make sure they understand how any performance pay applies to them and the new protocols for doing business. Everyone should know the goals and metrics you need to hit and when.
Whether you are part of the integration or not, it pays to stay alert to potential post-closing disputes and issues. You'll also want to keep an eye on the escrow account and the countdown for the release of any funds still tied up.
There is probably more than enough money at risk in escrow to warrant keeping an attorney on retainer to monitor these funds and their disbursements.
In the case of post-closing disputes or claims by the buyer, make sure you are well informed about the mediation and resolution mechanisms in your agreement. This means you need to be familiar with the institutions that you are agreeing to oversee a potential mediation or arbitration in the event of a dispute with the acquiring company so that you are not putting yourself in a difficult situation.