M&A Closing Process | A Complete Guide

The buyer has completed their due diligence, and you’ve meticulously done yours. The terms of the transaction have been broadly agreed upon, including the price.

Now, let’s talk about the closing. You’ve come this far, and we’re well-prepared.

No need to hold my beer…

While a flawless closing may be elusive, we can certainly get close. This article delves into potential challenges that may arise in the final stages of a transaction and provides strategies to mitigate them—benefitting both buyers and sellers.

Tips for a Successful Closing

Anticipate Last-Minute Challenges: When it comes to buying or selling a business, expect the unexpected. Smooth sailing is a rarity in these transactions, and issues can linger even after the deal is sealed. That’s why maintaining a strong working relationship between the seller and buyer is crucial, enabling them to collaborate effectively in resolving any unexpected hiccups.

Simplify Your Agreements: The key to a successful business transaction lies in simplicity. Clear, straightforward legal documents are not only easier to comprehend but also less prone to complications and legal disputes. Swift transactions translate to lower costs for all parties involved. Plain, unambiguous documents reduce the risk of misunderstandings, misinterpretations, conflicts, or regrets down the line. In the unfortunate event of litigation, a court, jury, or arbitrator can swiftly grasp the document’s meaning, leading to quicker proceedings and reduced legal expenses.

We Recommend the Following:

• Steer Clear of Overly Formal Language: Avoid cumbersome legal conventions such as “whereas,” “aforesaid,” or “heretofore.”
• Minimize Legalese and Technical Jargon: Use technical legal terms sparingly, only when absolutely necessary.
• Trim Excessive Verbiage: Keep your document concise and focused on the essentials. It’s neither possible nor practical to cover every potential scenario.

Buyer’s Obligations for the Closing

Initiate Key Buyer Actions Early in the Process:

Establish a New Entity: It’s pivotal for the buyer to swiftly create a new entity, be it a corporation or LLC, right at the outset of the process. Timeliness here is of the essence, as any delay in entity formation can significantly hinder progress and even prevent the transaction from closing. Active status for the buyer’s entity is an absolute must for a successful closing.

• Secure an Employer Identification Number (EIN): The EIN becomes a requisite when dealing with third parties like escrow agents, for tasks such as bank account setup and licensing. Thus, obtaining an EIN should be one of the buyer’s initial actions to streamline the process.
• Acquire the Necessary Business License: Transferring the business license is a crucial part of the sale process. Depending on the jurisdiction, the buyer may be able to apply for the license before closing or only after the transaction is finalized. Timing is key.
• Procure Essential Licenses and Permits: It’s incumbent upon the seller to compile a comprehensive list of permits and licenses for the buyer to secure. Once again, timing plays a vital role, as these need to be coordinated with other closing tasks, like bank account setup.
• Secure a “Doing Business As” (DBA) Name: If the buyer intends to operate under the same trade name, they must acquire a DBA by filing a fictitious business name statement (FBNS). The process for transferring a DBA may vary by jurisdiction, so understanding the local regulations is crucial.
• Establish a Business Bank Account: Prior to closing, the buyer should open a business bank account. Most banks mandate that the buyer possesses the necessary licenses, including a DBA and business license, and has formed the entity before they can initiate the account setup in the business’s name.
• Arrange Merchant Accounts: To apply for a new merchant account, the buyer must have the proper licenses and bank accounts in place. These prerequisites underscore the importance of proactive preparation in the early stages of the process.

Before the Closing

Here’s a concise checklist of crucial steps that both the buyer and seller should confidently undertake before reaching the closing table:

• Purchase Price Allocation: Early agreement on how to allocate the purchase price helps prevent delays caused by disagreements later on.
• Work in Progress (WIP) Calculation: Prepare a WIP spreadsheet to facilitate proration at closing.
• Equipment Inspection: Prior to closing, thoroughly inspect all equipment to avoid last-minute surprises and allow ample time for necessary repairs or replacements.
• Preliminary Inventory Count: Conduct an early inventory count to eliminate unexpected issues.
• Seller’s Entity Status: Ensure the seller’s entity is in good standing, as a closing cannot proceed otherwise, potentially causing significant delays.
• Tax Clearances: Obtain essential tax clearances, including:
  • Payroll Tax Clearance: Confirm payment of seller’s payroll taxes before closing.
  • Sales Tax Clearance: If applicable, secure a clearance certificate to address any outstanding sales taxes.
  • Other Tax Clearance Certificates: Depending on local regulations, clearance from state agencies may be necessary for other taxes.
• Third-Party Involvement:
  • Financing Documents: When third-party financing is involved, be prepared for additional documentation requirements, such as business plans and projections. Escrow often handles the closing process.
  • Franchisor Approval: If applicable, obtain approval from the franchisor, which may involve buyer training and franchise agreement signing prior to closing.
  • Lease Assignment: If landlord approval is needed for a lease transfer, proactively reach out to the landlord early in the process to avoid unexpected hurdles.+

Purchase Agreement

Confidently Navigate the Components of a Purchase Agreement:

• Assignment of Contracts: Any contracts involved in the sale must be clearly assigned.
• Bill of Sale: In asset sales, the bill of sale formally transfers asset ownership during the closing.
• Buyer’s Disclosure Statement: Buyers can make necessary written disclosures using this document.
• Consulting Agreements: When the seller assists the buyer during a transition period, a consulting agreement is essential.
• Corporate Resolution: Both buyer and seller must sign a corporate resolution, granting them authority to act on behalf of their entity.
• Equipment List: An inventory of assets, integral to the purchase price, should accompany the bill of sale.
• Holdback Agreement: Common in all-cash deals, this involves a third party holding a portion of the purchase price until certain conditions are met.
• Intellectual Property Transfer: Document and transfer any intellectual property (patents, copyrights, trademarks) included in the sale at closing.
• Non-Compete Agreement: At closing, the seller typically signs a non-competition agreement, refraining from competing with the buyer for a defined period.
• Promissory Note: When seller financing is in play, a promissory note is necessary. Smaller transactions often involve personal guarantees by the buyer.
• Security Agreement: Enables the buyer to use business assets as collateral for the seller note until paid in full. This prevents unauthorized asset sales or encumbrances without the seller’s consent.
• Seller’s Disclosure Statement: Sellers can provide vital written disclosures using this statement.

Navigating these components with confidence ensures a robust and well-documented purchase agreement, benefiting all parties involved.

Escrow and The Closing Process

An escrow agent, a trusted third party, assumes the vital role of safeguarding funds and documents until all escrow conditions are met. For the smooth closing of smaller transactions, we highly recommend engaging an escrow agent.

During the closing, numerous adjustments and prorations must often be orchestrated—covering aspects like lease payments, utilities, property taxes, and accounts receivable—to reconcile timing disparities between bill payments and the transfer of ownership. Escrow services excel in managing these intricate closing adjustments and prorations.

In cases involving third-party financing, such as bank loans, escrow becomes a necessity. It plays a pivotal role in business sales by undertaking various crucial tasks, including:

• Custody of Earnest Money Deposits: Safeguarding earnest money deposits, typically provided by individual buyers (not corporate buyers).
• Ensuring Clear Title Transfer: Conducting UCC and other searches to guarantee the seamless transfer of asset ownership at closing.
• Filing Notices to Creditors (in 13 states where required).
• Prorating Expenses: Skillfully handling the proration of expenses like property taxes and other financial obligations.
• Serving as a Third-Party Clearinghouse: Facilitating the payment of liens, debts, and outstanding bills.
• Securely Managing and Disbursing Funds: Expertly handling the safekeeping and release of funds as per the agreed-upon conditions.

Days Before the Closing

In the days leading up to the closing, both the seller and buyer should take these decisive steps:

• Final Inventory Count: For businesses holding a substantial inventory, conducting a final inventory count is crucial. This task should ideally be carried out on the day preceding the closing, involving both parties or enlisting the services of a professional inventory valuation provider. At the closing, the buyer typically compensates the seller for inventory, based on its original cost, in cash. Any outdated inventory may be addressed, subject to the buyer’s approval.
• Final Walk-Through: A final walk-through of the business by both buyer and seller ensures a smooth closing devoid of any unforeseen surprises.
• Escrow Funds Transfer: In transactions involving an escrow, the buyer should initiate the transfer of their closing funds via cashier’s check or wire transfer a full three business days before the closing date. Wire transfers can sometimes experience delays, potentially stalling the sale if executed on the day of closing. To mitigate this risk, our recommendation is to wire the funds to escrow at least three days prior to the closing. It’s crucial to confirm with your bank beforehand, as some institutions may impose daily limits on wire transfers. Please note that escrow funds should be directed to the selling entity, not the seller personally. In cases where escrow is not utilized, the buyer can wire funds the day before or on the day of closing. However, it’s worth noting that many escrow companies do not accept cashier’s checks due to recent fraudulent activities.

Signing and the Official ‘Closing’

Closing Formats: Closings can take place in two primary formats: virtual or in-person. In today’s landscape, virtual closings are increasingly common due to technological advancements. In such cases, closing documents are often sent to the parties via courier for physical signatures or signed electronically, with the escrow agent overseeing the release on the closing date.

Signers: While not all owners need to individually sign every document, they should provide consent authorizing a designated “signer” to act on their behalf. If the business is owned solely by a married person in a community property jurisdiction, both spouses should sign all closing documents. It is advisable for all officers to sign, but if unavailable, a corporate resolution can suffice.

Hard Copies vs. Electronic Documents: The Uniform Commercial Code (UCC) once mandated written and signed security agreements, often interpreted as hard copies. However, the UCC now accepts electronic records as security agreements. Nevertheless, local requirements may still demand hard copies, and many escrow companies continue to require physical signatures.

Actual Closing: The purchase agreement represents the binding commitment to the sale, while the “closing” signifies the actual transfer of ownership from seller to buyer. This occurs when both parties sign the bill of sale (for asset sales) and the buyer completes the payment transaction. Only when both actions are complete can the sale be considered “closed.” If these actions occur on different days, the closing date is the day of the later action.

Actual Transfer of Possession: Ownership transfer doesn’t hinge on the physical delivery of the bill of sale but on the mutual signing of the document by both parties. Once the bill of sale is signed, ownership is effectively transferred, regardless of whether the document has been physically exchanged.

Vehicle Transfers: For vehicles and titled assets, they should be included in the asset list attached to the definitive purchase agreement. When both parties sign the bill of sale, legal ownership of all assets listed, including vehicles, shifts from the seller to the buyer. It’s worth noting that although legal ownership changes upon signing, the actual transfer of vehicle registration with the DMV may take days or weeks. In some cases, if the sale isn’t registered promptly, third parties may continue to recognize the seller as the owner. To address this scenario, the purchase agreement often includes a “beneficial ownership clause,” requiring the seller to pass on any benefits to the buyer if they’re still treated as the owner by third parties.

Documents to Sign at or Before Closing: Several critical documents must be signed either before or during the closing:

• Purchase Agreement: This can be executed before or during the closing. While the purchase agreement and its schedules become legally binding upon signing, the actual transfer of legal ownership of the business occurs upon signing the bill of sale (for asset sales) or stock certificates (for stock sales).
• Schedules: These are typically signed simultaneously with the definitive purchase agreement (DPA). However, even though they become legally effective upon signing, legal ownership of the business only shifts when the bill of sale is executed.
• Exhibits (Bill of Sale): The bill of sale and, if applicable, the lease assignment, are appended to the purchase agreement and are signed exclusively during the closing. Actual legal ownership and possession of the business are conveyed to the buyer at the moment the bill of sale is signed. Typically, the seller signs the bill of sale once the buyer has made the agreed-upon payment and any contingencies have been resolved to the satisfaction of both parties. Until the closing, the seller retains full ownership and responsibility for the business.

Immediately After Signing

Once the closing is complete, both the seller and buyer should promptly undertake the following:

Client List Transition: The seller should promptly furnish the buyer with a comprehensive list of their valued customers or clients. This collaborative effort ensures a smooth transition of these vital relationships.

Employee Engagement: It’s crucial for the buyer and seller to convene a meeting to communicate the change in ownership to the employees. The approach to this communication varies based on the seller’s existing relationship with the workforce. We strongly advise the buyer to present a compelling and optimistic vision for the company’s future, reaffirming job security for all employees. This meeting should exude positivity, instill confidence, and reassure every team member about their continued role within the organization.

After Closing

Post-Closing Priorities for Seller and Buyer:

Following the closing, both the seller and buyer should attend to the following matters with a clear and straightforward approach:

• Accounts Receivable: If the seller retains ownership of accounts receivable, it’s vital to maintain their entity and bank account for collecting outstanding receivables. A meeting between buyer and seller is advisable to discuss post-closing collection strategies and customer notifications. Typically, the seller continues invoicing customers using the business address, while the buyer manages payments and forwards them to the seller. This process can be streamlined if both parties are present at the business during the training period.
• Telephone Services: Arrange for the smooth transfer of telephone services before the closing date.
• Training and Transition: Collaboratively complete the training and transition phase, documenting this process in a training log to mitigate potential disputes in the future.
• Transfer Key Assets: At closing, the seller should hand over essential assets, including computer access codes, safe combinations, alarm codes, keys to file cabinets, premises, and vehicles, as well as owner’s manuals, instruction manuals, and warranty information.
• Equipment Lease Transfers: If equipment leases are to be assumed, ensure a proper transfer from seller to buyer.
• Transfer Third-Party Contracts: This category encompasses agreements like advertising contracts and equipment leases.
• Transfer Key Relationships: Arrange joint meetings with key customers, vendors, and other vital contacts to assure them of a seamless transition under new ownership.
• Transfer Telephone Service: Prioritize the smooth transfer of telephone services, coordinating this change effectively.
• Transfer Utilities: Contact utility providers to facilitate the transfer of services from the seller to the buyer.
• Transfer Vendor Accounts: Collaborate with vendors and suppliers post-closing to inform them of the change in ownership.
• Transfer Digital Assets: Work together to transfer digital assets, including websites, domain names, phone numbers, and other technological resources.
• UCC Financing Statement: If a seller note exists, ensure compliance by filing the necessary notice or lien with the appropriate filing office.

Months After the Closing

In the months following the closing, it’s imperative to handle the following tasks with a straightforward approach:

• Allocation of Purchase Price: Ensure proper documentation by filing IRS Form 8594 at the conclusion of the tax year.
• IRS Checklist: Collaborate with your accountant to streamline entity closure once all accounts receivable have been successfully collected.

By adhering to these steps, you’ll maintain clarity and efficiency in the post-closing phase.