The Inner Workings of a Deal: Tips for a Successful Transaction Part IX – Closing and Post-Closing
Well, we’ve arrived. Last month, we negotiated the deal documents and we are ready to close on the sale of your company. While most of the hard work is behind us, there are still a few things to be aware of.
What does the Closing Look Like?
Not too long ago, deal closings involved large conference rooms in lawyers’ offices, reams of paper, and lots of angst as people confirmed the receipt of wire transfers.
In today’s world, a closing usually occurs electronically, with documents being signed and passed by e-mail, with a final conference call with all parties involved (including lenders, equity providers, etc.), where the people with the money give their consent to release funds, everyone thanks each other, and then wire transfers are made and received within moments.
How do Funds Flow at Closing?
In addition to paying the seller at closing, there are often other parties that need to receive funds out of the closing proceeds. Most commonly, transactions are completed on a cash free/debt free basis, so often the seller needs to pay off certain debts at closing (e.g., lines of credit, capital equipment leases). Also, deal professionals usually get paid at the closing (e.g., lawyers, M&A advisors, accountants).
So, prior to closing, the parties prepare a flow of funds chart that show how funds are routed. Most important are any of the seller’s lenders, as buyers will want to ensure that any rights these lenders have against the company are relieved at the time of closing. Creditors receive any required loan payoffs out of the sale proceeds, and then simultaneously release their rights.
While title to your company passes at the closing, there are frequently clean up activities that take place 60 to 180 days after the closing. Most notably, the buyer and the seller usually prepare a final balance sheet after the closing and then there is an adjustment payment made by one of the parties depending on the final outcome.
Most transactions require that the seller transfer a set level of working capital to the buyer as part of the sale. But, it is difficult to determine the precise level of working capital at the time of a transaction until a while later, as invoices are still being sent and bills are still being paid as the transaction is closing. So, at the time of the closing, the seller usually provides his best estimate of the status of the company’s balance sheet. Then, the parties set a date to review the final balance sheet and make any appropriate adjustments.
In most cases, you’ll be providing ongoing assistance to the buyer for some time after the sale concludes. It is not unusual for sellers to remain with the company for one or more years after the conclusion of the transaction. Obviously, the amount of assistance required depends on the nature of your company and your goals. Many sellers who sell to financial buyers continue to run their companies for many years after the original sale.
At Risk Payments
In many cases, you’ll be receiving proceeds from your sale for at least a couple of years after the closing, as at risk payments including stock, loans, and earn out payments mature.
In these cases, you’ll want to continue to participate in the company to some extent to ensure that your future payments are being protected.
You’ve done it. You’ve completed what will likely be the most important transaction in your professional and personal life.
Hopefully, this series has helped you identify your goals, plan for the transaction, and understand what to expect as the transaction progressed.
Obviously, a short guide like this series can only gloss over the surface of the complexities associated with selling a lower middle market company. Please seek out the experts you need to assist you in your transaction. There will be both opportunities and pitfalls in the sale of your company. Make sure you are prepared to take full advantage of the opportunities and can avoid the pitfalls.
Michael Schwerdtfeger is a managing director at Chapman Associates. Michael and his team are focused on providing exceptional results through sell-side mergers and acquisitions advisement to entrepreneurs and business owners exclusively. Michael leverages his 20 years of diverse experience handling complex business transactions to help guide his middle-market clients to the best possible deal outcomes.