One of the more common engagements for our firm is to assist with business sales and acquisitions. This article is the fifth in a series of articles which will walk through and generally discuss the steps typically associated with the sale of a business. In Part 1, we discussed the breakdown of the business, the identity of the relevant parties, the role advisors play, and brief discussion of the two primary types of sales that take place. In Part 2, we discussed preliminary negotiations and the letter of intent. In Part 3, we discussed the due diligence processed. In Part 4, we discussed the definitive agreements. Now, in Part 5, we will discuss the closing process.
Overview of a Business Sale
A typical transaction will generally entail the following steps:
- Initial Negotiations;
- Letter of Intent/Term Sheet;
- Due Diligence;
- Definitive Agreements;
- Transitional and Post-Closing Matters; and
- Tax Reporting.
Closing a deal is often a game of logistics and gathering all of the proper documents, filing appropriate documents, arranging for signatures, whether in person or remotely, and coordinating for the transfer of funds to the appropriate parties following confirmation of the satisfaction of the closing conditions, among other items to be addressed. Closing can occur formally when all parties meet at a designated time and place, the so called “closing table”. Alternatively, to the surprise of many, closing may occur quite informally with as little as an email confirming release of previously signed documents held in escrow, receipt of funds, and a declaration that the deal has closed.
The Closing Checklist
One of the best ways to ensure a successful closing and to prevent overlooking any necessary items is to prepare a comprehensive closing checklist. The closing checklist should list every action to be taken and each document to be delivered at or before closing and should list the responsible party for each such action. The closing checklist should also list any post-closing items and who is responsible for the same.
While this article discusses the closing, and the closing checklist is a vital part of a successful closing, the closing checklist should be prepared long before closing. Many times, the closing checklist will be prepared as part of the due diligence process or while negotiating the definitive agreements. It’s a good idea to get the checklist started early in the process and periodically circulate the checklist among all the parties for review and updating as the deal progresses. Just as with the definitive agreements and other deal-related documents, the closing checklist may involve some negotiating back and forth among the parties as to what each side will require in order to close. The definitive agreements should be reviewed in detail to ensure that every item which is listed as a condition to closing is listed on the closing checklist.
The Closing Documents
Every deal is different, and accordingly, every closing is different. Below is a summary of some of the common documents that are part of closing, but this is not meant to be an all-inclusive list of such documents. Depending on the terms of the deal, the industry in which the seller operates, and a host of other factors, some of the documents below may not be needed and there may also be additional documents not listed below that are necessary to effectuate a successful closing.
The Definitive Agreements
The primary documents required in order to close a deal are all of the definitive agreements which have been signed and released by all parties. As discussed by my colleague in Part 4 of this series, the definitive agreements are the documents which represent the actual binding agreement between the parties and contain the terms of the sale. They may come in a variety of forms depending on the type and structure of the transaction but will typically include a purchase agreement, whether asset or equity, and related documents such as disclosure schedules, employment agreements, promissory notes, and leases, among others.
In order to close, the definitive agreements must be signed by all the relevant parties and an effective date must be agreed to if something other than the date of signing. Often this happens at the closing table, typically either at the office of the buyer’s or seller’s counsel, or sometimes at the office of the financing bank’s counsel. Other times, this happens very informally and can occur days or weeks before closing actually takes place. The documents may be signed and delivered to each parties’ respective counsel, and then delivered to opposing counsel to be held in escrow until their release is authorized when everyone is ready to close.
As part of closing, the buyer, and in particular, the buyer’s financing bank, if applicable, will want to see certain corporate documents related to the seller’s entity. It’s common for a Certificate of Good Standing from the Secretary of State in which the entity is located to be provided, as well as for each state in which the entity is licensed to do business. Additionally, the seller should provide authorizing resolutions from the board of directors, shareholders, members, or partners, depending on what type of entity, which authorizes the entity to enter into the transaction. Another common corporate document is a Secretary’s Certificate signed by the selling entity’s secretary which contains certified copies of the organizational documents of the company.
Additionally, officer, director, and/or manager resignations may be needed as well as the necessary documents to appoint the replacements of the same. For an entity purchase, amendments or joinders to any operating agreements, or an amended and restated operating agreement, may be need to admit the buyer as a member or partner, or if the entity is a corporation, amended and restated bylaws may be appropriate.
As part of closing, the seller will also need to deliver any applicable transfer documents. These can vary depending on the type of transaction, whether an asset purchase or an equity purchase. For an asset purchase, the seller should deliver a bill of sale for the assets being purchased, any titles, such as an automobile title, if applicable, deeds in the event real estate is changing hands as part of the deal, and any other transfer documents necessary to effectively transfer asset ownership. If an equity purchase, the buyer will need to deliver the appropriate equity transfer documents, which may be stock powers and stock certificates, or a membership or partnership interest assignment.
Uniform Commercial Code (“UCC”) Searches and Lien Releases
Another item typically required at closing is evidence that the entity assets are not subject to liens, and if so, evidence of applicable lien releases unless the buyer has agreed to take subject to such liens. The buyer should generally request a UCC search in each state where the seller does business. The UCC search will the give the buyer some comfort that the assets that are part of the deal are not subject to any unknown or non previously disclosed liens. Additionally, where known liens are in place which the buyer is not taking subject to or assuming, the buyer will want evidence that such liens have been released, often in the form of UCC termination statement.
Depending on the type of entity, there may be special governmental or regulatory filings that need to take place as part of closing. Examples of regulated industry in which these special filings may be required are energy, insurance, healthcare, and banking. Additionally, certain mergers and acquisitions may require filings with the Securities Exchange Commission, the Federal Trade Commission, the Department of Justice, or a host of other governmental agencies.
Other documents that are typically required for successful closing include, when applicable, employment agreements, leases, third party consents, escrow agreements, promissory notes, and assignments of contracts. Additionally, lenders will often require the buyer to sign numerous loan documents related to the financing and to file a UCC-1 financing statements (to secure a lien on property being purchased) prior to closing. Often, as a condition to closing, the definitive agreements will also require certain information to be provided at closing such as an effective date financial statements and working capital calculations.
While we discussed many aspects of a closing, we have yet to address one of the most important items needed to complete a closing, money! In a typical closing, funds may be changing hands with multiple parties involved, not just the buyer and the seller. Payments may be coming from the buyer’s lender, the buyer, or a combination of both, and payments may be going not only to the seller but also to a lienholder in satisfaction of debt owed by seller. Commissions, attorney’s fees, and other advisor fees may also be part of the closing payments or may be handled separately outside of closing. Since money is moving all around, it’s important to have a settlement statement that clearly outlines the flow of funds that will happen at closing. Once the settlement statement is finalized and agreed on by all the parties, the parties can exchange wiring information so that the wires can be ready to go when needed. This should happen well ahead of the expected closing to prevent any issues that might hinder or delay a timely closing.
As previously discussed, the closing process may take place formally at the closing table where all the parties meet to sign the necessary documents, exchange deliverables needed to close, and close the deal. But it may also take place informally through the release of previously signed documents, the delivery of deliverables needed to close by email, and the declaration that the deal is closed by email. Once both parties have satisfied completed their closing deliverables, other than money, the parties can initiate the wires and the deal can close.
As you can see, the closing process can vary greatly from one closing to another depending on a variety of factors involved. There are a lot of moving parts that need to come together for a successful closing. A comprehensive closing checklist can ensure that all parties are on the same page as to what is needed to close and is vital to ensure that crucial items are not overlooked.
In the next part of this series, we will continue to discuss the transaction process in more detail, including transitional and post-closing issues and adjustments as well as final tax reporting.
Our firm is regularly engaged to handle many types of business transactions from simple equity sales to complex asset sales and mergers involving publicly traded corporations. With significant analytical, business, and tax expertise, our firm is well equipped and ready to assist our clients with their business transactions.