BUYING AND SELLING A BUSINESS: The Closing
The transaction cycle in a business acquisition is a bit of an emotional roller coaster. The parties hit an enthusiastic high note at the time of the letter of intent or term sheet is finalized. Then they proceed to frustrate one another through the due diligence process and in the negotiation of the definitive agreement. In my experience, usually just before the definitive agreement is signed, there is a question of whether or not the deal will actually come together. It is never over the same issue – it seems to be more of an emotional ebb and flow. But in any event, once the definitive agreement is signed, the parties are ready to close. Sometimes that final preparation is actually the hardest work in the entire transaction.
A few years ago, it would be almost unheard of to conduct a closing where the parties were not physically present in the same room to review documents, sign them, transfer funds, and have a congratulatory handshake and photograph session. Lawyers, accountants, surveyors, lenders, appraisers, and other professionals would either be in attendance for the entire closing or make their various cameo appearances to get the deal moved down the road.
Today, however, it is frequently more common for deals to be closed entirely electronically. There is no doubt that electronically exchanged signatures, whether in the form of a picture of an actual signature, or some other typed or numeric signature substitute, are absolutely effective to bind the parties. Certain recordable documents, such as deeds and mortgages, do still have to be signed personally and notarized in most states in order to be effective. If real estate is involved, then the closing is a hybrid of previously exchanged originals and electronically executed documents.
Coordinating a complicated closing is a difficult process. Scheduling competing calendars and timing objectives is not the only challenge. Making sure that there is a clear closing checklist and periodically reviewing its status with all interested parties is important to smooth a closing. Usually the definitive agreements set forth the big picture terms of what has to be done at the closing of the transaction. Sometimes ancillary documents are exhibits to the definitive agreements and it is merely a matter of having them signed. In other situations, they will have to be drafted and executed. Keep in mind there are a lot of non-parties who will need to cooperate in the closing who may not be particularly motivated to help. Landlords, subordinating lenders, and other consent parties usually are not consulted until just a few days before closing. And, believe it or not, they may have an opinion about what the documents that they are asked to sign actually say. And, documents that are promised to be delivered at closing frequently go astray or cannot be delivered on time.
In large transactions, a pre-closing conference call or actual meeting helps to identify what has already been accomplished and what is left to be done at closing. A well-organized closing, even of the most complicated deal, can be a fairly straightforward process lasting an hour or two. I have, however, personally participated in a closing that lasted over 28 hours.
A frequently overlooked logistical aspect is how long it will actually take to move funds once all of the documents are signed. Wire transfers are much quicker than they were years ago, but it is still not unheard of for a wire not to make it within the same business day despite the parties’ best efforts.
On the issue of third party consents, the burden almost always falls on the seller to get these. While confidentiality considerations may require a delay in asking for consents, no one likes to be asked at the last minute to sign a document that may vary his legal rights. These are delicate conversations and are best handled by relationship managers who are known to the parties being asked to give consent. And, keep in mind, the larger the institution that needs to sign the consent, the longer it is going to take to get it.
Now that the transaction is closed, most folks would figure that the only thing left to do is have the post-closing celebration. And while those are fun, there is always post-closing work to be done and that is the topic of our next article.