Anatomy of an M&A Transaction (V): Factors To Consider When Closing M&A Deals
By Michael Mercurio Esq., Offit Kurman
No matter how thoroughly you prepare to sell your business, closing a mergers and acquisitions (M&A) deal requires a great deal of patience and commitment from the seller’s vantage point. Chances are you will need to wait longer than you would otherwise prefer to receive your payout, as there are many I’s to dot and t’s to cross by the buyer. Keep focused and be mindful of seller fatigue (that uncanny sensation to just give in to the buyer’s demands in order to get the deal finished)
By this point, you have accepted the buyer’s letter of intent (LOI), endured due diligence, negotiated contract terms, and perhaps even finalized and signed the purchase agreement. You have reduced and eliminated your business’s trailing liabilities—the skeletons in your closet—and proved to your buyer that the business is a sound investment. At the same time, you have no doubt learned about the buying party: its goals and intentions for the acquisition; the terms on which it is willing to compromise, as well as those to which it holds fast.
But congratulations are not in order—not yet. Time is your enemy as the seller. Do not fall into the trap of believing the deal is over before it is indeed over (see above re: seller fatigue). Even in its final stages, a deal can fall through due to complacency on either side. If you fail to motivate and to otherwise drive your buyer to conclusion, you may lose leverage. Word of an impending sale may lower employee morale, which will only continue to drop as negotiations persist. It could even leak out into your customer basis, which could cause confusion in the market. A loss in profit or another material change to your business will alter the closing price. Your business may suffer a lawsuit or natural disaster while it remains under your control. And without proper protections in the purchase agreement, the deal is in the buyer’s hands to bring to conclusion, and may remain in limbo for months, even years.
In order to close quickly (hopefully with cash in hand), it is important to understand the obstacles in your path. Below are several common impediments, along with advice for mitigating them.
M&A transactions are subject to director authorization and equity ownership consent so, before agreeing to binding terms, ensure decision-makers are accounted for and satisfied. Your buyer may need to run the sale by its board of directors, and may seek advice from outside legal counsel as an extra precautionary measure. Add to that any federal and state regulatory approvals (depending on the industry) necessary to obtain, and it is easy to see how deals get delayed.
Keep your eyes on the prize. The documents your buyer presents to the presiding authorities should demonstrate your business’ major selling points, and reflect the thought-out conditions of the agreement. A willingness to cooperate and disclose is your greatest asset (know when to push and when to pull). Give the buyer what they want; show the buyer you are on their side. As long the deal remains a win-win for both parties, little may impede it.
Many M&A deals conclude with a simultaneous signing and closing; your buyer inks the deal and (hopefully) hands over cash at the same time. A deferred closing, on the other hand, presents several opportunities for your buyer to adjust the terms and purchase price if, for example, certain representations and warranties fall out of compliance at the time of closing. In other words, your buyer may attempt to save money at the last minute by tying you to your business while any negative changes in the business play themselves out.
Be very careful when agreeing to a deferred closing. If your buyer refuses to fully close and fund upfront, it may be a red flag: consider alternatives. You can always walk away from a deal, and a short “no-shop” period during which you are unable to sell your business is a better option than potentially jeopardizing your financial future.
Besides its timing, how and where a deal closes are important factors in its success. Traditionally, M&A deals close in-person—with the buyer, seller, and each side’s legal representatives present. Virtual closings, however, have increased in popularity as digital transmission methods have improved. Depending on your buyer’s preferences, you may decide to close over email, phone, or teleconference, and complete the transaction via wire transfer or an online money transfer service.
The deal may be over, but the next stage in your life is just beginning. There remain several additional steps to take to ensure you are legally protected and your financial future is secure once the business is out of your control. My next article will center on the ins and outs of post-closing.
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Michael MercurioOffit Kurman, Baltimore, United States
Michael Mercurio is business law and transactions attorney. He serves as outside general counsel to clients on matters related to corporate and business law, commercial transactions, government contracting and real estate. As a strategic partner to firm clients, Mr. Mercurio regularly counsels entrepreneurial individuals and assorted entities on all aspects of business and commerce including formation and structure; ownership, management and control; financing and capital; expansion and acquisition; sale and transfer; and contraction and dissolution.
published: January 2016