Closing day is finally approaching . . . this is a tremendous milestone!  As the parties begin wrapping up due diligence and finalizing the terms of their purchase and sale agreement, the details of the closing plan need to be addressed.   In many cases, closings can be chaotic and stressful.   To avoid unnecessary misunderstandings and delay, the parties should carefully prepare in advance for the logistics of the closing day.  

“If You Fail to Plan, You Are Planning to Fail” — Benjamin Franklin

The final push to conclude a purchase and sale transaction should include consideration and implementation of the 8 tips below.

1.  Re-Read The Contract; Create A Closing Checklist

Purchase and sale agreements typically contain provisions (sometimes called “Conditions to Closing”, “Closing Deliverables”, “Conditions Precedent”, or similar), describing the items which must be satisfied and delivered (or waived) as a condition of the closing.   Parties need to carefully review these provisions and must make sure that all required conditions are satisfactorily addressed prior to the closing.    In some cases (such as lien payoffs or debt repayments), the  condition may be satisfied simultaneously with the closing. 

It's important to note that certain closing deliverables have lead-times, such as obtaining a certificate of good standing or obtaining a third-party consent to the transaction.   As a result, it is essential to make sure the closing deliverables have been thoroughly considered, planned and timed well in advance of the scheduled closing date.  

By re-reading the final purchase and sale agreement in preparation for the closing, the parties will refresh their recollection of what has been agreed upon, to ensure that they are carefully implementing the requirements of the agreement.

Also, in many cases, the parties (through their legal counsel) will prepare a closing checklist to help ensure that no steps in the closing process are forgotten. Especially in larger transactions, a closing checklist can be a very useful tool for the parties to use.

2.  Decide Upon Messaging And Communication

In many cases, the buyer will need to have a plan for communication of the transaction to the target company's employees, contractors, customers, suppliers and other third parties, as applicable.   The seller may have an interest in the content of that messaging as well.   Where applicable, having a well thought-out communication strategy in advance of closing can be very important for a smooth transition upon the closing.   In most cases, such communications should not occur until after the closing has been completed and the parties have agreed upon the content of the message.   In some cases, the buyer and seller may decide that the occurrence of the sale need not be broadcasted to third parties.  

Relatedly, the buyer and seller should also discuss in advance whether there will be a press release or other public announcement issued at closing, as well as the content of any such public announcement.  Purchase and sale agreements sometimes contain restrictions on the unilateral issuance of a public announcement, so the parties will need to carefully review the applicable contract terms first (as well as the terms of any applicable non-disclosure agreement), before proceeding with any public announcement of the transaction.  

3.  Planning For Integration

Significant planning is required for integration of a target company into an existing business.  This may include consolidation of payroll systems, HR matters, insurance coverages, accounting and IT platforms, contract management systems, and more.   Additionally, even if the target company is not being integrated into an existing business, much advance planning will still be required  to ensure the smooth continuity of business operations upon the closing, including, for instance, ensuring bank accounts and IT platforms are available for use by the new owner on Day 1 or as otherwise agreed.  Depending on the complexity of the business, integration planning can take several weeks to several months, and may involve many different teams or departments within an organization.    Depending on the complexity and size of the business, integration planning should start early in an acquisition process.

4.  Preparation Of A Closing Statement

The parties should have a well-documented record of the sources and uses of funds at closing.  A closing statement, circulated in draft form for review and necessary edits prior to closing,  is a smart idea.   The final closing statement, which should be executed by both parties at closing, sets forth the purchase price, any adjustment to the purchase price, prorations, payoffs made at closing, closing costs, the sources and uses of funds, and the debits and credits made to each party's account to reflect the payments made at closing.   If an escrow agent or paying agent is involved with the transaction, they will typically prepare the closing statement.  If no escrow agent or paying agent is involved, either party or their legal counsel can prepare the closing statement.

5.  Planning For Payoffs And Lien Discharges

The purchase and sale agreement must clearly address whether the buyer is assuming debts or liens at closing, or whether debts and liens must be paid-off and satisfied by the seller as a condition of the closing.  

If liens or liabilities are being paid-off and discharged at closing, the following steps should be followed:

• Payoff statements will need to be ordered from the applicable creditor and reviewed by the parties prior to the closing.  A payoff statement tells the parties how much money is needed to payoff the debt in question.  If the closing is delayed, an updated payoff statement may be needed;
• If applicable, forms of lien release documents should be prepared and agreed upon by the relevant parties prior to the closing. Lien release documents vary by nature of the collateral in question, and must be prepared in a precise manner in order to be effective and recordable.  Release documents can have significant legal ramifications for the releasor (creditor), the releasee (seller), and the buyer.  As a result, depending on the transaction and the nature of the obligation being released, the parties should expect that lien release documents may be heavily negotiated and could take a significant amount of time to agree upon and finalize prior to the closing; and
• Once the forms of lien release documents have been agreed upon, the actual lien release documents should be executed by the lienholder and delivered into escrow in advance of closing, to be released and effective upon payoff at closing.

Approaching lien releases and debt payoffs in this manner will minimize 11^th hour confusion and will  avoid the difficult task of chasing lien releases after the closing and loan payoffs have occurred.

6.  Finalize The Contract Details

Prior to closing, the parties and their counsel must re-review the purchase and sale agreement and all other documents and instruments to be delivered at closing, to ensure that all documents are complete and correct.   For instance, all dates and blanks within the documents must be filled in, all notes, bracketed or highlighted items need to be resolved, and all referenced schedules and exhibits must be attached.   Leaving these types of items blank, unfinalized or unaddressed is unfortunately a common error - and it can lead to significant confusion or disagreement after the closing, or even, in an extreme situation, the unenforceability of the entire transaction.  In short, prior to the closing, all final terms of the contract must be agreed upon and clearly reflected in the documents.

7.  Obtaining The Necessary Funding Information

The buyer will need to line up its wire transfer or other payment method for the funding of the acquisition.   If paying by wire transfer, the buyer will need to have the seller's wire transfer instructions in advance.   If a lender or escrow agent is involved, the parties will need to ensure that the lender or escrow agent has the necessary funding information as well. The parties may have internal restrictions or policies which dictate wire deadlines and other funding requirements, and so these topics must be addressed in advance of the closing to avoid last minute confusion or delay. 

If third party payments are being made at closing, such brokerage commissions, loan payoffs, legal fees, consent fees, due diligence fees or other payments, the payor will need to ensure that it has the current payment amounts, approved invoices, and the applicable payment instructions for these various additional closing day payments.  Such payments should be reflected in the closing statement referenced in Paragraph 4 above.  

8.  Planning For Delivery Of Assets Upon Closing

The parties will need to have a plan for how to capture and deliver the assets at or following the closing.  For instance, if websites or other digital assets are being conveyed in the transaction, the parties will need to have a plan for transfer of passwords and other account access to buyer upon the closing, preferably while preserving account history and reviews.   If inventory or other personal property is being conveyed, the parties will need a plan for delivery or shipment of those items to the buyer in conjunction with the closing, including agreeing upon the timing and cost of shipment and allocation of risk of loss through delivery.  If a third party logistics firm (or "3PL") has custody of the inventory, then advance arrangements will need to be made to transfer the 3PL relationship to the buyer at closing, if applicable.    If the transaction is structured as an equity purchase, the original stock certificates or LLC membership units (if certificated) will need to be delivered at closing.   The purchase and sale agreement should clearly address how the various assets will be delivered at closing, including which party is responsible for shipping costs and risk of loss during transit, and the parties should have conversations about the topic prior to the closing, to work out any remaining details.

Conclusion

“ . . . bring lawyers, guns and money . . . ” — Warren Zevon 

Ha!  Definitely skip the guns, but do bring your lawyer and your money on closing day . . .  as well as all of the organization and advance planning you've accomplished based on the tips above.   

Closing day is often full of twists, turns, surprises and a fair dose of stress.   By planning for the many closing-day logistics in advance, the ride through closing will be smoother.    Be assured that with thoughtful advance planning including addressing the items listed above, the parties can accomplish a successful closing.   The Law Office of Jennifer M. Settles helps parties negotiate terms, draft contracts and close their deals.  Contact us today at (602) 617-3938 or through the Contact Form on our website, www.jsettleslaw.com, for a FREE initial consultation. 

Jennifer M. Settles, Esq. is a corporate lawyer at the Law Office of Jennifer M. Settles.  She advises clients on M&A transactions, commercial contracts, real estate matters, financing transactions and corporate law.  To schedule a free initial consultation with Jennifer, please call 602-617-3938, or connect through the Contact Form on the website.

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