Timing Matters: Signing Contracts Simultaneously With Closing vs. Prior To Closing

Posted by Jennifer M. Settles, Esq.Apr 04, 20240 Comments

Important Distinctions Between "Simultaneous Sign and Close" and "Sign Now, Close Later"

One of the many questions to consider when negotiating a business transaction is whether the parties should execute the definitive transaction agreement simultaneously with the closing, or at an earlier date prior to the closing.  This topic can be relevant in M&A transactions, real estate deals, purchase agreements, supply contracts, and other contracts.     Either approach can be used depending on the circumstances, and while neither approach is necessarily “better” or “worse” than the other, there are important distinctions between the two.

In this Blog post, we discuss the two approaches and some important considerations.

Simultaneous Sign and Close Approach   

Often, parties will negotiate and finalize the terms of a contract but not actually sign the agreement until precisely the time of the closing.   Under this approach, during the time period before contract execution/closing, the parties are typically engaging in due diligence, negotiating deal terms, and otherwise working to satisfy the conditions to closing.   During this pre-execution/pre-closing time period, the buyer is often arranging its financing, organizing its integration plan, assessing the seller's financials, performing due diligence, and negotiating and drafting the definitive transaction agreements.    Under this approach, assuming it's done correctly, there is no need for the definitive agreement to contain closing conditions, because, by definition, all conditions will have been satisfied prior to contract execution and closing.  

Pro Tip:  It's important to recognize that under the simultaneous sign and close approach, there is no enforceable contract until the contract is in fact signed by all parties.   As a result, under this approach, because no contract exists, either party generally may walk away from the deal without liability.  The existence of a letter of intent (LOI) is likely not enough to obligate the parties to proceed to closing.  

This approach is often (though not always)  the preferred approach for a buyer, and can be quite nerve-wracking for the seller.   Under this approach, if the buyer discovers something unfavorable about the seller during due diligence, or if the buyer otherwise has a change of heart about closing, the buyer can generally simply walk away.  

The knife cuts both ways, though.   By not being under contract, a seller will also have the right to walk away from the deal without liability.  Accordingly, in a hot seller's market, or in a scenario where the buyer needs the deal to close for strategic reasons, a buyer might very well be opposed to the simultaneous sign and close approach and instead prefer the sign now-close later approach. 

Simply stated, under the simultaneous sign and close approach, the parties must be cognizant that no contract exists until it is mutually executed by the parties.  The underlying Letter of Intent (if any) is typically non-binding (other than, perhaps, with respect to exclusivity obligations) and therefore cannot be relied upon to obligate the parties to close.   

Pro Tip:  Although it behooves the seller to cooperate with the prospective buyer in terms of allowing the buyer to complete its due diligence during the pre-contract period, a seller should not allow the buyer too much access to the business if no enforceable contract is in place.  For instance, until the parties are under contract, a seller should never simply hand over company assets or give the prospective buyer direct access to the seller's customers or employees.

Sign Now, Close Later Approach 

Under the "Sign Now, Close Later" approach, the definitive agreement is negotiated and executed by the parties early in the process, and the closing of the transaction occurs later.   Under this method, the agreement is typically executed during the due diligence phase, and it contains contingencies (sometimes referred to as “closing conditions” or “outs”) in buyer's favor, allowing the buyer to terminate the agreement if necessary.  See our other Blog post for tips and strategies regarding contract contingencies.     Depending on the circumstances, contingencies in an agreement often include satisfactory completion of due diligence, receipt of regulatory approvals and consents, shareholder and/or Board approval, and receipt of financing.  

Under the sign now, close later approach, if a contingency is not met (for instance, if the buyer is unsatisfied with its due diligence or does not qualify for its financing), and assuming the contract was correctly written, the buyer will have the right to delay the closing or terminate the agreement altogether. 

Generally speaking, the sign now, close later approach may give the parties more comfort that the closing will in fact occur.  After all, under this approach, an executed contract is in place (albeit, likely with contingencies). 

Pro Tip:  It is important to note that depending on the nature and extent of the contingencies, a buyer may still have broad rights to terminate the agreement and walk away from the deal under the sign now, close later approach.     Under the sign now, close later approach, it is absolutely critical for the contingencies to be clearly understood by the parties, precisely negotiated, and drafted with specificity, to reflect the parties' intentions.    

The sign now, close later approach is often (though not always) used in larger or more complex transactions.   For instance, if a third party consent is needed in connection with the transaction (for example, if a “change in control” clause in the seller's real estate lease will be triggered by virtue of the closing of the transaction), the parties might choose to execute the sale agreement in advance of the closing so that the party from whom the consent is needed (the seller's landlord, in this example) has the information necessary to make an informed decision regarding the consent request.  

Final Thoughts 

As described above, the language of a contract will vary in important ways depending on whether the simultaneous sign and close or sign now, close later approach is used.  The selected method will be dictated by market forces and the specific attributes of the transaction.    So long as the parties understand the implications, and so long as the agreement is precisely negotiated and drafted, either approach can be workable. 

Both buyer and seller should consult with their own qualified legal counsel to ensure that their interests are protected. The Law Office of Jennifer M. Settles regularly represents buyers and sellers in M&A, real estate deals, and other commercial transactions.    Contact the Law Office of Jennifer M. Settles today at (602) 617-3938 or through the contact form of our website, www.jsettleslaw.com,  for a FREE initial consultation!

Jennifer M. Settles, Esq. is a corporate lawyer with 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 consultation with Jennifer, please call 602-617-3938, or connect through our contact form on the website. 

Copyright © 2024 Law  Office of Jennifer M. Settles