You Made It – Closing Day

On the closing date, the seller and buyer may physically meet around a table, where the buyer delivers the final payment, and the seller signs and delivers the closing documents. Alternatively, they may sign the documents electronically or via FedEx. At Morgan & Westfield, most of our closings are virtual closings where documents are sent electronically or via next-day delivery.

Is your head spinning yet? If so, that’s good.

Days Before Closing

You and the buyer should do the following several days before the closing:

• Final Inventory Count: If the business has a substantial amount of inventory, an inventory count should be performed on the day before closing by both you and the buyer. Alternatively, an inventory valuation service can be hired to perform the count. The buyer usually pays the seller for inventory, based on the original cost of inventory, in cash at closing. You may liquidate or dispose of any obsolete inventory as long as the buyer’s approval is obtained. 
• Final Walk-Through: You should perform a final walk-through of the business with the buyer and ensure there are no surprises at closing.

Bring-Down

A “bring-down” condition requires the parties to reaffirm the reps and warranties at the closing. Normally, both the buyer and seller are required to deliver a bring-down certificate to one another at closing. A bring-down is necessary only if there is a delay between signing the purchase agreement and closing. In other words, the reps and warranties must not only be true as of the date the purchase agreement is signed, but they must remain true in all material aspects from the time the purchase agreement was signed through the closing. 

If there has been a material change in the reps and warranties, the buyer may terminate the transaction if the purchase agreement contains a condition that the reps and warranties are true as of the closing date. The purpose of the bring-down condition is to shift the risk of operating the business prior to closing to the seller. The buyer seeks assurance that the company they are agreeing to purchase will be materially the “same” company at closing. 

Materiality can be evaluated either on an individual or a collective basis. In most cases, the reps and warranties must be materially true on an aggregate basis before the closing can occur. For example, several immaterial inaccuracies may constitute materiality on an aggregate basis. 

“Each of the representations and warranties of the Seller contained in this Agreement shall be true and correct in all respects (without giving effect to any limitation as to “materiality” or any derivative thereof qualification set forth therein) as of the date hereof and as of the Closing Date as though made on the Closing Date, except for any failures to be so true and correct that, individually or in the aggregate, have not had or would not have a material adverse effect.”

Is your head spinning yet? If so, that’s good. This should serve as a wake-up call to rely on the guidance, experience, expertise, judgment, and objectivity of an experienced M&A attorney in such negotiations. While you should understand the high-level mechanics of the transaction, this is a perfect example of issues you should leave to your attorneys to sort out. If your head is about to explode now – while you are presumably in a calm, cool state of mind – imagine trying to make sense of this in the whirlwind of one of the largest, most emotionally draining transactions of your life. And that is why you should hire the best advisors you can afford.

The parties may conduct the closing virtually or meet around a table on the closing date.

Closing

Once the closing conditions have been satisfied, the closing can occur. In most cases, the closing is uneventful … an anticlimactic formality … an ordinary occasion … a forgettable event … a routine affair … a humdrum transaction. The more uneventful, anticlimactic, ordinary, forgettable, routine, humdrum, the better. For that’s precisely how the closing should be. All problems should have been worked out well in advance of the closing and the closing process should be as uneventful as possible. 

The parties may conduct the closing virtually or meet around a table on the closing date. Most closings today occur virtually. In this situation, the closing documents are often mailed to the parties via courier for signatures, and then sent back to the escrow agent for release on the closing date, or the documents are signed electronically. A virtual closing is uneventful for most, and this is becoming more common with advancements in technology.

Items To Immediately Address After Closing

You and the buyer should address the following after the closing:

• Accounts Receivable: The seller typically retains ownership of the accounts receivable in most transactions. If you are retaining ownership of the accounts receivable, you should keep the entity and bank account open so you can collect any outstanding accounts receivable post-closing. You should also meet with the buyer to discuss how to collect the accounts receivable post-closing and the possibility of notifying customers. Typically, the seller continues to invoice customers using the business address, and the buyer receives the payments and hands them over to the seller. This can often be simplified if you are working with the buyer at the business performing the training during the same period. 
• Client List: You will need to provide the buyer with a list of customers or clients and assist with the transition of these relationships.
• Employee Meeting: You and the buyer will want to meet with the employees to inform them of the change in ownership. The guidelines for telling employees vary widely and largely revolve around the dynamics of your current relationship with employees. I recommend that the buyer presents a solid and persuasive vision of the company moving forward and ensures employees of their continued employment. The meeting should be positive and upbeat.
• Telephone Service: An arrangement should be made to transfer telephone services before closing.
• Training: You should work with the buyer to complete the training and transition period. You will both need to document the completion of the training in a training log to minimize the possibility of disputes in the future regarding whether or not the training was successfully conducted.
• Transfer Key Assets: You should provide the buyer with the following at closing:
  • Computer access codes, safe combinations, and alarm codes
  • Keys to file cabinets, premises, and vehicles 
  • Owner’s manuals, instruction manuals, and information on any warranties
• Transfer of Equipment Leases: Any equipment leases that are to be assumed must be properly transferred from you to the buyer.
• Transfer of Third-Party Contracts: These include advertising contracts, equipment leases, etc.
• Transfer Key Relationships: You and the buyer should jointly meet with all key relationships following the closing and assure them that the transition will be a smooth, seamless process. These include key customers, vendors, and other relationships.
• Transfer of Utilities: The parties should contact the utility providers to transfer the utilities from the seller to the buyer.
• Transfer Vendor Accounts: You and the buyer should contact all vendors and suppliers after the closing to notify them of the ownership change.
• Transfer of Technology: You and the buyer will need to work together to transfer all technology to the buyer. This includes websites, domain names, phone numbers, and other asset transfers.
• Uniform Commercial Code (UCC) Financing Statement: You should file a notice or a lien with the appropriate filing office if there is a seller note.