Sometimes the hardest part of a transaction is getting everyone lined up in the right position and pushing forward to get those last few details ironed out before a purchase agreement gets signed.

Even though your diligence may have progressed very well, and draft agreements have been passed back and forth without significant changes, this does not always mean closing your deal is a slam dunk.  

Executing a Flawless Business Play: Winning from LOI to the Final Buzzer

Have a game plan

Changes in the business during the period from the LOI to closing might make a seller think their business is worth more, and surprise you with a last minute ask for a purchase price increase. If you included rollover equity in the deal, remind the seller the goal is for them to get an extra turn (or several turns) on valuation when you sell down the road, which should increase their returns and compensate them for any of these changes. Also remind them of the risk that the buyer is taking down the road that the seller does not have to worry about.

If you have not evaluated the tax impact to the seller throughout the deal, they likely just started conversations with their accountant once the initial draft agreements have been passed back and forth.  Have these conversations early and often to avoid last-minute negotiating because a seller didn’t consider the net cash they would retain after a deal.

Know the score

While your LOI might have discussion of certain specific items and how they would be treated, the diligence process might have yielded some changes to how the deal is structured, commonly around what is considered debt-like versus a working capital item (such as accrued vacation, bonuses, 401k matches or profit sharing, to name a few). Discuss these as they come up and try to maintain documentation trails as much as possible to ensure the seller doesn’t think you are doing a back-door pass on them at the last minute.

Timing is everything

When you consider the timing of your closing, make sure you understand payroll dates and accounts receivable collection cycles. While most finance departments prefer a month-end close for clean cut-off, a mid-month closing may yield unexpected variations in cash balances if not considered properly. Sellers may think they are able to strip all of the cash from the business at closing, but buyers generally want to ensure sufficient cash and working capital is available at closing to run the business without drawing on a line of credit (if available) immediately after closing. Confirm timing of payroll and payments from major customers in the period leading up to close so the business isn’t running on fumes when you take over. Remind the buyer that they will receive any cash above the excess amounts negotiated in the settlement period, which is usually 90-120 days after closing.

For the win

A transaction closing can be a very smooth event, without needing a full court press to get it completed. Transparent communication throughout the weeks leading up to anticipated signing will generally aid in getting to the finish line without much consternation. If buyers consider the activity between diligence and closing, ensure sellers understand their tax consequences, clearly define what is debt-like and what is covered within working capital, and ensure cash forecasts are understood by both parties prior to closing, many last-minute meltdowns in a transaction can be avoided.

Playing Defense: Anticipating Challenges and Covering All Bases

  1. Cultural Alignment Matters: While financials and legalities take the spotlight, don’t forget the importance of cultural alignment between buyer and seller. This can greatly affect the post-acquisition integration process. Discuss management styles, company values, and employee expectations to ensure a smoother transition.
  2. Escrow and Holdbacks: Address potential contingencies by setting up escrows or holdbacks for any uncertain liabilities that might arise post-closing. This can help both parties avoid disputes and provide a buffer for unexpected expenses.
  3. Mitigating Key Person Risk: If the business heavily relies on a key person, consider discussing a transition plan or retention agreement to ensure the business’s stability during the transition period.
  4. Contingency Planning: Be prepared for any unexpected external factors, such as regulatory changes or economic shifts, that could impact the deal. Including clauses that address such contingencies can demonstrate foresight and willingness to collaborate.
  5. Synergy Realization: Detail the strategies and plans for realizing the synergies mentioned during negotiations. Show how these synergies will be tracked and measured to ensure both parties benefit as projected.
  6. Data Room Access: Offer secure, ongoing access to the data room for a specified period post-closing. This can help in addressing any queries that might arise after the deal is sealed.
  7. Employee Communications: Outline a communication plan to address employee concerns during the transition. Assure the seller that you’ll handle this delicately to maintain morale and productivity.
  8. Post-Closing Advisory: Offer the seller the opportunity to provide advisory services for a defined period. Their insights could prove invaluable in the early stages of integration.
  9. Environmental and Social Responsibility: If applicable, discuss the business’s environmental and social responsibility commitments. Address how these commitments will be upheld and integrated post-acquisition.
  10. Earn-Out Agreements: If part of the deal involves earn-out agreements based on performance targets, ensure these are clearly defined and tied to measurable metrics to prevent ambiguity.
  11. Legal and Compliance Check: Commit to conducting a thorough legal and compliance check before closing. This ensures that there are no hidden legal issues that might surface after the deal is finalized.
  12. Customer and Supplier Notifications: Discuss the strategy for notifying customers and suppliers about the acquisition. A well-thought-out communication plan can help in retaining key relationships.
  13. Integration Timeline: Present a high-level integration timeline to give the seller a clear understanding of what to expect in the weeks and months following the deal.
  14. Employee Retention Incentives: If key employees are crucial to the business’s success, propose retention incentives to ensure their commitment during the transition.
  15. Non-Compete Agreements: Consider including non-compete clauses to prevent the seller from entering into direct competition that could adversely affect the business.
  16. Warranties and Indemnities: Define the warranties and indemnities being provided by both parties, ensuring that they cover relevant areas of potential risk.

As the game clock winds down and the deal’s final moments draw near, remember that open communication and strategic planning are your key players. Just like a well-executed play on the field, transparent dialogue between buyers and sellers can ensure a smooth transition. By embracing comprehensive strategies that cover all aspects of the transaction, from cultural alignment to legal checks, you’re not just signing papers – you’re aiming for a triumphant goal line crossing. So, stay in the game, focus on teamwork, and make that winning move towards a successful deal closure.

Content provided by LBMC professional, Brad Bonde.