You’d be forgiven, if you have never actually participated in a corporate transaction, for believing that the proverbial closing is the conclusion of a deal. Closings are colloquially and energetically discussed by experts, professionals and laypersons, alike. Closings serve as critical milestones in myriad transactional types and are announced as though they serve to package up all the mess of a deal, with a big number, a lot of smiles, and a bow on top.
Unfortunately, none of that is true. In fact, as we will see shortly, what constitutes the closing is not as clear as is generally imagined. And while closings do represent a critical milestone, that milestone is the middle of the deal, not the end of it. There are actually four phases in a deal, and the closing serves as the line of demarcation between Phases I & II, and Phases III and IV.
This writing serves as an introduction to this model, including a detailed description of each phase. Subsequent publications will include a “deep dive” into each phase, and the “best practices” for success therein.
The Four Phases
Broadly, the four phases are as follows:
Phase 1 – Pre-Deal (commencing upon Initial Discussions):
- Initial Discussions
- Development and delivery of Term Sheet(s)
- Pricing (Review of comparable sales)
- Marketing of Sale (Selection of business brokerage)
- Development of initial Due Diligence request list
- Development of Letter of Intent / Memorandum of Understanding (LOI/MOU)
Phase 2 – Deal (commencing upon Execution of the LOI/MOU):
Due Diligence delivery
- Due Diligence review
- Disclosure Schedules
- Definitive Document development, negotiation, turn, and delivery for signature
- Development of financing strategies (if necessary)
- Development of corporate architecture
- Compliance Review
- Budget Development
- Purchase price tax allocations
- Closing, that is, mutual execution of definitive documents
Phase 3 – Post-Close (commencing upon Closing):
- Recording / Filing
- Corporate administration (e.g. recording of transferred equity, execution of new/revised corporate agreements, meetings / minutes / resolutions
- Transfer of goodwill via limited-term, post-closing, seller consulting
- Termination / Resolution of Escrow
- Post-Closing diligence and resolution of any breaches of reps/warranties
- Deal Book Delivery
- Termination of Reps and Warranties
Phase 4 – Operations (commencing upon Termination of Reps and Warranties):
- Operations fully undertaken by Buyer (or designee)
- Integration of acquisition into buyer’s existing business e.g. achievement of synergies, reduction of overlap etc.
- Creation of new reporting structures: organizational charts
- Development of new agreements, as necessary
- Resolution of proposed budget with operational results
- Development of revised budget
- Coordination of professionals
We will undertake in-depth analysis of each phase, in subsequent blog posts.
Modern business has little appetite for complexity and has given way to a compulsion to “simplify” everything. However, simplification frequently betrays the goals of the parties. A common reaction of business owners to this vision of a deal is to ask why it’s so complicated. The answer is “because it needs to be.” As a matter of practice, we are minimalists, which may be particularly difficult to believe after consuming this introductory piece, but there is a fundamental information asymmetry between buyers and sellers that can only be effectively resolved through this process. If there were a faster, more efficient and more effective way, we would already be selling it.
The stakes of corporate deals are often astronomical, and many of the included risks are non-insurable, which means the only insurance available for the risk involved in buying or selling a going concern is good legal counsel and a comparably good deal process. The bottom line is that the only thing more expensive than deal counsel is undertaking a deal without competent deal counsel. As always, the cheap man spends the most.