Closing Argument - the Closing
A closing should be the least interesting part of the transaction because there should be no surprises, or last minute drama - one would hope.
The Closing is the culmination of everyone’s efforts. It is usually a pretty happy event, where everyone either gets paid, or gets what they had wanted out of the deal. The orchestrators of the Closing are the deals lawyers - one for each side, and the escrow agent, to act as the referee. Because most deals are made via the phone, or emails, and documents are often signed by counterparts, the Closing is often when the parties first meet each other. Nothing should be spontaneous at the Closing; every single question has been answered, all the numbers were counted, checked and checked again; the checks have been cut and all other issues are settled (or are agreed to be punted to Post-Closing).
(FYI: this is an excerpt from my 15-page e-guide, “Seven Ways to Better Deals”, which you can get for FREE when subscribing to my Weekly Newsletter.)
Buyer Obligations. The buyer needs to create the legal conditions where it can actually “accept” the business or asset into its ownership. So, as the Closing approaches, among other things that are specific to each deal, the buyer forms an entity (usually and LLC or a corporation), retrieves an Employer Identification Number (EIN) from the IRS, obtain a business license (if applicable, or anticipate the business license to be transferred), coordinates the procurement of other licenses and permits to start operating the business right off the gate, sets up a bank account, and – for the love of all that is good and holy – gets an business accountant.
Seller Obligations. The seller needs to be as cooperative as the buyer needs it to be. Sometimes, as the owner of record, only the seller can access government records and request third parties to assign contracts and rights to the buyer. The seller must “get its affairs in order” by asking for final bills from utility companies, pay off any fines and liens against the property being sold, and if the transaction involves employees and other contractors, the seller must facilitate their transition to be the employees and contractors of the buyer. Furthermore, the seller must obtain the relevant tax clearances to make sure, say, no sales tax or payroll tax is due. Finally, the seller needs to make sure that the R&Ws that were (hopefully) true at the signing of the contract of sale to also be true at the Closing (which may include a final inspection by the buyer).
Pre-Closing. Both seller and buyer would need to allocate the purchase price among the various components of the business or asset they are transacting. Usually, it’s an allocation among (1) property rights (2) equipment (3) fixtures and improvements (4) accounts receivables (5) goodwill and (6) intangible property. Buyer and seller should also agree on prorating and adjusting expenses already incurred by the seller in the ordinary course of business (like tax payments), as well as prorating the work done towards ongoing projects that would not be finished before closing. By the same token, the buyer would need to be reimbursed for any uncured or un-removed penalties, fees, or liens that will remain as issues after the Closing. Both parties must coordinate with third parties, like the landlord or lenders (both the seller’s and buyer’s). Among the final steps, the buyer and buyer’s lender, if any, delivers the funds to the escrow agent to hold and to distribute at the Closing.
During Closing. The actual Closing - the consummation of the transaction contemplated by the parties - can take place in the course of a few hours, or over the course of a few days. The Closing, or the transfer of ownership, consists of two steps: (1) the signing of the conveyance documents, like a deed, a bill of sale or any assignments, and (2) the payment of the balance of the purchase price, by a combination of cash, lender’s funding, or a seller’s promissory note. As long as these two steps are completed, the deal has closed. Now, it might take several hours or days (or even weeks) before these two steps are completed, with the Closing still pending.
Post-Closing. Often, the real fun just begins after the Closing. Matters that may take weeks or months to resolve are moved to Post-Closing, and if applicable, the escrow agent keeps some funds in escrow to be released only when some specific condition, say, resolution of a fine against the seller’s asset or business, is satisfied.