As global competition continues to intensify, growth is at the forefront of many minds in the investment world to increase value and maintain revenue. To be fair, growth has obviously always been at the forefront but digital technology has kicked things into high gear in the last 20 or so years.
Many are currently looking to pursue this growth and stay competitive by carrying out mergers and acquisitions (M&A) which can be a challenging feat. However, if you know the processes and work with an investment firm that understands your goals, it can bring in big money.
Table of Contents
- The Stages of an M&A Transaction
- Coordinating State Filings Before Closing
- Simultaneous Signing and Closing vs. Deferred Closing
- Closing Time
- Post-closing Important Things to Know
Whether you are new to the M&A world or just wanted a refresher on how closing processes work, we are here to arm you with the information you need to prepare for your next big deal.
The Stages of an M&A Transaction
Before we get into the closing process, let’s do a brief overview of the entire transaction. This starts after you have consulted with a firm and have chosen a company to buy that you believe will help you and/or your enterprise reach your financial goals.
While every M&A transaction is unique, most of them fall into a similar pattern.
- Preliminary discussions: Here buyers and sellers engage in informal talks to see whether a transaction is worthwhile. Companies may decide to include representatives consultants but rarely discuss deal structures.
- Provision of non-disclosure agreements (NDAs): Here all parties concerned sign a legal agreement to remain tight-lipped about information relating to any upcoming M&A deal.
- Letter of intent: If the buyer likes the terms of the deal that have been laid out and wants to move forward with the transaction, they’ll issue a “letter of intent.” This idea here is to write down the structure of the deal formally and set out the terms under which acquisition or merger might be worthwhile.
- The pre-signing period
- Negotiating the final document: Both sides engage in a final negotiation period with legal counsel, to hash out the terms of the final deal. They may decide to set out the terms in the letter of intent formally, or they may modify or add to those terms in some way.
- Completion of due diligence. Buying parties usually want access to more in-depth information about a company at this stage and will circulate a list of information requests to their target. This list might include financial documents, intellectual property documents, and essential commercial contracts.
- Population of disclosure schemes: Population of disclosure schemes are a form of insurance for the buyer that provides them with recourse, should the target company fail to disclose certain information, or breach the terms of the contract. This document includes representations and warranties that describe the operation of the firm.
- Signing: Signing occurs when both parties agree on the terms set out in the formal purchase agreements. Signing can happen at the same time as closing, but not always – we will discuss this in the next section.
- Closing: Closing occurs when both parties are satisfied with the terms of the deal, and money changes hands from the buyer to the target.
Coordinating State Filings Before Closing
For an M&A to be official, you need to file with the relevant state authorities. In the US, not all state requirements are the same, but there are some general guidelines you should follow prior to closing.
Pre-clear Certificates Of Merger
You don’t want to get to the closing date and discover that the state will not accept your Certificates of Merger. For this reason, it is better to “pre-clear” documentation with relevant authorities before completing the transaction.
Use an Updated Charter
Some buyers get into trouble when the charter of the target firm changes, but there are no amendments to the Certificate of Merger. To check whether things have evolved, you should obtain a Good Standing Certificate – a document that will inform you of any alterations to the original text. When possible, date the Good Standing Certificates as close as possible to the date of closing.
Simultaneous Signing and Closing vs. Deferred Closing
The type of closing process that is carried out can greatly affect the length of the transaction and how much leg work you and your team need to put in to finally close the deal. Here we will take a look at simultaneous signing and closing and deferred closing.
Simultaneous signing and closing
Both parties agree to sign and close the M&A deal at the same time.
Simultaneous signing and closing normally occurs in smaller deals that do not require a premerger notification form (see below), do not need a third-party present, or government approval for completion.
Think of simultaneous signing and closing as using a box of cake mix to bake a cake. It is much faster and easier to complete because you do not need as many ingredients or a full-blown recipe to get a finished product.
There is a period of time between the signing of the documents and the final closing and exchange of money.
Deferred closing is like the cake you make from scratch. You still get a cake – or a closed deal – but it takes extra ingredients and time to get to the finished product.
There are two common reasons why many M&A transactions are deferred, but it is important to note that there are many other reasons that deals do not simultaneously sign and close.
First, if the transaction value for an M&A deal equals or exceeds a certain amount, a premerger notification filing with the Premerger Notification Office of the Federal Trade Commission (FTC) may be required by law, and the parties must wait 30 days to complete the deal.
This waiting period is subject to exceptions and can be terminated early by the antitrust authorities if there are no competition concerns.
If competition concerns are present, the waiting period may be extended, and the parties can receive a request for additional information and materials. This could easily add several months to a transaction timeline.
The other common reason is that the sale may require a third party or governmental approval, especially in highly regulated industries. The period of time this can extend transactions can vary greatly depending on the situation.
Deliveries on deferred closing – and some simultaneous signing and closing – deals might include things like:
- Evidence of third-party consents
- Acquiring legal opinions
- Ensuring that key employees sign necessary agreements
- Obtaining government approvals
- Gaining ancillary contracts with third parties
- Consent of the board and stockholders
- A secretary’s certificate affirming that the charter documents of the target company are accurate
Once all closing conditions are agreed upon, parties will proceed and complete the transaction.
Although we all like the idea of going into a huge board room and signing the contract with a fountain pen that weighs almost as much as a coffee mug, the transaction is usually completed electronically.
If necessary, the buyer will pay cash by wire transfer to the seller’s bank account and/or issue shares of the company.
At this time, a portion of the purchase price might be sent by the buyer to a third party financial institution serving as an escrow agent.
Various closing certificates will also be exchanged and things like transition services or ancillary agreement or employment agreements, might also be signed and become effective.
After this is all complete, the buyer now owns the acquired assets, and the seller has received all of the money from the transaction (unless some is tied up in escrow).
Post-closing: Important Things to Know
You may think that since the transaction is closed that means that the buyer and seller relationship is over, but that is far from the case in most situations.
Initially, the parties will likely cooperate in determining if it is necessary to pay a difference in the purchase price to reflect the actual assets or working capital that was previously agreed upon.
A seller may also provide transition services to help the new owner successfully move into their new position. This could involve anything from a briefing of operations to IT support.
There are many other potential post-closing conditions that may tie the buyer and seller that may remain effective for several years post-closing.
Whether you’re an individual looking to make a change, an executive hoping to make a strategic move, or a professional investor, we bring unique knowledge and skill to every step of the M&A process and provide you with the resources you need to succeed. Click below to check out our acquisition workbooks. If you are ready to get started on your next deal, call us at (913) 701-3475 or use the contact form to set up a consultation.Check Out The DVS Group Acquisition Workbooks