Mergers and Acquisitions For Dummies (87 page)

Also, Sellers may want to make estimated payments to taxing authorities (for income taxes or capital gains taxes as result of the transaction) at the time of the closing. These authorities may or may not be represented in the flow of funds, but paying them off along with the other debts may be beneficial simply because Seller gets those payments out of the way and thus reduces the odds she'll forget to make the payments or she'll spend the money before making required payments to the sundry taxing authorities. Speak to your tax advisor for the best way to handle your specific tax situation.

Make sure wire instructions are correct, and make sure each entry has an entity name and a contact person. Making an error or omitting this information may cause a delay in a party receiving its money.

Signing the final purchase agreement and other documents

After both sides have approved the flow of funds statement (see the preceding section), the closing proper begins. This time is when both sides sign the final purchase agreement and sometimes other agreements, such as employment contracts, noncompete agreements, non-solicitation agreements, leases, and so on. The documents pass back and forth as I describe in the earlier section “Gathering the Necessary Parties,” and then all that's left is paying out the money.

Generally speaking, both sides agree that the deal isn't final until both parties sign all documents. In other words, being the first to sign a document doesn't put you in some sort of danger that the other side will balk at signing the documents and thus leave you on the hook.

Distributing the funds: Show me the money!

After all the necessary agreements have been signed, Buyer
funds
the deal by obtaining money from his sources and distributing that money to Seller and any other party that appears on the flow of funds statement.

A typical funding occurs as follows:

1. Money from Buyer and any other funding source (such as a bank) comes into a Buyer-controlled account.

2. Seller's debt, including bank loans, notes payable, promissory notes, loans by shareholders, and so on, is paid off with Seller's money.

3. Seller's advisor fees, including legal, accounting, investment banking, and so on, are paid off. These expenses come out of Seller's money.

4. Money is wired to the escrow account.

5. Money is wired to Seller's account.

6. Buyer's advisor fees are paid off. Buyer usually pays these expenses.

Although wire transfers are highly recommended for most deals, cashier checks may be a suitable alternative for smaller deals where the total proceeds are less than $1 million. Speak to your advisors about the recommended course of action for your specific deal.

Schedule your closing at an appropriate time of day so that you can complete the transfer. You can't close a deal at 11 p.m. because you can't wire money that late! Most closings begin in the morning with the goal of closing by 2 or 3 p.m. Eastern Time because that's the nominal cut off time for banks. So even though wiring money after that time isn't unheard of, plan on closing by 3 p.m. Eastern.

Popping the champagne

After the wires are sent, both sides should contact any advisors or team members not present at the closing and inform them of the happy news. Your advisors can then constantly check their bank accounts waiting for news of their wire transfer.

And you're done with the deal. Pop some champagne, celebrate a bit, and start spreading the news, 'cause the deal is closed.

It's not a deal until the wires clear. Make sure you've received your money before you celebrate a successfully closed deal.

Tying Up Loose Ends Shortly after Closing

Closing a deal really doesn't mean the deal is completely closed on closing day. That's not a version of “how much wood would a woodchuck chuck,” it is a reality of M&A. In most deals, Buyer and Seller have little bit of work to conduct after the deal closes.

Allowing time to fully close the books

Although the deal is closed as of the closing date, a company can't produce an accurate balance sheet on that very day. Depending on the business, 30 to 90 days are necessary to fully close the books. For that reason, the closing uses an estimated balance sheet.

At some agreed upon post-closing date, the parties make adjustments to that closing day balance sheet based on the fully closed books. In some cases, Buyer pays more, and in other cases Seller receives less. Often, this adjustment is made to the money in escrow.

Making a working capital adjustment

Most purchase agreements include an adjustment for working capital. Prior to closing the deal, Buyer and Seller agree to the amount of working capital that Buyer is purchasing.

Working capital
is the difference between assets that can quickly be converted into cash (accounts receivable, inventory, and prepaid expenses) and the bills that are due immediately (accounts payable, wages payable, interest accrued, and unpaid liabilities). Think of working capital as being the same thing as cash.

At closing day, the parties adjust the purchase price based on the amount of the company's working capital. Working capital adjustments help prevent a Seller from simply not paying bills prior to closing; cash belongs to the Seller, so he may be inclined to sell off inventory and accounts receivable and stop paying bills in order to generate cash. In that scenario, the Buyer assumes a business with huge debts at closing. For example, if both sides agree working capital should be $1 million at the closing date but the closing day balance sheet shows $1.2 million in working capital, the Buyer pays the seller an extra $200,000 at closing.

If the Buyer has to pay more at closing, it's because she's purchasing more cash. Say you agree to buy a car for $5,000. Would you be willing to pay $5,100 if that car also included a $100 bill on the dashboard? The net expense to you is the same, $5,000. The same principle applies to a working capital adjustment.

Chapter 17

Handling Post-Closing Announcements and Adjustments

In This Chapter

Disclosing a sale to employees and the media

Tackling post-closing adjustments and contingent payments

Covering breaches and escrow claims

J
ust because the deal is closed doesn't mean all the work is done. You need to announce the deal to employees and to the rest of the world. And in most cases, both Buyer and Seller have to continue to interact with each other on some level for some period of time after the close.

In this chapter, I introduce you to the wonderful world of post-closing issues, including informing employees about the deal, making media announcements, taking care of the post-closing adjustments, addressing any contingent payment, working through breaches, and handling escrow.

Start Spreading the News

Following the close of the deal, the first order of business for many deal-makers is to announce the deal. Make the announcement to employees and the media as soon as possible after confidentiality no longer prevents you from talking about the deal.

Despite the best efforts of all involved in the sale process, rumors of a sale will have undoubtedly spread. Therefore, Buyer and Seller alike should immediately take control of the information release in order to disseminate accurate information. Keeping quiet can breed ambiguity, and ambiguity is no one's friend. Don't let further rumors fly.

Telling Seller's employees about the deal

Employees are an important stakeholder in any business, and they deserve to learn about the sale as soon as possible; Seller's employees probably want to know the identity of the new boss! Buyer and Seller both need to address Seller's employees. Those disclosures often occur at separate times, but depending on the specifics of the deal, both parties may want to coordinate efforts and make the announcement at the same time.

Sellers: Informing the employees

When I say employees should learn about the sale as soon as possible, I mean the same day the deal closes! Stat! After the papers are signed and the wire transfers clear, you should assemble the employees (if in one location) and make the announcement. If the closing is finalized after hours, tell the employees first thing the following morning. The key is to control the message and make sure you're the one delivering it. If employees are going to hear the news, better they hear official and accurate news from their leader than unofficial and potentially inaccurate secondhand innuendo (masquerading as news from fellow employees).

Don't wait until all the employees are present. Invariably, someone will be at a sales meeting, out of town, or out sick. Letting the genie out of the bottle and telling some of the employees now is better than waiting a day or two until you can tell all of the employees.

If the company has multiple locations, do your best to assemble as many people as possible and have other locations join by conference call. If a conference call isn't feasible, direct managers in the other locations should deliver the news as soon as possible.

Be sure to keep the proceedings positive. Selling a business can be a very emotional time; after all, owners often view their employees with a parental eye. Expressing and displaying emotions is wholly appropriate, but don't let the meeting become downcast. The announcement should focus on what the employees and new owner will be able to do in the future and not be a pity party for you the Seller as you move on to the next phase of your life. A positive and uplifting message helps eliminate ambiguity and hopefully creates excitement and amity between the employees and the new owner.

Don't bad-mouth the new owner. Be gracious, supportive, and encouraging, and remind the employees that the new owner can take them to the next level. Focus on moving forward; refrain from dredging up times of yore and refighting past battles, especially if the negotiations and sale process with the Buyer were difficult and arduous. Take the high road: Act like a responsible leader as you hand the baton to the next leader.

Buyers: Making a good first impression

If you haven't coordinated with the Seller to make the announcement together, I highly recommend getting in front of the employees as soon as possible; no more than a few days should elapse between the deal closing and your meeting with the employees.

Before meeting with the employees, take the time to understand the local culture of the company. The way you and your colleagues do things may be different from the approach of the people at the newly acquired company. Seek out someone who has lived in the area and ask for some insights about the local culture. You don't want to pander to the employees, but you do want to demonstrate that you are aware of their customs and ways of doing things. Showing that you're cognizant of someone else's views, opinions, and sensibilities is a great way to begin building a relationship.

When speaking with the employees, act like a leader at all times because you're going to be under a microscope. Although talking about your plans for the company is permissible and encouraged (even if those plans differ from the previous owner's plans), refrain from bad-mouthing the former owner. However, don't go overboard and become cloying in your comments, either. Don't dwell on the past too much. Move forward and focus on the future.

Business deals often succeed or fail based on how well an owner is able to connect with the employees. Demonstrating that you are a relaxed, confident, friendly leader with a sense of humor requires walking a fine line. You don't want to be a stiff, jargon-spouting automaton, but you also want to avoid going overboard and becoming overly familiar. Some people have that innate ability to connect with people and others don't, so walking that line may be more difficult for some.

Check out Chapter 18 for more on combining the companies post-sale.

Making a media announcement

After the deal closes, the sale can become public information. Usually, the Buyer controls news releases; in fact, the purchase agreement may define how to disseminate the information to the media.