The Only M&A Closing Checklist You Need (Pre-Closing, Post-Closing, and More)
If your business is looking forward to a merger and acquisition (M&A), having a comprehensive M&A closing checklist is necessary to ensure a smooth flow of processes.
Such a checklist can serve as a roadmap, guiding you through each step of the process, from pre-closing to the final stages.
In this article, we’ve created a comprehensive M&A closing checklist to get you started.
We understand that M&A is a complex process and can take up all your time and energy. At Exitwise, we can help you hire and manage an expert M&A team so that you land a successful M&A deal without compromising on your true valuation.
TL;DR - M&A Closing Checklist
Let's start with a quick overview of the mergers and acquisitions checklist when closing a business sale.
We'll break the items into pre-closing and post-closing formalities and discuss what each action entails.
Gathering necessary documents and information
Due diligence completion
Final negotiation of purchase agreement
Regulatory approvals
Third-party consents
Financing arrangements
Tax matters
Employee and management agreements
Intellectual property transfers
Real estate matters
Environmental matters
Insurance
Execution of transaction documents
Release of escrows and third-party consents
Regulatory filings
Internal and external communications
Operational transitions
Post-closing adjustments
Integration plan execution
Post-closing obligations
Final legal and compliance checks
Given that the checklist is long and detailed, you might have trouble working on it on your own.
The expert team of M&A professionals we help you hire can assist you. They'll ensure every step is completed successfully while safeguarding the deal and your best interests.
Why an M&A Closing Checklist Matters
A checklist for closing a business sale is important for several reasons:
Cost Savings: A proper checklist lowers the chances of M&A failure. You can avoid or reduce the financial costs of a canceled deal. A successful deal also means your time and efforts will bear fruit rather than go to waste.
Securing a Good M&A Success Rate: When you sell your business successfully, you secure a good reputation. This reputation can bode well for you when you want to sell other businesses. Buyers may examine your M&A success rate to see if your past deals were smooth and achieved the expected synergies.
Promoting Organization and Efficiency: A closing checklist helps you keep track of tasks. The process is systematic and more efficient since you can see who is responsible for each task, which saves time.
Promoting Adaptability and Flexibility: The checklist allows you to be flexible and adaptable to changes because it is a living document rather than a rigid tool. You can adapt the closing process to include new information, adjust timelines, or foster collaboration between you and the buyer.
Risk Identification and Mitigation: A detailed checklist helps you discover potential risks, such as legal non-compliance, that you must address before closing.
Documentation and Record-Keeping: Your checklist acts as a comprehensive record of the transaction and closing process. You can use it for future reference, legal proceedings, or audits.
Now that we’ve outlined the importance of the checklist, let's examine the items you need to consider.
Pre-Closing M&A Checklist
You should begin the closing process long before the actual closing date of the M&A deal. It involves meticulous planning, gathering necessary documents, and ensuring all parties are on the same page.
Gathering Necessary Documents and Information
Collecting the proper documents and necessary information is the first step in the M&A process. You must analyze your financial statements, legal documents, operational data, and other aspects.
This step ensures you have essential decision-making data to expedite the M&A process and prevent unnecessary delays.
Pre-Closing Formalities
Check out these 11 pre-closing steps and what each of them involves.
1. Due Diligence Completion
The first step in any M&A closing checklist is the completion of due diligence. Usually, the buyer executes the due diligence. However, you must thoroughly review your company's financial, legal, and operational aspects to prevent any red flags in your business.
Let’s look at what each of these entails:
Financial due diligence can include examining the company's financial statements, assets, liabilities, and future projections.
Legal due diligence mainly deals with reviewing contracts, legal disputes, and law compliance.
Operational due diligence usually focuses on your company's business model, market positioning, and efficiency.
2. Final Negotiation of Purchase Agreement
The purchase agreement seals the M&A transaction with legally binding paperwork. It generally includes price adjustments, representations and warranties, covenants, and indemnification terms.
Price adjustments are usually based on your business's net working capital, debt, or other factors that may impact its valuation. To get an idea, consider checking out our valuation calculator.
Representations and warranties cover many issues, including the accuracy of your financial statements, compliance with laws, and undisclosed liabilities.
Covenants are promises to do or not do certain things.
Indemnification terms provide for compensation to the acquiring party if the representations and warranties prove to be untrue.
Based on these factors, you can negotiate the final terms of your agreement to reach a deal that's acceptable to both you and the purchasing party.
3. Regulatory Approvals
M&A transactions may require regulatory approvals, which include antitrust and competition law compliance, ensuring the deal doesn't create an unfair competitive advantage.
You may also need industry-specific approvals, such as from the Federal Communications Commission for telecom mergers or the Federal Reserve for bank mergers.
4. Third-Party Consents
Third-party consent is unavoidable in M&A transactions to ensure proper collaboration with all parties involved. These consents can include lenders, landlords, and material contracts.
For example, a company may need its landlord's consent to transfer the lease to the buying party.
The financial aspects of an M&A deal can involve debt financing (where the acquiring company borrows money to finance the acquisition) or equity financing (where your company issues new shares).
The financing may be a one-off payment or stage-wise partial compensation, depending on the type of merger both parties agree to.
6. Tax Matters
Tax intricacies play an important role in the outcome of the deal. However, if you involve experts in planning and structuring the tax aspects, you can minimize the tax burden and maximize the benefits of the sale.
Usually, the term sheets are drafted by the buyers, making most of the terms disadvantageous to you. That’s why you should consult with expert tax advisors right from the beginning to restructure the terms before signing the deal. At Exitwise, we help you hire the best tax advisors, investment bankers, and M&A attorneys to maximize the value of your business.
These advisors can also guide you regarding pre-closing restructuring transactions to ensure a smooth deal.
7. Employee and Management Agreements
Employee and management agreements are crucial in determining your company’s structure after the M&A.
The agreement usually includes:
Retention plans to keep key employees
Employment agreements outlining the terms of employment
Termination agreements for employees who will be laid off
8. Intellectual Property Transfers
In many M&A transactions, intellectual property (IP) is a crucial or sometimes even a primary asset (examples include patents, trademarks, logos, designs, copyrights, etc.).
The deal may involve transferring these rights to the buyer or drafting appropriate licensing agreements where the buyer is licensed to use the IP.
9. Real Estate Matters
Real estate matters can include property transfers or lease assignments.
Reviewing all real estate documents to ensure a smooth property rights transition and avoid any future legal disputes is important.
10. Environmental Matters
Environmental compliance is becoming a mainstream necessity for many companies. Therefore, you should ensure that your company complies with all environmental laws and has all the necessary permits and licenses.
If you’re unsure, contact the relevant authorities to ensure you don’t miss out on important processes.
These compliance checks will help potential buyers assess their liabilities and result in a smoother transaction for you.
11. Insurance
Finally, the M&A closing checklist usually includes reviewing your current insurance coverage for general liability, property, cybersecurity, etc.
Buying companies appreciate transparency in these matters, as they know their risks and liabilities and can formulate new policies or adjustments accordingly.
Understanding the Closing Process
The closing process in an M&A deal usually involves working with the buyer to achieve the best value from the transaction.
Closing Formalities
Here are nine essential steps involved in the closing process:
1. Execution of Transaction Documents
The closing begins with the execution of transaction documents. These generally include:
The purchase agreement, which details the terms of the deal
The bill of sale, which reallocates ownership of assets
Assignment and assumption agreements, which transfer liabilities and obligations
Once you and the buyer sign and date these documents, they are considered ‘executed.’
2. Release of Escrows and Third-Party Consents
The M&A process usually involves an escrow account- which holds all the paperwork and funds till the terms of the escrow agreement are met. Once the conditions are met, the escrow is released.
Additionally, you would need third-party consent for this step. You may require consent from lenders, landlords, or other parties with a stake in the transferred assets to transfer documents.
3. Regulatory Filings
You may want to add certain post-closing regulatory notifications, such as the transfer of additional assets, future obligations of both parties and more. These clauses are common and can be easily integrated into your agreement with the help of an M&A expert on your side.
Additionally, you should submit the compliance filings required by law. These can include filings with the Securities and Exchange Commission, the Federal Trade Commission, and various other regulatory bodies to ensure compliance.
4. Internal and External Communications
Another critical step in the closing process is internal and external communication, where you inform your employees, customers, suppliers, and the public about the merger and acquisition.
You can communicate about the M&A through employee notifications, press releases, and company website updates so all stakeholders stay informed about the change.
5. Operational Transitions
Operational transitions are an integral part of the closing process.
These usually include:
IT system integrations
Operational handover of departments and functions
Accounting system upgrades
And more.
6. Post-Closing Adjustments
You can make post-closing adjustments to the business if both parties think they’re necessary.
These can include:
Working capital adjustments (which ensure the company has sufficient funds to continue operations)
Earn-out arrangements (which are additional payments you may receive if the company meets specific performance targets)
7. Integration Plan Execution
This step involves implementing the strategic plan for integrating the two companies.
It can involve:
Merging operations
Consolidating offices
Integrating culture and systems
And other tasks for coherence.
8. Post-Closing Obligations
Post-closing obligations can include:
Indemnification claims process (which protects the buyer from losses due to breaches of the purchase agreement)
Dispute resolution mechanisms (which provide a way to resolve disagreements that arise after closing)
9. Final Legal and Compliance Checks
The final step in closing usually involves obtaining conclusive legal opinions from M&A lawyers and completing compliance certifications.
These ensure that you meet all legal requirements and that the company follows the applicable laws and regulations.
M&A Closing Pitfalls and How to Avoid Them
Even with a handy checklist, you might make some mistakes that could jeopardize the deal. The trouble is that this can happen even when you have successfully sold businesses in the past.
To avoid that, here are some common M&A closing mistakes to look out for:
Insufficient Due Diligence on the Buyer: Most business owners look into the buy-side keenly only when qualifying the buyer. However, due diligence on the buyer should continue even in the closing process. You might notice last-minute red flags on their end. Your M&A team should closely examine the buyer across different aspects until the deal closes successfully.
Deal Fatigue: By the time you get to closing, you may not be able to wait for the deal to be over. Impatience can lead to costly mistakes. You must get psychologically ready for a lengthy and involving process. Working with M&A professionals also helps take the most demanding tasks off your plate.
Failing to Manage Expectations: Despite having a comprehensive checklist, the deal may fall apart without your fault. You must set realistic timelines and definitions of success for the deal and the closing itself.
Ambiguous Agreement or Unclear Deal Terms: Vague language in the definitive purchase agreement can lead to legal disputes. Your M&A attorney must ensure all the terms are clearly defined, including representations and warranties, indemnities, and post-closing obligations.
Poorly Managed Closing Logistics: Logistical mistakes, such as delays in sharing closing documents, incorrect monetary transfers, and missing signatures, can disrupt the closing process. You can prevent this by referring closely to the checklist and timeline. If needed, assign a specific closing coordinator from your M&A team to liaise with the buyers.
After Closing
The closing of an M&A deal is not the end of the process. After closing, you must take some essential steps to ensure a successful transition.
Consider looking at a few of our M&A success stories to learn from other successful exits.
Here are three crucial considerations in the post-closing phase:
1. Immediate Actions to Take After Signing
Once the deal is signed, these are some immediate actions that you need to take:
Transfer Essential Assets: You must transfer your essential assets, like computer access codes, alarm codes, instruction manuals, etc., to the buyer.
Transfer Customer Lists: This action is crucial to ensure that your existing customers get the same support without any break in service.
Transfer Vendor Accounts: You should transfer your vendor and other third-party accounts to the buyer to ensure continuity in business dealings.
2. Post-Closing Obligations
The most crucial obligation in M&A is integrating the two companies' operations, culture, and systems. It involves merging business processes, aligning corporate cultures, training employees, and integrating IT/physical systems.
Both parties must ensure careful planning and execution to minimize disruption and maximize synergies.
3. Ensuring a Smooth Transition
Ensuring a smooth transition is highly critical for the success of an M&A deal. You can do this by regularly updating all stakeholders about the progress and changes to business operations to help alleviate concerns and build trust.
Since employees make or break a company, supporting employees during the transition is crucial. Some support steps include:
Training for new systems or processes
Counseling services
Clear communication about changes to roles or responsibilities
A well-executed employee support program can help maintain morale and productivity during and after the transition.
Apart from the above considerations, another important step is working to retain customers and maintain customer service levels during the transition. This involves communicating with customers about the merger/acquisition, ensuring service levels are maintained post-merger, and promptly addressing customer concerns.
Frequently Asked Questions (FAQs)
Here are answers to questions business owners usually ask us regarding M&A closing checklists:
Who Prepares the M&A Closing Checklist?
Each side of the M&A process prepares its closing checklist. Your M&A professionals can prepare the sell-side checklist for you.
It's best practice for both the seller and buyer to share and collaborate on their checklists to increase their effectiveness as the deal evolves.
What Documents Are Typically Included in a Closing Checklist?
Your closing checklist should indicate all the documents that will be shared, signed, or delivered at closing. Depending on the nature of the deal, these can include:
Business plan
Corporate resolution
Intellectual property details
Government permits and licenses
Closing certificates and closing date certificates
Assignment and Assumption of Agreement/Bill of Sale
M&A regulatory compliance certificates
Business compliance certificates
Transition service agreement
Non-compete agreements
Disclosure schedules
And more.
Additionally, the checklist should include all the documents delivered before closing. These may include tax returns, M&A NDAs, financial statements, third-party consents, key vendor and customer contracts, insurance policies, employee agreements, etc.
Where Can I Find a Closing Checklist Template for M&A Deals?
It's best to have the sell-side M&A experts share their M&A closing list template with you from their M&A templates library. Their template is more detailed and customizable to your deal.
You may find some templates online. However, these may not be as detailed, especially if they haven't been prepared by an M&A expert.
Can an M&A Deal Fall Apart During the Closing Stage?
Yes. An M&A deal can fall apart in the closing stage. Some common reasons for such failure include:
Unexpected regulatory hurdles or legal issues.
Either party discovering a deal-breaking red flag in the other.
Material changes to your business during the M&A process, which may discourage the buyer.
Deal fatigue, leading to a last-minute breakdown in communication, or the desire to close the deal.
Changes in economic, market, or political conditions.
To control these, hire the right experts, conduct thorough due diligence, and communicate and negotiate effectively. You should also be proactive, flexible, and adaptable to new developments.
Conclusion
Mergers and acquisitions are complex processes and need careful planning and execution.
Remember, every M&A deal is unique, and you must adapt this checklist to fit your deal's specific needs and circumstances. Consult with legal and financial advisors to handle all agreement aspects adequately.
If you are looking for the right experts to facilitate your M&A deal, Exitwise will help you find and build your dream M&A team. All you have to do is connect with us, and we’ll take care of the rest.
