The seller of a business may think the closing is the end, and that they have no more responsibilities. Ignoring the issue of seller financing, they may think that is the case.
However, the closing does not signal the end of the seller’s responsibilities. There are a whole bunch of things that must be settled in the months following the signing.
The most important point is that the contracts and other deal documents must be carefully worded to avoid misunderstandings to avoid later litigation. One investment banker has said, “you start negotiating post-closing adjustments on day one.”
Here are some items that may come up:
Transition: the buyer and seller must agree on how to manage the transition including everything is managed until the new unit is integrated into the new company, or the new owners take over. This includes everything from treasury to accounts receivables. Some investment bankers attempt to limit the transition period to six most at the maximum. Buyers that have minimal transition services needs are best.
Clawback Issues: The buyer may “clawback” or recover amounts from the sale price. This is usually based on the representations and warranty clauses in the purchase agreement. Sometimes up to 25% of the purchase price can be affected and needs to be reserved. There needs to be a time limit for making such a claim, three to six months is common. The seller often sees this as a potential source of abuse, allowing the buyer to demand money back after the deal is done.
Working Capital Adjustments: There is often enough money at stake in the resolution of working capital agreements to justify the accounting and legal expenses required. This is especially true in the sale of operating units of a larger company rather than the purchase of a completely free-standing company. Operating units do not have experience in handling the operating systems of the business under their own systems. This problem is compounded when there are numerous inter-company charges and allocations. In the purchase agreement, it is needed to clarify non-recurring charges as well as allocations for things like leases, warehouses, and supplies.
Pensions and Retiree Medical Plans: Pension plans tend to be not given much thought in the process but the amounts involved can be significant (I’m from Illinois, and the Public Pension crisis in the state is a great example!). The first point is the historic pension expenses charged to the business. Also, the current status of the pension plan needs to be analyzed to determine if it is properly funded. The seller should consider the assessment of the alternatives of the pension depending on who is the likely buyer.
The process for retiree medical plans is similar to pensions except that most buyers are usually unwilling to provide retiree medical benefits. These are rarely funded and the benefits do not vest with the employee until they retire. By retaining the liability, the seller can demand a higher valuation for the business in a buy-out.
While there are many standard items to be resolved after the closing, It is painful to continue to go back and forth after the sale on warranties and rep types of issues. These details should have been settled upfront during the initial negotiations. The goal is a clean break – sale without drama in the aftermath.
