Your books are clean, due diligence is complete, and negotiations have secured favorable terms for the sale of your business. The next phase is the closing. That should be the easy part, right? Think again. Deals can fall apart at this stage for several reasons. You're not finished until ownership of your business is transferred to the buyer, which is why understanding the M&A deal-closing process matters.
Unfortunately, it is often the seller’s actions that lead to a failed closing. Buyers come in ready to sign. Sellers think they are ready, but hesitate. How do we protect good deals when it’s natural to get cold feet?
Today, I want to talk to small business owners who are looking to exit about the closing process. Some pitfalls can derail the sale of your business in this phase of M&A. By the end of this article, you'll have the information you need to make profitable decisions.
First, it's important to acknowledge that emotion can influence our decisions.
There's a subtle change that takes place when the terms you negotiated are incorporated into legal documents. The buyer might not feel it, but sellers have an emotional attachment to the business that could filter into the closing process.
In my experience, I've seen those feelings turn into contract withdrawals, further negotiations, or requests to change the deal's tax structure.
Closing involves specific activities that must occur in a specific order to keep the deal moving forward.
Closing on a business sale is very different from closing on a house. To start with, there are more people in the room.
Every member of each party's advisory team is there, including lawyers and CPAs. Lenders may have a representative present, but funds should already be approved at this point.
Here's what needs to be concluded and agreed upon:
- Execution of the purchase agreement and all ancillary documents, including non-compete agreements, employment contracts, and transition service arrangements
- Transfer of ownership, whether through asset conveyance documents or stock transfer certificates, depending on the deal structure
- Funding and disbursement of the purchase price, including any escrow arrangements or holdback provisions
- Filing of required government and regulatory notifications
- Settlement of outstanding obligations, including payoff of existing debt, resolution of liens, and distribution of prorated expenses
A delay in any one of the activities listed will, in turn, delay the resolution of other critical activities. We don’t want that.
Sellers who have maintained an ongoing advisory relationship with an M&A firm, especially one focused on finance and tax rather than deal-making, are less likely to encounter this issue because the financial groundwork is already in place. The seller's job is to take the plunge and sign the deal.
Every deal comes with tax implications that affect deal value, and too many business owners are not informed by M&A and CPA professionals in time.
I've spoken with many business owners who didn't understand the tax consequences of a sale until the day of closing. With due respect to my colleagues in the accounting field, that is gross negligence on the part of their CPA. In my office, we ensure sellers know their options and potential consequences.
Here's what I want you to get familiar with:
- Purchase Price Allocation: Asset categories such as equipment, inventory, goodwill, and intellectual property are part of the total sale price. Purchase price allocation is the act of determining how the total sale price is distributed across asset categories, and we must look for tax-efficient opportunities, as well as risk. Why? Because each asset is going to be taxed at a different rate. Some will come with depreciation schedules.
- Income Treatment: The decision to structure a deal as a capital gain or ordinary income should be made well before we sit down to close. It affects how assets are classified and can significantly affect your net proceeds.
- Installment Sale Provisions: Opting for an installment-based payment structure makes sense in some cases. From a tax viewpoint, this allows you to defer a portion of the tax liability as long as the purchase price is paid over time.
- State and Local Tax Obligations: Taxes vary by jurisdiction and can add unexpected costs if not accounted for in advance.
- Reasonable Compensation Determinations: Deals may include ongoing employment or consulting arrangements, which a seller should fully understand before closing.
Each of these elements should be addressed well before closing day.
Our process is thorough: Model the tax impact of the agreed-upon terms, identify opportunities for tax minimization, and ensure the closing documents reflect the negotiated structure.
Sellers who work with us through this process know exactly what their after-tax proceeds will be before they sign. Shouldn’t that be the standard in the M&A industry?
Before we sign, we're going to read the protections and penalties as if they were written in dollars.
Make sure the signed documents match the terms you negotiated. Know what survives closing because that is where risk lives. Escrows and holdbacks delay payment, so treat them like part of the price. Working capital adjustments can change your final check at the last minute.
Now, it reads on the page here like I'm telling you, our potential client, to do these things. That's not it. We'll be with you the whole way.
Non-compete and transition terms can limit your next move, so lock them down.
The signatures on the closing documents make the sale legally binding. Buyers and sellers know this before coming to the table, but experiencing a closing firsthand drives it home. Before you sign, review every document with your advisory team and confirm that the executed agreements match the negotiated terms. Pay particular attention to:
- Escrow and holdback provisions that delay receipt of a portion of the purchase price, typically as security against post-closing claims
- Indemnification obligations that could require you to compensate the buyer for losses discovered after the sale
- Representations and warranties survival periods, which define how long after closing the buyer can bring claims against you
- Non-compete restrictions that limit your ability to start or join a competing business
- Working capital adjustments that can modify the final purchase price based on the company's balance sheet at closing
Each of these provisions has financial implications that extend well beyond closing day. A seller who doesn't fully understand an indemnification clause could face unexpected liabilities months or even years later.
Working capital adjustments, if not carefully defined during negotiation, can result in a lower final payment than expected. Our team will make sure that doesn't happen.
Let's touch on the emotional side of closing again.
Closing is a legal and financial process, but it's also deeply personal, particularly for the seller. If you were directly involved in the business, the emotions run even higher because you're saying goodbye to employees you hired and processes you built.
Many sellers go through a kind of mourning period after a sale before they can move on to the next project. Others aren't phased in the least.
It's best to examine these feelings before setting a closing date. Emotional decision-making at the closing table is one of the most common reasons deals fall apart at the last minute. Make sure you really want to sell. Detach yourself from the human side of the business. That may be difficult. We can handle it.
When you sit down and talk with our team at Novyx Group, we’re looking to understand your relationship to your business, but we don’t want to walk in with an emotional attachment to your business, and neither does your pocketbook.
An M&A firm's role in this process is to focus on the financial and legal aspects of the deal. That will all be done before we reach this stage.
It is the responsibility of this firm to preside over every step of the closing process.
The Novyx Group is actively involved in every step of the closing process. Let's take a look at some responsibilities that require specialization and are, of course, critical to closing confidently.
- Verifying that closing documents accurately reflect the negotiated terms, particularly purchase price allocation and tax-related provisions
- Confirming that all tax filings are current and that no outstanding compliance issues could delay or complicate the transfer
- Reviewing working capital calculations and any post-closing adjustment mechanisms
- Coordinating with lawyers and lenders to ensure the financial aspects of the closing are executed correctly
- Advising on tax minimization and wealth-building strategies for the proceeds, ensuring the seller's financial future is protected
The books are clean. The tax strategy is in place. The documents have been reviewed. It's time to sign the deal.
Looking toward integration? Expect operational and systems changes as soon as the buyer takes control.
Closing marks the official transfer of ownership, but the M&A process isn't over.
The final phase is integration, in which the buyer combines operations, systems, and teams to realize the value of the acquisition. For sellers who have negotiated transition roles or earnout provisions, integration directly affects your remaining financial stake in the deal.
Sellers who have worked with our firm throughout the M&A process, from exit readiness through due diligence and negotiation, arrive at closing with no surprises.
We'll cover the integration process in detail in the final article of this series. If you're preparing to sell your business and want to ensure a smooth closing, contact The Novyx Group.
The work you do now will determine the outcome at the closing table and ultimately define a career.
Get a partner. Schedule a discovery call today.
Talk soon,
Jeremy A. Johnson, CPA, CEPA®
Founder & CEO
The Novyx Group
