Last Minute Surprises Challenge Deal Closing
There are always some surprises in the process of selling a company and every time it is something new. Here are some examples of surprises and challenges during the last two weeks of a $12 million deal that we recently closed.
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PrintWe had gotten through the larger business issues, such as defining the outline of a purchase agreement and what that Letter of Intent really meant. We had even moved through much of due diligence, where attorneys and accountants converged on the seller’s business for three days of on-site investigation and weeks of follow up questioning.
Now it was time to close the deal. Part of the closing process is to complete schedule after schedule that become part of the closing documents. The schedules list in detail all the contracts, leases, assets, liabilities, equipment, employees, intellectual property, etc. etc. that are involved in the transaction. Often a few surprises show up.
Our first surprise was when the seller provided information on the patents, and it became known that he didn’t own 100% of the patents – an employee owned 30%. It just didn’t occur to him that this would matter to anyone, but in the LOI it says all assets should be transferred free and clear. The buyer, a very large public company, understood this oversight wasn’t intentional, but they made it clear that they own 100% of all their patents and they would not make an exception. We scrambled, and in the end the buyer and seller split the cost of buying the patent from the employee.
We had been careful to explain to the seller than he needed to identify any personal property that is his that should be excluded from the transaction: cars, artwork, etc. What slipped past was the fact that an employee owned some of the lab equipment that was being used. We were just about to sell that employee’s equipment out from under him. That was caught in time and we excluded those assets.
This deal was an asset sale, and while the buyer was assuming the Accounts Receivable asset, the seller was keeping the “Sales Tax Payable” liability. We all assumed that the sales tax payable was tax owed to the state for past sales. Two days before close, the seller’s bookkeeper alerted us that 100% of this taxes payable account was matched by an equal amount in AR. In other words, the customers would pay the sales tax when they paid the AR down, so the buyer would get that money, but the seller would be responsible to pay for it. Fortunately that was a quick fix, but it would have been much tougher or impossible after close.
A day before close the thing happened that you don’t want to happen. A routine phone call went downhill and an accountant from the buyer’s team began a new line of questioning about a complex revenue recognition issue. This accountant was on the due diligence team and he personally spent three days at the company’s facilities, so we felt he had plenty of time to learn about the business prior to this. To have this brought up at the very last minute in a challenging manner was frustrating, to say the least. Fortunately, cooler heads prevailed and it only caused a one-day delay.
Here is a list of other items that we encountered in the final few weeks:
- There was holdback of a portion of the upfront payment, and we still needed to finalize the negotiation on the interest rate paid by the buyer on that money
- An important employee was left off the list of employees to get new employment agreements
- Attorneys were still arguing over items such as jurisdiction and indemnity details
- Accrued vacation had to be paid out of the purchase price, but some allowance had to be made for people who had vacations planned after closing
- The buyer and seller had to reconcile patent and invention incentive systems that were very different
- The lease had to be changed to include an assignment clause.
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