The purchase agreement has been signed! Let’s open the champagne and celebrate! Hold on though… let’s take a breath… and step gently onto the left pedal (the brake, not the gas!). A signed purchase agreement does not equate to a done deal. Buyers and Sellers are often in a hurry to get to the finish line. This is great, so long as all parties are realistic about the steps and associated actions between a signed purchase agreement and the close of escrow.
The big gorilla that stands in the way of a closed deal is due diligence – the process of acquiring information in order to understand a company before completing a transaction. The information requested will vary depending on the nature and scope of the deal. While due diligence is usually conducted by Buyers, it is also common that a Seller may conduct due diligence on a Buyer (especially when a Seller’s Note is a component of the deal). The due diligence period can vary widely depending on the scope and complexity of the deal, but typically is anywhere from 30 – 90 days.
Throughout the due diligence process, contingencies (also known as conditions) are removed. Each contingency removal is instrumental in moving the deal a step closer to closing. Once all contingencies are removed, escrow is typically opened. The time horizon between all contingencies removed and close of escrow is measured in weeks.
An important consideration, which affects the closing date,concerns the block and tackle aspects of readiness. Buyers and Sellers often underestimate the actions required, so that both parties are ready for the ownership transition on the day of closing. The laundry list of readiness actions can be long and varied. For starters, here are just a handful of items that almost every Buyer and Seller need to consider prior to closing:
- • Successful creation of Buyer’s corporate entity and related bank accounts
Transfer of vendor accounts for all aspects of the business, from insurance, employee benefits, outsourced services, and suppliers. This can take some time, particularly if any of these vendors extend credit to the business, which could require new credit checks from the Buyer
- • Accounting considerations. Is the Buyer ready with their own Quickbooks to conduct business on Day 1 of the transition?
- • Merchant account set-up. Most businesses collect funds from customers in various ways. Most companies have a credit card processing option, so it’s necessary to consider that a Buyer needs to be ready with their own credit card processing solution on Day 1.
- • Transition plan. Most transactions include a transitional period where the Buyer and Seller will work together. Prior to closing, it’s useful for the Buyer and Seller to have a transition plan. In this way, both parties are on board with a mutual approach to make sure the transition occurs in an organized manner, and that nothing important has been overlooked.
On the day of closing, both Buyers and Sellers will look back over the amount of activity and work transpired since the purchase agreement was signed months earlier. While it may be tempting to schedule closing just weeks after a signed purchase agreement, it’s important to leave breathing room – so that each step in the process can be completed with care and attention.