Typical conditions to closing a transaction
June 24, 2024
by a searcher from Cornell University in Calgary, AB, Canada
I am working on my first EOI and one of the requirements is that I submit "Details of any significant conditions to closing a transaction such as regulatory, board, or head office approvals"
Are there any typical conditions to closing that I should include in this list? I am a solo self-funded searcher without any investors lined up behind me yet. I won't need approval from anyone other than my wife...
from The University of Texas at Austin in Miami, FL, USA
Closing of the transaction shall be subject to customary closing conditions, including: (1) satisfactory completion of Council’s accounting, business, technology, regulatory and legal due diligence; (2) negotiation and execution of a Definitive Agreement and all other related agreements; and (3) receipt of all necessary consents and approvals
Standard conditions to Closing, which shall include, among other things: satisfactory completion of financial, legal and technology due diligence; an opinion of counsel to the Company; and background checks on the key employees.
The completion of the transaction will be subject to the following conditions: Buyer will be given an opportunity to complete its due diligence examination, the results of which will be satisfactory to Buyer in its sole discretion. All amounts due to or from shareholders, affiliated entities and other related parties that are not to be paid at Closing will be 100% repaid, forgiven or otherwise settled prior to the Closing Date. As of the Closing Date, the Company will possess an appropriate amount of working capital adequate to fund ongoing operations equal to an agreed upon amount to be determined during due diligence. The Purchase Price will be adjusted to reflect any shortfall or surplus in working capital relative to the agreed upon target on a dollar-for-dollar basis. All Company indebtedness (including, without limitation, bank term debt, vehicle loans, capital lease obligations, promissory notes, guarantees and letters of credit but excluding trade payable or operating liabilities accrued in the normal course) will be 100% repaid or otherwise settled prior to the Closing Date. Mutually satisfactory transaction documents negotiated in good faith and executed. Each party will be responsible for its own transaction costs.
The Parties shall undertake in good faith to close the Transaction on or before [……], 2024. Buyer’s obligation to close the proposed Transaction will be subject to customary conditions, including: Buyer’s satisfactory completion of due diligence; the Board of Directors of Buyer and Seller approving the Transaction; the Parties’ execution and delivery of the Definitive Agreement and the ancillary agreements by each of the Parties; the receipt of any regulatory approvals and third partythird-party consents, on terms satisfactory to Buyer and Seller; John Doe CEO Seller and Jane Doe COO entering into employment agreements with Buyer on terms agreed with Buyer; Seller, John Doe CEO, and Jane Doe COO and identified affiliates entering into restrictive covenants, in a form acceptable to Buyer and Seller, agreeing not to: (i) compete with the Business Company for five years following their respective termination of employment with the Company closing, and (ii) hire or solicit any employee of the Business Company or encourage any such employee to leave such employment for a period of three years following their respective termination of employment with the Company closing; and there being no material adverse change in the business, results of operations, prospects, condition (financial or otherwise), or assets of the Company.
Conditions Precedent to Closing. a. The Purchase Agreement, satisfactory in all respects to the Company, its owners and the Purchaser and their respective counsel, shall be prepared, executed and delivered, containing usual and customary terms and provisions including representations, warranties and covenants on the part of the Company and indemnifications in favor of the Purchaser made by the Company for any breach by the Company of the representations, warranties and covenants contained in the Purchase Agreement. The Purchase Agreement shall be executed within sixty (60) days of the date of this letter. b. All necessary corporate and governmental approvals, and third party consents, shall be received by Purchaser and the Company. c. The Purchaser shall conduct the necessary due diligence of the value and existence of the Assets and quality of the Company’s prior earnings. d. Assignment of the lease and consent of the Landlord, as to Business premises. e. The Purchase Price is based on four (4) times projected 2023 EBITDA of Two Million Five Hundred Sixty Thousand Dollars ($2,500,000) to be proven in due diligence. There will be a basket of $50,000 higher or lower on the $2,500,000 for adjustments that will be made if due diligence finds an agreed upon change in 2023 EBITDA.
from Ohio State University in Chicago, IL, USA
Purchase agreements could have a simultaneous sign and close (i.e., once your contract is executed, you simultaneously wire the money and own the Company) or a separate sign and close (i.e., you sign the contract , but the closing doesn't become effect and you don't wire the money until certain conditions are true).
If your eventual purchase agreement has a simultaneous sign/close, your signature to the purchase agreement is your sole condition, so the deal isn't effective until you are happy to sign it.
Some deals have a separate sign and close because certain things need to occur, like a a regulatory approval or similar. In these cases, both parties may sign the contract and have a binding deal, but the closing won't happen unless the conditions occur within some time frame. In this case, you would be legally obligated to close and pay the money, except for certain negotiated situations. A deal with a separate sign and close thus exposes you to risks if you end up changing your mind, so closing conditions need to be carefully considered.
Specific closing conditions are difficult to know before completing due diligence, and you may not decide at the offer stage if you need a separate sign and close or conditions. So, like the other commentor mentioned, they are looking to understand any barriers to closing you may know about know, which are typically a financing contingency, approval to close by any partners you might have, or anything else. My non-binding offers have always had a financing contingency and approval by my "investment committee", which is just me and my partner... You could include anything, like successfully relocating to businesses' location for example. Conditions like a financing contingency or other things make your offer less attractive relative to other offers without strings attached, but depending on how many Buyers are available, you could get a seller to agree to them.
Please note, I have had recent challenges were new conditions needed to be added later in the deal, and it goes over like a lead balloon. Try hard to provide certainty to close and limit surprises for your seller, if you can.