Between signing and completion: the closing and integration details sellers miss

Two things happen after the price is agreed, and neither is covered by the preparation that got you here. One decides how much of that price you actually receive. The other decides whether the business the buyer paid for still exists a year later. Neither gets much attention until it is happening.

What to take away

Between agreement and completion

Signing and completion are usually separate events, and the gap between them exists so that conditions can be satisfied.

Typical conditions: the buyer's funding is finalized and drawn, and third parties consent. That means a landlord to assignment of the lease, a franchisor or a regulator to the change of control, sometimes a major customer. Any required regulatory step is done. The disclosure exercise against the warranties is completed, and specified problems found in diligence are fixed.

The gap for a small private company is typically four to eight weeks, and longer where a regulator, a franchisor or a landlord has to approve something before completion.

Two disciplines matter in this period. Somebody must own the condition list and drive it, because each item involves a third party with no urgency at all. And the seller must keep running the business normally: the agreement will restrict what can be done without the buyer's consent, and performance during this window is visible to everyone.

Deals die here more often than sellers expect, usually because a consent nobody chased arrives too late or does not arrive.

The working capital adjustment

This is the mechanism most likely to surprise a first-time seller, because it changes the money received after the price has been settled.

Why it exists

The price is for a business that can operate. An operating business needs working capital circulating in it: money owed by customers, stock on the shelf, and money owed to suppliers netting against them.

Collect the receivables, run down the stock and stretch the payables, and the buyer must inject cash on day one to carry on. They would pay the agreed price, then fund the business again.

So the buyer sets a condition: the business is delivered with a normal level of working capital. If it arrives with more, the seller is paid the excess. If it arrives with less, the price is reduced.

Stated that way it is obviously fair. The surprise is in what "normal" means, and in what sellers have often been doing for years.

Why it catches sellers out

Owners of private businesses manage cash for their own benefit. They chase collections when cash is tight. They stretch suppliers. They defer restocking. In the months before a sale, when attention is on presenting good numbers, that behavior often intensifies.

Every one of those moves reduces working capital. Under a working capital adjustment, cash pulled out of the operating cycle before completion comes back off the price. The seller took the cash early and pays for it at closing, sometimes without ever understanding the connection.

The second surprise is a definitional one. Many deals are agreed on a "cash-free, debt-free" basis: the seller keeps the cash, clears the debt, and the price assumes neither. Then the working capital definition determines which items sit inside working capital and which count as debt or cash.

Accrued liabilities, customer deposits, deferred revenue, tax balances, and unpaid bonuses: inside or outside changes the settlement. Finance leases do the same. Both sides' accountants will argue.

An item classified as debt reduces the price. An item excluded from working capital does not raise the peg. So the same liability can cost the seller twice if the definition is sloppy.

How it works mechanically

A target level, the peg, is agreed before completion, generally by reference to the business's own history over an agreed period. At completion an estimate is prepared and the price is adjusted provisionally. Afterwards, completion accounts are prepared, the actual level is calculated, and the difference is settled between the parties.

A worked example, in round numbers. The peg is $600,000, set from the trailing twelve months of the business's own figures. At completion the estimate is $640,000, so the buyer pays $40,000 on top of the headline price.

The completion accounts then show an actual level of $575,000. The seller was paid $40,000 too much against the peg and is $25,000 below it, so $65,000 comes back from escrow.

The negotiable parts, all of which are worth attention:

What sellers should do about it

Stop managing cash for the closing date and start managing it for the peg. Once the mechanism is agreed, the operating cycle should look normal: normal collections, normal payment terms, normal stock. Anything else either costs you at settlement or invites an argument.

Model the settlement before signing. Apply the agreed definition to your last several periods to see what the number would have been. If it is uncomfortable, say so before the agreement is executed.

Running the agreed definition against past periods is one of the seller preparation examples that shows how a settlement number can surprise you.

Completion itself

Procedural mechanics are unforgiving. The funds flow schedule shows where payments go: loan repayments, escrow, adviser fees, and balance to the seller.

Then come releases of security registered against the assets, transfer documents, consents in final form, and signed employment and consultancy agreements. Finally, complete the practical handover of bank mandates, systems, insurance, and supplier accounts. Hand over passwords and keys too.

Have the funds flow agreed in writing days ahead, not on the morning, with every lender condition from the funding already satisfied. It is the last chance to notice that a deduction someone assumed was already handled is coming out of your proceeds.

The day after

What breaks first, in most acquisitions, is not strategy. It is the ordinary running of things.

Payroll is the first casualty. The mandate on the payroll account did not transfer, or the only signatory left with the seller, and wages do not go out on the due date.

Bank mandates and system access fail in the same week. The buyer cannot authorise a payment because the old signatories are still on the account. Nobody has a login for the accounting system or the email domain, so invoices cannot be raised.

Supplier accounts fail quietly. An account in the seller's name has a credit limit that does not carry over, so an order is refused or held, and the buyer finds out when the goods are late.

None of it is difficult, all of it is urgent when it happens, and all of it is avoidable with a list made two weeks before completion.

The handover

The transition period is a contractual term, and it is worth defining as carefully as the rest.

What works: a written plan naming the relationships, systems, decisions and recurring problems to be transferred, each with a named person on the buyer's side receiving it and a date. Specific availability rather than a vague promise to help. Joint contact with the customers who matter, in a sequence agreed rather than improvised.

What fails: a departing owner who is technically present but no longer engaged, or one who cannot let go and continues making decisions the new owner has to unwind. Both are common. The second is more damaging, because staff will continue to route decisions to whoever they believe is in charge, and the ambiguity can persist for months.

If part of the price depends on future performance, be aware that the handover and the earn-out interact. The buyer will make changes; some will affect the measurement. That interaction should have been settled in the deal structure rather than negotiated in the middle of a transition.

Telling people

There is no version of this that is comfortable, but there are better and worse versions.

Staff learn at or right after completion, and the first hours set the tone. Their questions are narrow and predictable: Is my job safe? Who do I report to? Does anything change about my pay and conditions? What is the plan?

Vagueness reads as bad news. Say what has been decided. Say plainly what has not and when it will be. Do not promise what the buyer has not agreed to.

What each employment contract provides, and the obligations owed on a transfer, are governed by law that varies by jurisdiction and by deal structure, and there may be requirements about notifying or consulting staff before completion. Ask the lawyer early, because getting the timing wrong has consequences and cannot be fixed afterwards.

Jurisdiction changes the answer. In the United States, notice duties come from state law and the federal WARN Act, which applies to larger employers. Whether staff transfer at all turns on whether the deal is an asset purchase or a stock purchase.

In Canada, employment standards legislation sets minimum notice and the common law adds a reasonable notice period, and the rules differ by province. This publication's main market is the United States, with Canada as a second market, and the employment framing is not identical in the two.

Key customers and suppliers should hear it directly and quickly, ideally from both parties together. The message that works is continuity, who they will deal with, what stays the same, and how to reach someone. Silence gets filled by rumour, and competitors are usually the ones filling it.

What the seller still owes after completion

Completion does not end the seller's exposure. Several obligations survive it, and each one has an expiry date attached.

Keep your own copies of everything, including the diligence disclosures: if a warranty claim arrives later, the disclosure record is your defense. And know the dates on which each obligation expires.

Before completion, each side should be able to answer

Seller: What exactly will land in my account after every deduction? What working capital position am I contractually committed to deliver, and does my current operating pattern deliver it? What am I still liable for, in what amount, and for how long?

Buyer: Which conditions remain outstanding and who is chasing each? Is every account, mandate, license and system transferring on the day? Who receives each relationship from the seller, and by when? What happens in week one if the seller becomes unavailable?

The transaction is the easy part to see. What is being handed over is a set of relationships and habits that only exist because people keep repeating them, and the weeks around completion are when that repetition is most fragile.

Common questions

What most often delays a completion?

A consent from someone outside the transaction, usually a landlord. It is also the item most often left unowned by both sides.

Can the working capital target be avoided?

Rarely, and you would not want it: it protects whichever party delivers a normal business. What you can do is agree the definition precisely and model it before signing.

When should staff be told?

That is partly a legal question, and it depends on jurisdiction and structure, so ask your lawyer before fixing the date. What you can control is that the message is prepared rather than improvised.

How long should the seller stay on?

However long the agreement specifies, doing named things for named people. An open promise to help is the version that fails.