Transferring Intangible Assets: Playbook for Selling the Knowledge-Based Enterprise - Closing the Deal
[This is the final article of an 8-part series covering the key elements involved in the sale of IP-based and professional services businesses.]
Once a Knowledge-Based Enterprise (“KBE”) seller and a prospective buyer have completed due diligence and executed the Purchase Agreement and ancillary agreements, they are ready to consummate the KBE sale transaction, which is referred to as the “closing”.
In this article, we discuss the final actions leading up to the closing, what happens at closing, and post-closing matters.
Preparing to Close
Even if due diligence is complete, there is typically a great deal of activity leading up to the closing date. Much of this activity is directed towards negotiating and finalizing ancillary agreements related to the KBE sale, and to obtaining required consents from various interested parties.
Ancillary Agreements. As discussed in the Purchase Agreement article, the Purchase Agreement serves as an “umbrella” contract aggregating all the key deal terms and typically integrating, by reference and exhibit, a number of other contracts related to the transaction agreements such as key employee agreements, intellectual property transfer agreements, and other documents.
Most of these ancillary agreements are not finally negotiated and executed until after the Purchase Agreement is signed. However, each party’s closing deliverables will undoubtedly be fully executed versions of these documents. As such, once the Purchase Agreement is signed by the KBE seller and the buyer, the parties will continue to negotiate the terms of these ancillary agreements.
Consents. A number of internal and external consents to the KBE sale transaction are typically required, and both the KBE seller and the buyer will be required to obtain and deliver these consents at closing. Internal consents usually refer to obtaining corporate approval from the shareholders and directors of the buyer and the KBE seller.
In addition, consent to the KBE sale may be required from any number of outsiders who may be impacted by the KBE sale. These can include lenders and creditors, landlords, and key contracts with suppliers and customers. In some instances, government approvals may also be required.
Closing Day
The closing date is typically stated in the Purchase Agreement, but very often will need to be moved at least once, so account for last minute challenges. In most instances, both the buyer and KBE seller will agree to extend the closing date as needed. Once the actual closing date arrives and the buyer and KBE seller are ready, the KBE sale transaction formally occurs.
The Purchase Agreement will specify what each party is required to deliver to the other at closing. For an asset sale, the KBE seller will typically deliver a Bill of Sale and other instruments of title to transfer the assets to the buyer. For an equity purchase, the KBE seller will deliver stock certificates or other means of transferring their equity to the buyer. In addition, each party must deliver their respective consents and ancillary agreements as required by the Purchase Agreement.
The buyer will also need to pay the purchase price for the KBE, although depending on the deal terms in the Purchase Agreement, only a portion may be payable in cash at closing. The cash portion should be paid to the KBE seller, but the remaining amount owed may be satisfied by future cash payments, by delivery of funds to escrow, or by the buyer providing the KBE seller with a promissory note.
Failure to deliver all required documents and payments as required at closing could jeopardize the entire transaction and could expose the breaching party to legal liability.
Often, closing is when payment is made to each party’s legal counsel, accounting firms, business brokers, and any other agents involved in the transaction. Finally, if a portion of the KBE sale proceeds were to be paid to satisfy a debt of the KBE seller, these funds are also paid at closing.
Post-Closing Matters
Some details regarding a KBE sale cannot happen until after closing. For example, if the KBE’s registered patents, copyrights and/or trademarks are transferred to the buyer as part of the KBE sale, the registrations will need to be modified to show the new owners. Similarly, some “titled” property such as real estate and vehicles, will need updating.
Where a portion of the purchase price is paid via a promissory note or earnout, the parties must continue to cooperate to ensure those provisions are satisfied. Otherwise, a breaching party may be liable for damages.
In addition, most representations and warranties made in the Purchase Agreement survive the closing for several years. Thus, in the event any of those representations and warranties are breached, the breaching party may be legally liable to the other party.
After Exit
After closing, many KBE sellers struggle to adjust to life in the KBE under new ownership, if they stuck around to work in the KBE following closing. Life as an entrepreneur often is very different than life as an employee. They are not used to asking permission or having their decisions questioned by others. As such, more often than not, the KBE sellers part ways with the new owners within the first year or so.
For those who leave the KBE behind completely, many KBE sellers are unsure what to do next. Some will immediately dive into a new venture – respecting their non-compete obligations, of course. Others will take some much-needed time off. But KBE sellers are typically not sedentary for too long. From my experience, entrepreneurs can do just about anything – except nothing!
Conclusion
As with all aspects of a KBE sale, each closing deal is unique. The foregoing provisions represent an example of the elements involved in the closing of a KBE sale. Of course, KBE sellers should work closely with their legal counsel to facilitate a smooth KBE sale closing.
About the Author:
Jim Chester is a 20+ year business and technology attorney, professor, and entrepreneur. He is a recognized authority in buying and selling technology businesses, global technology transactions, and providing strategic legal counsel for innovators and industry disruptors. For more on Jim, visit here. He may be reached at jim.chester@klemchuk.com.
To view the previous articles in this 8-part series:
1 - Transferring Intangible Assets: Playbook for Buying & Selling Knowledge-Based Enterprises
2 - Transferring Intangible Assets: Playbook for Selling a Knowledge-Based Business - Overview of the Process
3 - Transferring Intangible Assets: Playbook for Selling a Knowledge-Based Business - Preparing for the Sale
4 - Transferring Intangible Assets: Playbook for Selling the Knowledge-Based Enterprise - Finding Buyers
5 - Transferring Intangible Assets: Playbook for Selling the Knowledge-Based Enterprise- Negotiating the Deal
6 - Transferring Intangible Assets: Playbook for Selling the Knowledge-Based Enterprise - Due Diligence
7 - Transferring Intangible Assets: Playbook for Selling the Knowledge-Based Enterprise - Purchase Agreement
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