Mike Harvath, Matt Lockhart, and Ryan Barnett discuss the final week before closing an M&A deal in the tech-enabled services industry. They dive into the importance of completing schedules, working capital calculations, and obtaining consents early to avoid last-minute issues. Examples of schedules include contracts, employment agreements, and financial statements. They highlight the significance of clear communication with employees and stakeholders to manage expectations and significant deal changes are rare in the last week unless prompted by external factors.
This episode of Shoot the Moon covers Buyer & Seller perspectives in the last week(s) leading up to close.
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Mike Harvath 00:06
Hello and welcome to this week's Shoot the Moon podcast, podcasting live and direct from Revenue Rocket world headquarters in Bloomington, Minnesota. If you tune in regular you know that revenue rocket is the world's premier m&a and growth strategy firm that services a tech enabled services market. With me today are my partners, Matt Lockhart and Ryan Barnett. Welcome gentlemen,
Matt Lockhart 00:31
and great to be here as always, Mike, I hope your travels were a success. Do you know I like to give some updates from our great state, the great white north of Minnesota. And it is the Great Minnesota get together. And so for those of you who are listening, and I know you're all over the place, you should come to Minnesota for the Minnesota State Fair, because it is one of the greatest state fairs around.
Mike Harvath 01:06
Don't you think, Ryan,
Ryan Barnett 01:08
it is an extravaganza that for me, I'm a kind of every other year guy, because it's just that good when you go, you've got to take a little break before the next year, perhaps just to let belly preside. But I heard things like paella being more delicious than ever, and a deep fried ranch appearing on menus. So as we evolved from pickle pizza to deep fried Ranch, you can have fun if your heart's content, at the Minnesota State Fair. Uh, yeah, no, it's great. Also, we got going on in this Well, Mike was away. Matt, you've been working on a number of deals and and a couple of them are, are what we think are, the last week before a close. And so as buyers and sellers both start to approach a close of a deal. So it starts to, it's a, it's a, kind of an exciting week, but a lot of things are happening. So we want to cover, you know, what are some tips and tricks to help survive the last record close, and what kind of things can we do to help get ahead of that this context, you know, we are an M&A advisor. We work with clients on both the buy side, in which we're helping by helping firms buy other firms, and we also help bring your firm to market when the time is goes right for an exit. And we see a lot of things in the IT services world specifically. So in this context, we're talking about both side buyers and sellers as that last week of close app. And so, man, you're in the thick of it right now. What are you dealing with? What are you seeing in that last week? And what are a few things in a lot of the hard stuff of Lois negotiations and purchase agreements are going on, you know, what's that last week look like?
Matt Lockhart 02:56
Yeah, sure. You know it's it's probably like, in some ways, your children None, none too are the same. So every deal is its own journey. But there are, you know, some common things that you know typically we see. I guess maybe to start out, it can go really, really smoothly, or it can be really bumpy. And there are a lot of factors that you know that enable that, and in the sort of the grand scheme of things, the earlier that you can close things out in the context of all of the all of the agreements that need to be in place, all of the information that needs to be documented, All of the schedules that need to be done, all of the information related to the flow of funds, etc, etc, the earlier that you can have those identified and understood by both parties, and the earlier that you can close them out or check them off as being complete and satisfactory, the smoother that the last week will go. Now, it's very it's not, it's not common that everything is done because there's still work to be done. You know you're you. You're coming out of the the diligence period. Often times there's work that still needs to be done in in confirming some customer information, which typically comes later. Are in in the due diligence process, pre closed. So there's always activities. But if you think that you can leave too many of those activities to the end, well then that's going to be a bumpier end of week and end of the end of the period, and last week or last mile. Don't you think? Mike?
05:23
Yeah, I would agree. I mean, there's certainly things that come up or get that become a little bit of a fire drill. Some of those are around consents that may be requested, you know, weeks earlier and they're a little bit slow to come, right? You gotta get those moving along, or payoff letters or other things that are pursuant to being needed by a buyer in order to close right. And so the sooner you can portend all of those things and get on them, including your schedules. Schedules are always somewhat a little bit of a big lift towards the end and near the closing week. And some of them can't be produced before then. So you want to be really clear about what schedules to the purchase agreement or attachments to the purchase agreement coming down ahead of time, and which ones have to wait till later or near the end and make sure you're allocating enough time. It always seems that sellers are somewhat surprised at the level of effort that goes into developing a complete set of schedules and what's required, and being way ahead of that before you get to the last week of close will make the normal, what I would say, bit of a fire drill on getting some of these other items around consents and other other items easier, if that's all that's left in the last week, or even the schedules that you know, for example, are are pursuant to punching those out right at the end due to, you know, maybe where you are in the accounting cycle and what is considered close out of the accounting cycle for the definitive agreement pursuant to your working capital calculations and some of These other you know, financial matters that oftentimes get pushed to late and the process need to get done, but having a full view of what's required from your advisor and and from the team in general on both sides of the table prior to close will be important early and often, And then making sure you get ahead of it, because there's always something that is either unforeseen in my experience, or didn't come when it was requested, and someone thought it was there, but it's not, and you need to try to go get it near the end of the process.
Ryan Barnett 07:59
Yeah, Mike, I want to dig in on those schedules. And so just for the audience here, just to make sure we're understanding what the definition of a schedule is, you know, when we talk through it, it's there's a lot that goes into it. And I think every time we get to the last week, the question you're always asking everyone on the team and where we're at with schedules. So you know, what is the schedule? What are two or three examples of a schedule that someone's going to be expect during this time frame.
08:26
Yeah. I mean, you know, an example of a schedule might be all copies of all of your contracts that are active. Sometimes you want copies of contracts that are not active. But generally, that would be an example of a fairly, what we'll consider, you know, reasonable lift. That means you have to go get them, you have to append them, you have to make sure that they're attached, typically, that they're digitized, that they're in the data store. Now, most of the time that stuff would have been in a due diligence portal. But having it in the due diligence portal and having it be attached to the purchase agreement are different. Sometimes you can digitally attach them and point to the directory. Sometimes you physically have to have them a PDF of all those contracts attached. It depends on the legal teams are involved, but that would be an example. Or all of your employment agreements are another example. For all your active employees. You need to be able to have copies of those you have to have copies of your complete financial statement pursuant to the day of the whatever the financial cutoff is in the deal, usually that is a period in which the up to a certain month that's closed out or has already been closed. So it may be a month ahead of closed. It might be two months ahead of close, but it's typically a period of time. Where you have to have, you know, a balance sheet at that date, you have to have your P and L balance sheet, all of your normal financial reporting as a schedule to the purchase agreement. It could be all of the consents associated with the purchase agreement from lenders. It could be, I mean, there's just a bunch of things, or landlords. That's a good example. You know, someone's going to assume your lease, let's say, pursuant to a deal for your office space, your landlord has to consent to that, to that assumption. And those can sometimes be hard to get because, you know, landlords are already have you kind of on the hook for the for the rent commitment, and in some cases, they're just not all that incentive to put any time or cycles into changing that, because they have to do some diligence on the buyer. They have to make sure they're, you know, credit worthy. They got to make sure that do the diligence they would do on any new renter that takes a little time. They've got to do some legal research, etc. So those are kind of all examples of schedules, and there's a remarkable number of schedules. I'm always amazed at how many schedules are required by a given purchase agreement that are referenced in the legal documentation of what we'll call the four corners of the legally binding purchase agreement. Anything that's referenced in that agreement typically has to be what we'll call physically signed and not or attached to the purchase agreement. And Dave Mumbai used to actually printed out paper, and you printed lots of copies of it, and you attached all these documents. Now it's all done almost universally digitally, but it still has to be attached to one complete set of documents, and they're usually by the time you attach all these schedules, those purchase agreements, can grow to be hundreds of pages that you can add,
Matt Lockhart 12:02
but don't you think, Mike, that this is an example of man schedules really have to be done prior to the last week before a close. And maybe they can't be all 100% complete, but they materially gotta be complete. And so then, if you back up, you know, you gotta have those identified as to what is going to be in place and what that means, you know, shoot three, four weeks prior to a close. So that's just an example where, you know, in some cases, you know, delays, or, you know, lawyers haven't spent as much time as as as necessary earlier on in the process to make that last week smoother.
12:52
Yeah, I would add that, you know, in addition to that, there's sometimes a regulatory impacts to certain deals, like you've probably heard of deals that are larger, that may impact commerce in a more broad way for businesses in a particular state. Sometimes states require regulatory approval of a transaction. Sometimes those approvals can take a long time, multiple months, depending on the state and the level of regulatory approval that's required, the multi step process that might, you know, need to go through in order to get that approval. And you know, not thinking through that that's a schedule item, that's an item that has to be attached the purchase agreement that regulatory approval can delay a deal. And you know, certainly no one wants to delay deals. So, you know, thinking about this way in advance and understanding kind of what the gating factors are around schedule certainly is a hugely important aspect of, you know, in many ways, that final week before closing?
Ryan Barnett 14:05
Yeah, schedules have been been huge. And I think to your point, Matt, early and often is the the best so trying to get it ahead as best understanding some of these are certainly moving parts within the business, if I think about another major category here starts to become working capital. And working capital calculations, Maddie mentioned flow flow of funds. And at the same time, when you buy a business that's traditionally cash free and debt free, and what is, what does that truly mean for that last week, when you start to look at the actual working capital calculations and the agreements to that, and how does that even go? Perhaps, post close on any kind of true up, frankly, Matt or Mike, I'm not sure who's best to answer that. Matt. I want to get a scone, or Mike, either way.
Matt Lockhart 15:02
Yep, sure. You know, I'll get us going. So, you know, I think that this is a perfect, another perfect example of, you know, where we've seen delays and or bumpiness in the last week is if you're is if you're still working through that working capital calculation in the last week. Boy, you're you're late, and it's going to be harder, because you can, you you can, based upon the, you know, the trailing 12 months of the business, have a very good understanding of what the rationale, what the logic is going to be for the working capital Peg, Right? And the peg is, is everybody's agreeing upon this is, this is the standard working capital that is necessary to to operate the business, and you can have a very solid agreement on that prior to the first week, and then save that everything is happening as as normal, and there's no, you know, unexpected or material changes in the business in that last week, then that that can happen really quite smoothly. And then, to your point, in in terms of a true up, you know, you've got a true up method in place to align the the fringes of whatever the working capital expectations may be. And so, again, it that shouldn't be a last week item now that then speaks to what is typically a last week item, which is the closing statement, right, the closing balance sheet, and the closing statement, which then lines up to to support the working capital peg and the working capital arrangement that you put in in place. I
Mike Harvath 17:08
I Would also add, okay, you know, this all flows through to the flow of funds, right? Pretty important document that can have a little bit of a fire drill in the last week, particularly as it relates to vendor payments. So when you think of vendor payments that typically are attached to flow of funds, they include, you know, maybe an accounting advisor or an M and A advisor, particularly advised on either side of the transaction, usually are tied to the flow of funds, you know, or could be legal, but it's usually legal accounting and M and A advisory vendor statement. So it means that all those guys got to get their bill in, basically, in order to be included into the flow of funds. And sometimes that can get a little bit tricky, especially for legal that might be working on the project right up to the last minute. They have to portend kind of what their bill is going to be, and make sure they have clarity on that. And you know, and you may have a different arrangement with your lawyer to pay whatever overages that might occur beyond what's included in the flow of funds on the proceeds. The main reason that both buyers and sellers want that to be in to flow of funds is that they don't want any disputes. This is particularly important for buyers, that there isn't a dispute on a fee with an M and A advisor or a lawyer or an accountant post transaction, particularly if they do a stock deal, they're going to inherit that liability and the risk associated with that so if you're a buyer, you want to make sure that that's those sellers fees, or the transaction fees, are included in the flow funds that are paid out of proceeds, so that you know you're not stuck, if you will, conceivable and unlikely, but conceivable, you could get stuck with a bill, even though your purchase agreement says that, you know, for example, a seller would be responsible for m&a advisor fees or legal fees or accounting fees. That just eliminates that risk by making sure those guys are all paid off at the time of close and well, vendors sometimes are slow in getting their bills in, and you certainly want to make sure everybody has clarity on that and has them in well in advance so they're prepared to as the whether that payment to close is coming from the buyers legal escrow account or from a bank that they want to know, where to send the money to the seller and the respective parties and lenders, maybe if they're paying off loans, or if they're, you know, excess working capital, all that's going to get treated you know, whether that's coming, as I mentioned, from the lawyer or bank you need to make sure there's clarity and agreement on the flow of funds, so it goes smoothly.
Ryan Barnett 20:07
If I take a step away from some of the cash flow and working capital calculations, which are extremely important and one of the biggest things that I think there's a lot of people working on and take a look at what's happening to the people in the organization. Matt, what, what's going on with the team, or teams on, on, preparing for a close and assuming kind of a simultaneous sign and close here and and what happens to, perhaps integration planning, or what happens to notifying the team? You know what's going on with people?
Matt Lockhart 20:49
Yeah, great point, Ryan and and I think this is an area that is a real can be a real positive in in the last week. So again, and we work through the due diligence period. The start of the due diligence period is very confirmatory, largely around financials, around contracts, and you know, operations, if you will, sort of phase two is, is the beginning of of sort of combination legal diligence and agreements and the like. And then, you know, working through those items and moving into sort of the last phase, which is finalizing all those agreements, the backs and forth, the, you know, the areas that we've talked about before, that can be, you know, sensitive. And again. Let's get all of that stuff done as as early as possible, where then in the last week or the last two or the last mile prior to close, more time can be spent on how are we communicating? And I think that's really the number one item that sometimes gets overlooked. And, you know, sometimes it's overlooked, you know, because there's a say in a financial buyer in place and it they're really not thinking about the not, they can't, you know, they're thinking hard about, how are we going to make the most of this opportunity, but maybe not thinking about that individual who has no idea that this is all going on. And you know, as we say, change is something that happens to other people. Well, in in this case, there's going to be a change in the business and that communication plan to make sure that everybody is understanding and excited about the new opportunity with a new company and or a new partnership is really probably the most important aspect. You know, pre close, when we know that a deal is going to be done and it's moving forward, how do we make sure that we're not missing, missing out on the communication plan to employees, to partners, and then obviously, to the to the existing clients of of the selling firm. Now, some of that communication can be delayed. It doesn't happen. Doesn't have to happen on day one, but it's hard to keep things under wrap for too long, and so really focusing on that communication plan is is pretty darn critical. Obviously, you don't want to be discussing cutovers in in payroll in the last week. So there's other, you know, sort of immediate post merger integration items that have to have been discussed. But you may be, you know, talking about technicalities related to that and some other post integration. A lot of the post integration items can be identified prior to close, but, but certainly not worked on, but, man, that communication plan is is pretty darn critical.
Ryan Barnett 24:20
Yeah, and it's all great points, Matt, I think part of the consideration here, you know, if you're doing something like an asset deal that has where you have to recreate employment agreements, those are things that are can be a big experience that I think oftentimes just comes up. You've been working on the deal for so long that you realize, wait this next step is, how do I get this running and be successful after day one? And that communication, communication plans, everything from writing a press release, if you haven't told many employees in the company, and then all of a sudden they have to write a press release that this has happened to me before, and a company, they've got a. Acquired, and you learn of the acquisition that, hey, we're being acquired, and I kind of write a press release now, like tonight, on a Sunday night, you know, those things happen. And it's kind of a there's a lot of excitement that goes into it. And it can be a lot of it can be very interesting. At the same time can be very it's very interesting. And to your point, full of change and great opportunities for for people that are going through it. Uh, Mike, I had kind of one just area, and I I'm not sure how much time, time we need to spend here, but you know, how often do deals change in the last week this point, should things be turned out, they're all aimed towards kind of legalese, than than deal structure. You know, I've heard of bad some, some horror tales here. But you know how much, how often do deals change and such?
26:00
Yeah, you know, I'd say, in my experience, very seldom do they change, from a price and terms perspective in the last week. Very rarely it does happen. But it very, very rarely occurs if it's going to change. It typically changes weeks ahead of close. We've had situations, you know, for example, in 2007 and eight, when we had a client was being acquired by a public company, and the public company stock was in freefall because of the great recession. And, you know, we were all set to close, I think, three weeks later, and the buyer called this and said, We got to restructure the field. We're going to do it or and here's those constraints and why, and if we don't, we can't do it. And so we got through that, we were able to kind of negotiate new terms. But I'd say it's pretty rare. I would say, unless there's an external, create, reactive force, very rarely did a material deal change in the last week. Now, there's things that can change. You know, there's components of maybe a employment agreement, or some sort of a, you know, a component. But I would say those are even pretty rare. I think that most of the negotiations are done by the time you get to closing week, and unless there's material change in either company outside of the agreement, there's just not a reason to change the transaction we haven't seen, although you would think this might be an issue, you know, a notice or meeting that announces the deal, where there's things like mass exodus of staff or anything like that. There's a lot of fear on behalf of buyers and sellers that that might happen, but that doesn't really happen, and oftentimes the deal was announced just ahead of when it's finalized or signed, within days to a week. And so even there, there hasn't been, at least in my experience, you know, material changes that have been caused by, you know, some some external force that would get one side or the other to want to change terms or get cold feet. Usually it's just ticking and tying out the final closing statements, agreements, financial agreements, schedules, all things we've already talked about.
Ryan Barnett 28:36
If you're listening here, I would love to hear from you on any questions you may have about this topic, or even suggest your own, feel free to let us know at info@revenuerocket.com, but Matt and Mike, I love both of your perspective on this last week, it closed. You know, what's really exciting about close is actual close. You know, what does that day look like? And for both, yeah, what's a proper celebration that should be had on such a big monumentous thing being done?
Matt Lockhart 29:07
Well, it really is a kind of an anti climactic day, you know, because, you know, in in days of past, everyone may get together, and everybody's in a boardroom and they're signing physical documents and etcetera, etcetera. Well, you know, we are in a virtual world, right? And so most often the the signatures are are online, and everything's in place, and the flow of funds is initiated, and everyone says, you know, congratulations to each other. Typically, online is, is what we see. And so it can feel a touch anticlimactic. Obviously super important. We. Often recommend to to both parties that it's a great day to just take a breath and and and sit back and enjoy the moment and plan for a big celebratory dinner someday later the idea that you know, everything has to happen on that day, you know, maybe not, maybe not the best use of time, sure can. But the close itself is awfully anti climactic and and good to just kind of take a breath after, you know, after that period of of due diligence and goals have been met and and good time to to sort of reflect and start to think forward. I don't know. What do you think? Mike,
30:55
yeah, I'm 100% agreement. Matt, I think we find a lot of people ask us that question. You know, what should I expect on closing day? And oftentimes it's this is going to go reasonably quickly, even if there's multi parties and sign offs required, and you're going to want to get some rest. You know, you've just completed one of the most unnatural acts in business, there's a lot of energy and and knowledge and expertise that needs to be shared, and people collaborating and working hard to get this done. And, you know, just being able to sit back and reflect as a seller on kind of what you've done and that, you know now, you kind of go to this next step in your business, and you know what that means for you, both personally and professionally, I think is important, and it'll help you have clarity about there will be a right time to celebrate that. Usually it's weeks later when not only does all everyone know about the deal? But you know, the world may know too. Now put out press releases, and you may have even done interviews with with the press on the merits of the deal, and now it's, you know, well known more broadly, I'd say, after you can get a good night's sleep without having to worry about this detail or this report or that report needed for schedules, and you can get back into a more normal routine, is the time to probably raise a glass and celebrate either with your team or with your family, or both, and then onward and upward.
Ryan Barnett 32:40
That sounds great. Matt, I think we covered a lot here. Covered what it's going to look like in the last week. Schedules. We talked about working capital, we talked about consent, we talked about and and what it looks like for today. So greatly appreciate Matt Mike, your time here today, and again, if you have any questions for us at revenue rocket, as the world's premier m&a advisor, IT services companies. We're happy to talk about something that's on your mind. So let us know at info@revenuerocket.com and with that, Mike, I'll turn it back over to you.
33:18
Thanks, Ryan. With that, we'll find ribbon on it for this week's Shoot the Moon podcast. Certainly hope that you guys all Tune in next week when we further unpack and discuss all topics M and A and growth strategy for tech enabled services companies with that make it a great day and a great week. Thanks a lot. You.