During the course of our M&A blog series over the past few months, we have covered various aspects of the M&A process, such as transaction documentation, warranties and indemnities, earnouts, and pitfalls in the process.

In this final blog post, we focus on the post-closing phase, the phase after the transaction has been closed. What are some key considerations to keep in mind during this phase? 

Claim time-limits

As part of the transaction, the seller typically provides warranties to the buyer regarding the target company’s business. As part of the agreement, the buyer cannot lodge endless breach of warranty claims against the seller, and therefore, a claim time-limit is set (for example, between 12 and 36 months after the transaction is closed). It is therefore important for the buyer to remember and adhere to this time limit, as failing to do so could prevent the buyer from successfully submitting a claim to the seller. 

Earnouts

An earnout can be agreed upon as part of the purchase price, as mentioned in blog post #8 under “Key considerations to keep in mind in respect of earnouts.” When an earnout is used, a portion of the purchase price is made contingent on achieving specific financial or operational targets in the future. These targets typically relate to the post-transaction period. For the seller, it will be important that the buyer - who will then be in control of the target company - makes sufficient efforts to achieve the targets, ensuring the seller receives their earnout. To this end, agreeing on certain information rights (such as periodic updates on the target company’s EBITDA performance) can be crucial for the seller to gain insight into the target company’s post-transaction performance results. 

Closing accounts 

Also related to the purchase price is the closing accounts mechanism. Under this mechanism, the parties agree on a provisional purchase price for the target company before the transaction is closed

The sale and purchase agreement includes a detailed provision outlining how the final purchase price will be determined after the transaction is closed. The final purchase price is determined by reference to the closing accounts, i.e. the post-transaction balance sheet. It is therefore important that the seller and buyer jointly agree on the closing accounts and, consequently, the purchase price. If an agreement cannot be reached, it is important to include an appropriate dispute resolution mechanism in the transaction documentation.

Non-compete clause

The buyer determines a purchase price to be paid to the seller for the target company. The buyer typically intends to make the business a success and achieve certain results. Therefore, it is undesirable for the buyer if the seller, with all their knowledge, expertise, and network, starts a business that competes with the target company. That is why the transaction documentation typically includes a non-compete clause, which prevents the seller from competing with the target company for a specified number of years. It is also common practice to include an appropriate penalty clause in case the seller breaches the agreement. 

Transfer services 

It is common practice for the buyer to require the seller's assistance in transferring the business to the buyer. We often see agreements where the seller, based on a services contract, provides transfer-related services, such as training specific personnel or completing existing projects.

Even after the transaction is closed, there are many things to consider and make appropriate arrangements for. Therefore, it is important to seek good legal advice to avoid disputes and unwanted surprises as much as possible.