M&A Deal Points | Simultaneous vs. Deferred Closings: What's right for your deal?

One of the key decisions when structuring a business sale is whether to close the deal at the time of signing (a simultaneous sign-and-close) or to sign first and close later, after certain conditions are met (a deferred closing). Each approach has its advantages and challenges, depending on the specifics of the deal.

Let’s explore the key considerations for both options:

Simultaneous Sign-and-Close

This approach is straightforward: the deal closes as soon as it’s signed.

Benefits:

• Simplicity: No need for interim covenants, closing conditions, or termination clauses.

• Flexibility: Either party can walk away before signing, without further obligations.

Buyer Preference:

• Buyers often favor this structure since it doesn’t lock them into a commitment before closing.

Seller Preference:

• Many sellers like the simplicity of this structure as well. Although the seller may still be under a no-shop agreement during the LOI phase, walking away after the exclusivity period ends is much easier compared to being bound by a purchase agreement.

Deferred Closing

In this structure, the deal is signed first, and the parties are obligated to close later, subject to specific conditions.

Benefits:

• Useful in cases where regulatory approvals, shareholder votes, changes to the corporate structure, or third-party financing are required before closing.

Challenges:

• Risk of Conditionality: Some closing conditions, like a “diligence out” clause allowing the buyer to withdraw if not satisfied with due diligence, can create an imbalance. This essentially gives the buyer an option to walk away while binding the seller to the deal—a dynamic most sellers find unfavorable.

• Sensitive Disclosures: Sellers may need to share confidential information, inform employees, or notify third parties (e.g., landlords, suppliers, or customers) about the sale before the buyer is fully committed. If the deal falls through, these actions can disrupt operations and damage relationships.

Mitigating Risks for Sellers:

• Consider negotiating to strike full diligence out clauses or transitioning to a simultaneous sign-and-close if conditions become overly burdensome.

• When limited conditionality is required, sellers can still opt for a simultaneous sign-and-close structure to protect themselves from unnecessary disruption.

Strategic Considerations

Level of Competition:

• High competition: Sellers may prefer a sign-and-close structure to retain flexibility in case a buyer doesn’t meet expectations.

• Low competition: A deferred closing may be acceptable, but sellers should carefully assess the leverage they might lose due to unfavorable conditions.

Specific Deal Requirements:

• If regulatory approvals or financing dependencies exist, a deferred closing may be unavoidable. However, sellers should ensure that conditions are clearly defined and not overly subjective to avoid giving buyers excessive leverage.

The Bottom Line

Deciding between a simultaneous and deferred closing is a pivotal strategic decision in any M&A transaction. Sellers must weigh the risks, benefits, and market dynamics carefully. Partnering with experienced M&A and legal advisors can help navigate these complexities, ensuring the chosen structure aligns with both the deal’s goals and the seller’s interests.