The period between the effective date and closing represents a crucial phase in any M&A transaction, when the formal transfer has yet to take place while the purchase agreement has already been signed. This interim period brings specific obligations, risks and challenges that require careful attention from all parties involved.
For entrepreneurs selling their business, it is essential to understand the dynamics of this period, as crucial conditions must be met before the actual transfer of ownership can take place. Thorough preparation and professional guidance are indispensable to go through this phase successfully.
What is the difference between the effective date and the closing date?
The effective date marks the moment when the purchase agreement is signed, while the closing includes the actual transfer of ownership and payment of the purchase price. These two moments can coincide, but are often apart.
On the effective date, also known as signing, all contractual documents are formally signed by seller and buyer. At that point, mutual obligations arise, but no transfer of ownership takes place yet. The purchase agreement usually contains suspensive conditions that must be fulfilled first.
The closing, on the other hand, is when the transaction is actually completed. This is when the shares are legally transferred, the purchase price is paid and any guarantees and indemnities come into effect. It is only at this point that actual control of the company passes to the new owner.
What conditions must be met before closing?
Typical suspensive conditions include financing approval by the buyer, advice from the works council, bank approval and possibly ACM approval in merger-sensitive transactions. These conditions protect both parties from unforeseen developments.
Financing conditions are common when the buyer needs external financing for the acquisition. The condition expires once the financing party makes a final commitment for the required capital. In companies with more than 50 employees, advice from the works council is required by law, with the works council being given a reasonable time to advise.
Bank approval may be required when existing credit facilities contain change-of-control clauses. These clauses give banks the right to review credit agreements upon a change of control. For large transactions, ACM approval may be necessary to rule out competition concerns.
How long is the period between effective date and closing?
The period between the effective date and closing typically ranges from a few weeks to three months, depending on the complexity of the conditions and how quickly they can be met.
Simple transactions without complex conditions can be completed within two to four weeks. This is especially true for companies without a Works Council consultation requirement, with existing financing with the buyer and no competition issues.
More complex situations require more time. Works council consultations typically take six weeks, although this can vary from three to 12 weeks, depending on the complexity. ACM proceedings take a minimum of four weeks in Phase I, with a possible extension to 13 weeks if referred to Phase II. Financing processes can also take several months, especially for large transactions or complex financing structures.
What are the risks during this interim period?
The interim period brings operational, financial and legal risks that can threaten the transaction. Market disruptions, performance degradation and changing circumstances are the main risks for both parties.
Operational risks arise because the company is in a transitional phase. Staff uncertainty may lead to key employees leaving, while customers may become reluctant to take on new contracts. These developments could affect the enterprise value and make the buyer doubt the transaction.
Financial risks manifest themselves in possible performance degradation or unexpected costs. When the purchase price is based on closing accounts, negative developments can directly affect the final purchase price. Legal risks include non-fulfilment of conditions, which can lead to dissolution of the contract.
What activities take place during this period?
During the interim period, conditions are actively fulfilled, communication with stakeholders organised and preparations made for the actual handover. These activities require close coordination between all parties involved.
Fulfilling conditions is key. This includes applying for funding, going through OR procedures, obtaining bank approvals and possibly filing ACM notifications. Each condition requires specific documentation and follow-up to ensure timely fulfilment.
Communication with stakeholders is carefully planned and executed. Staff are informed in line with legal requirements and the business strategy, while customers and suppliers are prepared for the transfer of ownership. These communications should be transparent but also respect confidentiality where necessary.
Preparation for handover
Practical preparations include updating administrations, preparing transfer protocols and aligning integration plans. These preparations ensure a smooth transition on the closing date.
How will the company be managed between effective date and closing?
The company remains under the seller's management, but with contractual restrictions that prevent major decisions without the buyer's consent. This construction protects the value of the acquisition for the buyer.
Ordinary business operations can generally continue unhindered. This includes regular operational decisions, normal personnel matters and usual commercial activities within the set frameworks. The seller retains full responsibility for day-to-day management and operational performance.
However, extraordinary decisions require the buyer's consent. These typically involve investments above certain threshold amounts, new credit agreements, changes in the organisational structure or entering into long-term contractual commitments. These restrictions prevent the seller from affecting the value of the business in the period prior to the transfer.
The period between the effective date and closing requires careful planning and professional guidance to manage all risks and ensure a successful transaction. For entrepreneurs wishing to navigate this complex phase, it is advisable to seek timely professional contact contact experienced M&A advisers.
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