Impact of closing mechanisms on business management

In previous articles on M&A consultancy, we addressed different issues that affect the agreement reached between two parties for the integration of companies. Regardless of the formula chosen (merger, absorption, etc.), we have stopped on different occasions in the analysis of the closing formulas. Precisely because of the difficulty and problems that it usually causes.

The mechanisms for closing corporate operations are those formulas used, as a result of a negotiation, to finalize and close business agreements between companies. In fact, it is common for the transaction and the closing to take place on different dates (signing and closing), giving rise to an interim period for compliance with the mutual obligations that the parties have agreed upon.

In our article Closing Mechanisms for Corporate Operations, we listed some of the most frequently used closing mechanisms. We refer to what is exposed there, so that we will not result in the enumeration of them.

However, as we have already pointed out, the choice of an appropriate closing mechanism can have a great impact on business management.

Of special relevance in this regard will be the due diligence report resulting from the audit carried out by the purchasing party on the target company, object of acquisition. Due diligence is a process in which the financial, legal and operational situation of the company being acquired is examined. This process can help identify potential contingencies and liabilities that may affect the operation and allow steps to be taken to minimize risk. Said analysis will be conclusive with respect to the obligations assumed between the parties whose fulfillment may be carried out, to a large extent, after the agreement and before closing. That is, in the interim period between signing and closing.

Going into the different agreed formulas. Paying the price in cash, as a closing formula, can be a useful option for companies seeking immediate liquidity, but it can also leave the acquiring company with less cash available for other investments and opportunities. On the other hand, the use of shares may allow the acquiring company to retain its cash, but it may also dilute the value of the acquiring company’s existing shares.

For its part, including an earn-out agreement as part of the closing can be a useful tool to align the interests of the buying and selling companies around the future financial results of the acquired company. However, it can also lead to conflict if financial expectations are not met or if there are disagreements about the terms of the agreement.

Guarantee mechanisms, such as guarantees and insurance, equally frequent, can provide protection to the acquiring company against possible contingencies and liabilities. However, they can also restrict the flexibility of the acquired company and limit its ability to make strategic decisions.

Therefore, it is important that companies carefully consider the closure mechanisms they will use and assess the potential impacts on business governance. A correct analysis of the specific situation, together with the appropriate legal and financial advice throughout the transaction process, ensures compliance with some legal limits that must not be forgotten, and in turn guarantees that the benefits for the parties involved can be maximized.

We must consider the management of the absorbed company’s human resources as a relevant issue. The buyer must provide peace of mind to the workforce, since, except in situations of distress or restructuring, the jobs are maintained. In any case, transparency in communication is recommended and the employees of the company that has been sold participate in the common project. If nervousness spreads among employees, or if doubts arise about the stability of the employment situation, the performance of the business and the loss of talent are jeopardized.

The same is true for suppliers and customers. The exchange of information can be the cause of success or failure of the operation. With even greater reason, delicate situations can arise in this regard when the acquired company is a competitor. Frequently, the management of these issues is entrusted to the period between signing and closing, where it is convenient to handle the situation with some skill, no matter how difficult it may be depending on the circumstance.

Conclusion

We have listed different examples that demonstrate positive and negative aspects of the different closing mechanisms in an M&A transaction. and their relationship with the direct impact they may have on the continuation of business management.

There is no ideal closing formula for all operations, but we must attend to the specific case. There is the additional circumstance that the interests of the buying and selling parties are often contradictory, so that the objective is to find that solution that allows it to be accepted by all the parties involved, and in turn does not harm the future of the company. company.

M&A deals can provide great opportunities for business growth and expansion. However, it is crucial that companies have a sound strategy and adequate legal and financial advice to ensure that all legal and financial requirements are met, and to maximize the benefits of the transaction. With a careful and well-planned approach, companies can carry out successful corporate operations that have a positive impact on their long-term growth and success.

José Luis Casajuana Ortiz
Socio de J. L. Casajuana y responsable del área internacional

18/05/2023