Sign-and-Close vs. Sign-then-Close
Have you ever heard lawyers talk about sign-and-close vs. sign-then-close deal structures? Ever wondered what that means?
Perhaps it’s obvious (perhaps it’s not). But just in case, let’s look at it in greater detail.
What is a sign-and-close deal structure?
A sign-and-close deal is exactly what it sounds like: The buyer and seller sign the purchase agreement and close the deal at the same time.
The moment the ink dries, ownership transfers.
This structure is simple and intuitive. Many inexperienced buyers therefore assume that their deal will be sign-and-close.
Yet a sign-and-close structure isn’t always feasible. In fact, when buying a small business, it rarely is. This is predominantly for one reason.
If you are relying on an SBA loan to purchase the business, you cannot utilize a sign-and-close structure. Your lender will require a sign-then-close structure.
Even if you are not relying on an SBA loan, a sign-then-close structure may still be necessary. But before we discuss why, let’s take a look at what the term sign-then-close means.
What is a sign-then-close deal structure?
With a sign-then-close structure, the buyer and the seller sign the purchase agreement, but the transfer of ownership happens later—after certain closing conditions are met.
Common closing conditions include:
that the buyer has obtained sufficient financing, on reasonably satisfactory terms and conditions, to enable the buyer to consummate the transaction
that the parties have fulfilled their respective covenants under the purchase agreement
that the parties’ representations and warranties remain accurate.
Other common closing conditions include those relating to regulatory approval, in addition to the successful signing of a new lease if the business rents real estate.
If this sounds like more work than sign-and-close, you’d be right. But as alluded to above, choosing between sign-and-close vs. sign-then-close isn’t just a matter of personal preference.
The correct structure is largely dictated by the circumstances.
Sign-and-close vs. sign-then-close: Which structure Is right for me?
There are several common scenarios that dictate a sign-then-close structure when buying a small business.
First, as mentioned earlier, SBA loans require a sign-then-close structure. If you're relying on an SBA loan, your lender will want to see a signed purchase agreement before completing its SBA loan closing process. The same is often (but not always) true with a conventional lender.
Second, some businesses require regulatory approval (think licensing) before a new owner can take control, requiring a sign-then-close structure. For example, if you are purchasing a construction business, you may have to obtain or transfer a contractor’s license. In this scenario, the parties sometimes enter into a management services agreement in the interim period between signing and closing.
Third, there are parallel transactions, requiring a sign-then-close structure. For instance, the buyer is purchasing a business and some associated real estate. In this case, the closing of these parallel transactions will be mutually dependent (i.e., if one doesn’t close, neither will the other).
Even if you have the flexibility to choose between sign-and-close vs. sign-then-close, one structure may fit better than the other.
In fact, when buying a small business, it is generally better to sign-then-close. The buyer is often heavily reliant on the seller to successfully transition the business. Transition planning requires a high degree of trust and cooperation.
A sign-then-close structure permits the parties to negotiate the purchase agreement. Leave the pressure of doing so behind. And then focus on transition planning.
It’s about better transition planning and giving yourself time to prepare for ownership.
As always, work with a lawyer who has experience closing the type of deal you want to do. If your lawyer doesn’t have experience working on SBA funded deals, for instance, she may not realize that your lender will require a sign-then-close structure.
There is nothing complicated about choosing between sign-and-close vs. sign-then-close, so long as you and your advisors have your eyes open.
What language should I include in my LOI?
You don’t necessarily need to write the words sign-and-close or sign-then close in your Letter of Intent (LOI). However, all well-drafted LOIs should include a proposed timeline, which will imply one structure or the other.
For example, for the typical SBA funded deal, the LOI could contain the following language:
Buyer is prepared to move quickly and intends to close the Transaction by [______], relying on the following timeline:
(a) Phase I (Days 1 to 30): Financial and legal diligence; tax review; lender term sheet
(b) Phase II (Days 30 to 60): Transaction documents; commitment letter
(c) Phase III (Days 60 to 90): SBA closing; legal closing; transition planning.