By Christopher T. Koenig, Bellavia Blatt & Crosset, P.C.
All too often in a buy sell transaction the settlement statement (statement), also referred to as the closing statement, is prepared just prior to the conclusion of the transaction. Indeed, it may be hastily assembled the night before or on the actual day of the closing. By that time, there can be unnecessary last-minute confusion amongst parties’ counsel and buyer’s lender as to the appropriate format to use, including whether the document should take on a more “accounting” or “legal” feel.
A rushed review of files from a prior transaction may reveal an old template to use, but it may not be what is most appropriate or applicable to the deal at hand. Additionally, by that time intricate calculations become rushed, leading to increased pressures and the potential for mistakes.
This article discusses the advantages of addressing the statement earlier in the process, and offers formatting suggestions that may simplify the drafting process for all interested parties to the transaction.
Start drafting the settlement statement at the beginning of the process, not the end
Contained within the asset purchase agreement (APA) and any related real property agreement (RPA) are item prices of central importance to the statement. For example, the dollar amounts for furniture and fixtures, goodwill, and special tools and equipment are often known at the time the APA is executed. Similarly, the purchase price of the realty is clearly defined when the parties sign the RPA. Collectively then, those numbers can be inserted into a draft document that should be created shortly after the APA and RPA are executed.
Of course, certain figures will only become known as the transaction moves toward closing. At the outset, then, “fill-in-the-blank” spaces with appropriate descriptions can be reserved for those numbers which, by way of example, include the price of the new and used vehicle inventory, work in process, and the price of the parts based on a future physical inventory. These items generally remain unknown until days or hours before the assets change hands.
There are other amounts that fit somewhere in between the two previously described categories, including several that may require per diem calculations to ensure that credits are apportioned appropriately. These figures may include charges for utility bills, school taxes, and service fees for items such as waste removal. It is wise to start investigating and identifying those items in advance, deciding where they will be inserted on the evolving draft statement, and putting simple notes in the margin of the document so that both parties can clearly see and agree upon how the final calculation will be determined.
Arriving at these exact numbers can include considering a variety of factors that may render the calculation process a tedious exercise. For example, it could include a scenario where past due yearly school taxes must be paid to pass clear title to real property, and the seller’s inability to pay the taxes prior to closing will necessitate that the buyer pay the principal and penalties and subtract the total amount from the seller’s final proceeds.
In this case, discussing the correct apportionment of financial responsibility early on allows the parties time to agree on the formula that will be used to arrive at the final number. That way, when the exact closing date becomes known, the formula is in place and all that needs to be done is to recalculate the final figure.
Finally, no matter who ultimately takes responsibility for drafting the settlement statement – counsel for buyer or counsel for seller – it should eventually be viewed as a shared responsibility since it is intended to accurately represent the transaction for both parties.
The document should be regularly exchanged amongst the parties as it evolves, with the usual caveat during each exchange that it is subject to modification until a final copy is executed. It is also not a bad idea to be a bit humble during these exchanges, requesting in the caveat that recognized calculation errors should be pointed out and corrected.
Format the settlement statement in Excel to facilitate inevitable changes
Creating a Word or similarly styled document to memorialize the statement may be a more comfortable and less daunting proposition for legal practitioners uneasy with the accounting feel of Excel. However, the fact of the matter is that Excel offers much more flexibility to modify numbers without manually recalculating figures that are often subject to change.
Taking time to become familiar with the advantages that Excel offers applicable to the circumstances of a buy sell statement can result in the more efficient preparation of the document in the long run. Additionally, an added benefit is that an Excel template, once created electronically, can easily serve as the basis for statements applicable to future transactions.
Like any statement, in its simplest form the top of the Excel document should contain descriptive information relevant to the transaction, including names of the buyer and seller, an address relevant to the assets and the real property, the lender (if any), as well as the date and place of the closing. Credits assignable to the buyer and the seller can then be shown in vertical columns, flanked on the left by a description of each entry and on the right by the previously mentioned calculation notes in the margin. At the bottom, signature lines should be inserted so that the buyer and seller can eventually memorialize their acceptance of the finalized document at closing.
The beauty of Excel is that with a little practice the cells, or boxes, on the page can be easily programmed to automatically calculate individual amounts, subtotals and totals. This avoids the need for manual calculations and, as previously mentioned, eliminates the tediousness of recalculating when figures change.
This is important when drafting and redrafting a statement, and why using Excel offers a definite advantage. It allows for easy layout and formatting changes to any part of the document while simultaneously accommodating “on the fly” updates to calculations without the need for manual verification.
The last thing anyone wants is a closing marred by discrepancies and time delays. Considering the statement early in the process, regularly exchanging it in an evolving draft format amongst the parties, and utilizing Excel to streamline all calculations will collectively ensure that those goals are more easily achievable. While closings are sometimes fraught with unexpected challenges to overcome, finalizing the settlement statement should not be one of them.