We are reviewing the preliminary closing settlement statement and the buyer is deducting our legal fees, tail insurance, and employee deal bonuses as debt-like items. How should transaction expenses be handled so they do not shrink our net proceeds?

Question

Tyler Smith · Accepted Answer

In standard M&A transactions structured on a cash-free, debt-free basis, buyers will classify any liability that represents an obligation created prior to closing as debt or a debt-like item. That includes unpaid seller legal fees, M&A advisory commissions, quality of earnings expenses, runoff tail insurance policies, and change-of-control or transaction completion bonuses for your leadership team.

If you do not plan for these expenses upfront, they will directly reduce the closing cash wire to your bank account dollar for dollar. The critical distinction is understanding what belongs to the seller's side of the ledger versus what the buyer can be negotiated to share or fund.

First, build your waterfall model before signing the LOI. Every transaction expense must be anticipated so your net walkaway proceeds are clearly modeled. For change-of-control bonuses, if the buyer requires your leadership team to stay post-close, negotiate to have those bonuses structured as post-closing retention agreements funded by the buyer rather than pre-closing transaction bonuses deducted from your purchase price.

Second, address the Directors and Officers (D&O) tail insurance policy during LOI negotiations. Standard six-year tail policies can cost fifty to one hundred thousand dollars or more. Negotiate in the LOI that the cost of the tail policy is split fifty-fifty between buyer and seller, or treated as a shared operational expense rather than a pure seller debt deduction.

Ensure that any operational bonuses accrued in the normal course of business are captured in the Net Working Capital target calculation, not double-counted as debt-like deductions. If an accrued bonus is already reducing working capital, deducting it again as debt constitutes double-dipping by the buyer.