Managing Legal and Financial Risks Between Signing and Closing in M&A

15.5.2026 | ARROWS law firm

The period between Signing and Closing is a critical phase in M&A transactions, where the successful transfer of multi-million amounts and the fulfilment of conditions are decided. In this interim period, business owners face significant legal and financial risks that may jeopardise the final price and even the deal itself. This article explains what actually happens to the assets during this interval and how to effectively eliminate losses. Get practical guidance on how to protect your profit and secure smooth financing during this high-risk window.

The photo shows a lawyer addressing the issue of risk in the period between signing and closing.

The role of money between Signing and Closing
Risks for the seller: the company’s value is leaking away
Key aspects: How the money physically moves and where it is held
Risk table: Money between Signing and Closing
Operating covenants: How to protect the business during the interim period
Working Capital Adjustment: How the numbers are calculated at the last minute
FAQ: Most common questions on the working capital adjustment
Representation and Warranty Insurance (RWI): Insurance against errors

Key takeaways

Between Signing and Closing, weeks to months may pass, during which funds and control over assets are in a critical transitional state. The transaction can still fall through if the contractual conditions are not met. The main reasons are typically regulatory approval processes and securing financing.
The seller risks a loss of company value. If the seller does not act in line with its contractual commitments (breaches operating covenants), the company’s value declines before Closing and the seller’s margin evaporates.
The buyer faces the risk that financing will fail. Even if a loan was approved, the bank (lender) may change the terms, request new data, or refuse the loan—this is a very common reason why M&A transactions do not close.
The money is held in a secured arrangement. It is typically held in escrow with a notary, attorney, or bank until all contractual conditions are met. Without clear contractual documentation and proper management, deposits can be “frozen” for months after Closing.

The role of money between Signing and Closing

Many business owners think that once the agreement is signed, the transaction is essentially done. The reality is quite different. Signing is not the financial closing—it is only a legal commitment that both parties wish to carry out the transaction.

The actual transfer of ownership, control, and money only takes place at Closing, which is the legal moment when it is finally confirmed that: the buyer is now the owner, and the seller is entitled to the agreed price.

Between these two moments, the “money moves” in the sense that an advance payment toward the purchase price (often referred to as earnest money or a deposit) has usually already been placed into escrow, which signals the buyer’s serious intent and protects the seller in case the buyer withdraws.

The buyer’s financing is not yet finalised. The buyer may have conditional loan approval (so-called conditional approval), but the final signing of the loan documentation and the drawdown of funds with the notary or bank only happens at Closing.

In the meantime, the seller does not yet have the purchase price, even though it is stepping away from the business, but it must not allow the assets to be devalued. The seller must operate in the ordinary course if the agreement requires it.

Escrow agents, lawyers, and other third parties hold documents, guarantees, and sometimes even funds—everything is waiting for the final wording of the Closing documentation to be aligned and for the conditions precedent to be satisfied.

This period between Signing and Closing is commonly referred to in practice as the “interim period” or “gap period” and can last from a few days (for simpler transactions) to months (for complex M&A with regulatory approvals, foreign investment, etc.).

Why is everyone so nervous about the money for those few weeks?

Risks for the seller: the company’s value is leaking away

If, during the remaining 60 days to three months, the seller is not under pressure to keep the business in a normal state and starts dealing with things only “at the last minute” (no new investments, no maintenance, no hiring), it leads to a “value leakage” effect—i.e., value slipping away.

Specifically, employees may leave, because during the uncertainty around the transaction, key employees may consider departing, which threatens the company’s operational stability.

If the transaction is known, key business partners may look for alternatives; contract negotiations slow down and are put on hold. Money can also “leak out” in the form of excessive dividends.

If the seller is not controlled, it may pay out excessive dividends, move money aside, or fail to carry out routine maintenance of assets. Legal and operational issues arise, as the other side’s lawyers often uncover previously unknown facts during the interim period.

This may include, for example, litigation with a former employee, a non-transferable licence, or a refusal of a regulator’s consent. That is why all modern M&A agreements include operating covenants—legal obligations for the seller to run the business in the ordinary course until Closing.

If the seller breaches this covenant (e.g., closes an office, lays off half the team without approval), the buyer has the right to refuse to complete the transaction in order to protect itself against a lower value of the acquired business.

ARROWS’ Prague-based attorneys ensure that such protective mechanisms are addressed already when drafting the agreement and that they comply with case law and market practice in the relevant jurisdiction (for example, in the USA there is extensive Delaware Court of Chancery case law on what “ordinary course” means, to avoid disputes).

Risks for the buyer: financing fails, terms change

A very common reason why M&A transactions do not close is incomplete financing. The buyer had conditional loan approval (so-called conditional approval), but between Signing and Closing, the world changed.

The bank (lender) changed its rating, market rates increased, or an issue arose on the buyer’s side. Typical scenarios include situations where the buyer does not receive final approval (so-called clear to close).

The bank requests additional documents, revised financial statements, confirmation of the company’s current status—and when something appears that does not align with the original forecast, it refuses financing.

Financing terms may deteriorate. The bank may say: yes, we will finance, but the rate is one percentage point higher; or we require an additional 5% equity; or you must start repaying earlier.

The bank may also change its view of the target company. If there is worrying news about the sector, regulation, or customers, the bank may conclude that the risk is not acceptable.

At this point, the seller feels like a bystander—the money is promised but does not arrive, and it is unclear when, or whether, it will arrive at all. If the transaction is structured so that the seller (or the buyer) can exit the deal at a certain stage (a so-called walk-away right), these changes may enable one party to slip out.

ARROWS’ Prague-based attorneys assist both parties by clearly defining in the purchase agreement which financing changes are acceptable and which are not, and which party bears the risk if the terms change.

Conditions that must be met before the money is paid out (conditions precedent)

The agreement between Signing and Closing usually includes a list of mandatory conditions precedent – things that must happen for the transaction to be closed.

If these conditions are not met, the buyer (typically) has no obligation to close the deal and may reclaim its purchase price deposit, provided it had a contractual right to withdraw from the agreement.

1. Regulatory approvals (antitrust, foreign investment, special licences)

In the Czech Republic, if the transaction is large enough (typically above a certain turnover threshold set by law), it must be approved by the Office for the Protection of Competition (ÚOHS) under Act No. 143/2001 Coll., on the Protection of Competition.

Within the EU, it must also be assessed under the EU framework for screening foreign direct investment (Regulation (EU) 2019/452). A foreign investor must often also discuss the investment with the Ministry of Industry and Trade under Act No. 34/2021 Coll., on the Screening of Foreign Investments.

ÚOHS approval in Phase I typically takes 30 days; in Phase II it usually takes up to 5 months. Foreign investment screening by the Ministry of Industry and Trade typically takes 30 calendar days in Phase I and usually 90 calendar days in Phase II (with the possibility of an extension to 150 days).

In the Czech Republic, this is particularly critical: if the parties implement the transaction before it is officially approved (so-called gun-jumping), they face fines under the Protection of Competition Act of up to 10% of worldwide net turnover for the last completed financial year.

The M&A agreement therefore always defines who will be responsible for obtaining the regulatory approvals and what remedies (e.g., divestment of part of the business) a party is willing to implement in order to obtain approval.

2. Financing (for the buyer)

The buyer must demonstrate that it has secured financing or that the bank (lender) has given a clear to close – final approval with a specific amount and terms. If the bank fails, the buyer typically cannot close the transaction (if it has contractually protected itself), and the seller may either trust the buyer and hope for a solution, or sue for breach of contract.

In some cases, reverse termination fees are used – a penalty payable by the buyer if it walks away from the transaction due to financing failure.

ARROWS’ Prague-based attorneys focus on ensuring that financing is secured well in advance and that it is clear what happens if the bank fails.

3. Accuracy of representations and warranties

The agreement includes a number of representations and warranties – the seller’s statements that the assets are unencumbered, that there are no hidden debts, that all customer contracts are in order, etc.

At Closing, these statements must still be true – if it turns out they were untrue (e.g., a receivable appears that no one knew about), the buyer may refuse to close.

The length of the survival period (how long after Closing the buyer can claim that the representations were incorrect) is critical. It usually differs for general representations (12–24 months) and fundamental representations such as title/ownership or authority (sometimes several years, depending on the nature of the warranty).

4. Third-party consents (partners and creditors)

Conditions often appear in the agreement such as: “The transaction may be closed only if the landlord has consented to a new lease relationship with the buyer” or “if the bank has consented to the change in ownership of the shares”.

These are critical conditions that can block the entire transaction, which is why it is important to address them in advance.

ARROWS’ attorneys map these conditions already during due diligence and then prepare a consent strategy – a plan for obtaining these consents in a timely and efficient manner to avoid unnecessary last-minute delays.

Key aspects: How money physically moves and where it is held

1. How does a wire transfer work at Closing?The buyer must send the money (typically by bank transfer) 1–2 days before Closing to ensure it arrives on time. The lending bank also transfers the loan proceeds into escrow (an escrow account). Once the escrow holder (escrow agent, typically a law firm in Prague, a notary, or a bank) is satisfied that all funds are in place and all documents are signed and in order, it issues instructions for the transfer of ownership and the payout to the seller.

2. What is escrow and how do you protect money held in it?Escrow is a neutral third party (typically a law firm in Prague, a notary, or a bank) that holds the seller’s and buyer’s money and documents until all contractual conditions are met. Without escrow, the seller would risk transferring ownership and never receiving the money.
The escrow agreement must be very clear – who may request release from the escrow account, in what order, what the time limits are for raising objections, etc.

3. What happens if the buyer changes its mind at the last minute?If the buyer breaches the agreement by pulling financing without being entitled to do so (i.e., it breaches a contractual condition), the seller can typically keep the purchase price deposit (held in escrow). It may also seek specific performance – a court order requiring the buyer to close the transaction, if legally possible.

FAQ: Most common questions about money mechanics in the interim period

1. If the transaction is “signed”, why hasn’t the bank (lender) sent me the money yet?
Because a “signed” transaction is not yet closed. The bank does not want to release the money until all regulatory conditions are met and the final checks have been completed (e.g., a valuation for real estate or a title search to verify ownership). Also, until property insurance is arranged and until the bank is satisfied that the buyer truly has its own funds for the down payment. All of this takes weeks.

2. What if something bad happens to the target company during the interim period – e.g., key employees leave?If this breaches the operating covenants (the seller was required to run the business in the ordinary course), the seller is in breach of the agreement. The buyer can choose: either close the transaction at a lower price, or reclaim its purchase price deposit and withdraw from the deal. To prevent this, ARROWS’ attorneys draft operating covenants very specifically – what the seller may do and may not do – to avoid later disputes about what this actually meant.

3. We have a “signed” transaction and the seller is telling me the price has increased by 10%. Do I have to pay it?
Only if you agreed to it in the purchase agreement (e.g., as part of a working capital adjustment, an earnout mechanism, etc.). Otherwise, no – the price is fixed. If the seller is trying to increase the price, it is a breach of the agreement, and you have the right to step away from the transaction (if you have a Material Adverse Change clause in the agreement – or another ground for withdrawal).

Risk table: Money between Signing and Closing

Potential issues	How ARROWS helps (office@arws.cz)
Financing falls through : the bank changes its terms, worsens the rates, or refuses the loan – the buyer cannot close, the seller is not paid.	ARROWS attorneys will work with you already when preparing the agreement to define which financing changes are acceptable and which are not, and we will ensure that both parties’ rights are clearly set out in the contract in the event of financing failure.
The seller devalues the assets : during the interim period they lay off the team, do not invest in maintenance, or siphon value out of the company – the value of the business decreases.	We will set specific and enforceable operating covenants with measurable criteria and monitor compliance during the interim period; in the event of a breach, we will secure the buyer’s protective rights.
Regulatory approval is not obtained : the transaction carries significant antitrust risk, or a public authority rejects a foreign investment – the deal gets stuck for months or collapses.	We carry out early regulatory analysis, prepare filings with the Czech Office for the Protection of Competition (ÚOHS) and the Ministry of Industry and Trade, and negotiate remedies; we have experience with complex M&A transactions in the Czech Republic and know what takes how long.
Third parties (landlord, bank, creditor) refuse consent : without their consent, the agreement cannot be assigned, and therefore the transaction cannot close.	We identify all critical consents already during due diligence, prepare consent statements, and negotiate with third parties; we have experience negotiating consent fees and alternative solutions (e.g., contract novation).
Escrow funds get frozen : without a clear escrow agreement and coordination, it is not certain where the money will go and how to get it back if the deal collapses or a dispute arises.	We prepare detailed escrow agreements with a clear process, contacts for the escrow holder (escrow agent), and protective mechanisms; in the event of a dispute, we will handle enforcement of the release of funds from escrow.

What happens when the buyer is a mortgage borrower (real estate example)

A special case for real estate acquisitions: If the buyer finances the purchase with a mortgage, between Signing and Closing they depend on the bank issuing a clear to close on a certain day – confirmation that the mortgage is fully ready to be drawn down.

The bank will want a final verification – current statements, confirmation that the buyer is still employed, that they have not borrowed anything else, etc. In some countries (e.g., the USA), Closing involves a so-called wet closing – the buyer and seller meet in person, sign all the paperwork, and at the same moment the funds are transferred and the property is handed over.

Elsewhere it is a dry closing – the documents are signed on one day, but the funds and ownership are transferred later, once it is confirmed that everything is in order.

In the Czech Republic, real estate purchases are often carried out through an attorney or notarial escrow of the purchase price, which ensures that at Closing (or immediately thereafter) ownership is transferred (by registration in the Czech Cadastral Register) and the purchase price is released at the same time.

The notary or attorney will ensure that all funds are in place and that neither party can “run away” without fulfilling its obligations.

Operating covenants: How to protect your business during the interim period

Operating covenants are the seller’s legal obligations to run the business in the ordinary course between Signing and Closing, without material changes.

Further, not to invest tens of millions without the buyer’s consent, not to sell material assets or key customers, and not to pay themselves high dividends or million-crown bonuses that are not in line with ordinary practice.

Last but not least, they must not hire or dismiss employees without consultation with or approval by the buyer.

If the seller breaches the operating covenants, the buyer has the right to close the transaction at a reduced price (a purchase price adjustment) or to condition Closing on the seller restoring the business to its original state.

In extreme cases, the buyer may take back the deposit on the purchase price and walk away from the deal (if the contract allows it). ARROWS attorneys will ensure that the operating covenants are not overly vague.

For example, the sentence “the seller will run the business in the ordinary course” is too vague – a judge may interpret it in different ways and a dispute will arise.

It is better to write: “without the buyer’s approval, the seller must not: (i) reduce revenues by more than 10%, (ii) dismiss more than 3 top managers, (iii) enter into contracts exceeding CZK X million, etc.”

Working Capital Adjustment: How the money is calculated at the last minute

In M&A, the price agreement often includes a so-called working capital adjustment – a price adjustment depending on the level of “working capital” (current assets minus current liabilities) at Closing.

The idea is simple: the contract is signed with an estimated price, but during the interim period working capital may change. If ordinary receivables decrease (customers pay less), or liabilities increase (suppliers are waiting to be paid), working capital is lower.

The buyer should not pay the same as if it were high, and therefore the price adjustment is important for a fair settlement.

A typical scenario is that the agreed target working capital (Target Working Capital, TWC) is CZK 10 million and Closing takes place with actual working capital (Actual Working Capital, ACW) of CZK 7 million.

The price adjustment is then ACW – TWC = 7 – 10 = –CZK 3 million. The seller must refund the buyer CZK 3 million (this amount is usually settled from escrow).

Conversely, if ACW is higher (e.g., CZK 12 million), the seller receives a bonus, which is advantageous for the seller.

ARROWS attorneys will ensure that the definition of working capital is absolutely clear – what is included and what is not. Further, that there is a sufficient period for the calculation (a post-closing adjustment, typically 60–90 days after Closing).

In the event of a dispute, it is important to have a clearly defined process: which party will appoint auditors, how the dispute will be resolved, etc. Without a clear definition, disputes often arise – the seller and the buyer interpret terms differently, and a legal battle can follow that may last for years and cost hundreds of thousands in legal fees.

FAQ: Most common questions about the working capital adjustment

1. Where does the money go when it is found that working capital is lower?Usually it is drawn from escrow (the escrow fund). At Closing, the buyer sets aside part of the purchase price (typically 1–5% of the total transaction value) in escrow. If the working capital adjustment turns out to be negative for the seller, the required amount (e.g., CZK 3 million) is taken from escrow and paid to the buyer; the remaining amount is released to the seller.

2. Who prepares the calculation – an auditor, an accountant, a lawyer?Usually both parties appoint an independent auditor or accounting firm to calculate the final closing statement under the agreed rules. If the parties cannot agree on the figure, it goes to arbitration or to court, which can be demanding and time-consuming.

3. How long does it take – can I access my money, or is it a year-long wait?
The usual timeframe is 60–90 days after Closing for the calculation; then another 30–60 days for disputes and their resolution. If there is a dispute, it can take six months to a year. ARROWS attorneys will ensure the purchase agreement sets clear and measurable parameters – this shortens the waiting period and minimizes disputes.

Representation and Warranty Insurance (RWI): Insurance against errors

Given the risks that the seller’s representations may be incorrect, many M&A transactions are now insured through Representation and Warranty Insurance (RWI).

RWI is an insurance policy typically arranged by the buyer that will compensate the buyer for loss if, after Closing, it is discovered that a representation was untrue (within the policy limit and outside excluded cases).

RWI has advantages such as the seller not having to bear a long period during which it would be liable (survival period), because the policy protects the buyer even after Closing. It also reduces legal confrontation – instead of the parties litigating, the insurance responds.

It allows the seller to achieve a “clean exit” from the transaction with minimal liability, which is a major advantage for the seller.

However, RWI also has limits (cap), a deductible, excluded items, and the coverage period is limited. ARROWS attorneys will assess with you whether RWI makes sense, what limits and exclusions are acceptable, and what the coverage should be.

Interim covenants: What the seller may (and may not) do in the interim period

Modern purchase agreements include a detailed list of interim covenants – the seller’s obligations during the interim period.

If the seller breaches an interim covenant, the buyer (typically) has the right to close the transaction at an adjusted (lower) price. The buyer may also make closing conditional on the breach being remedied.

In extreme cases, the buyer has the right to walk away from the deal and recover the purchase price deposit.

ARROWS attorneys ensure that interim covenants are specific and measurable (not just vague “ordinary course” language). They also ensure they are enforceable (with a clear process for monitoring and resolution).

It is important that they comply with the case law and legal system of the relevant jurisdiction (e.g., in the USA, references are often made to decisions of the Delaware Court of Chancery, which has established a number of precedents).

Obligation	Practical example	Breach
Operate in the ordinary course	New customer contracts are signed without restrictions, employees are paid on time, maintenance is carried out.	The seller pays itself dividends of CZK 50 million without the buyer’s approval, when the usual dividend policy was CZK 5 million.
Not to sell material assets	You can sell an old office, but not the entire vehicle fleet or a key branch.	Without the buyer’s consent, you sell a key production machine or a trademark.
Protect data and intellectual property	You do not change passwords, do not delete databases, and you protect know-how and trade secrets.	The seller “takes revenge” and deletes the customer database or hands sensitive data to a competitor.
Comply with contracts	You do not disrupt contracts with customers, suppliers, banks, and creditors.	The seller takes out a large loan, breaching a financial covenant with the bank, or terminates a key customer contract.

Escrow: How to protect yourself when money “disappears” or gets frozen

Escrow is a neutral account (typically held with a bank, a notary, or an attorney) into which the buyer’s purchase price deposit (at the beginning of the process) and a portion of the purchase price intended to cover potential losses from breaches of representations and warranties (at Closing) are paid.

Funds are also deposited here to remedy issues that emerged as problematic during the interim period, ensuring financial protection for both parties to the transaction.

The escrow agreement must clearly state how much money is deposited and for how long. It must also define who is entitled to withdraw the funds and under what conditions.

It should specify what happens if the parties do not agree (this typically leads to a decision by the escrow holder, arbitration, or court proceedings).

Without a clear escrow agreement, problems may arise—for example, the buyer withdraws funds without the seller’s approval, or the seller withdraws funds even though they were meant to be held as security.

Another issue may arise when the escrow holder (bank, attorney) improperly charges excessive fees and the remaining funds become uncertain. After Closing, the buyer cannot withdraw funds for remediation because it does not have clear consent from the escrow holder or the seller.

ARROWS attorneys will structure the escrow agreement with you so that the funds are protected, while also ensuring they do not remain “stuck” in escrow longer than necessary.

How do Signing and Closing differ across countries?

In the USA (especially in real estate)

Signing is the execution of the agreement.
Closing is often a physical meeting with a notary/escrow holder (escrow agent), where final documents are signed, funds are transferred, and ownership is transferred.
In between, there are 30–45 days during which a property inspection, valuation, and verification of title (title search) take place.
In M&A (acquisition of a company), Signing and Closing are often separated by months because regulatory approvals and financing need to be arranged.

In the Czech Republic (M&A)

Signing is the execution of the long-form agreement (e.g., a share purchase agreement – Share Purchase Agreement, SPA).
Closing is the execution of a short-form transfer agreement (e.g., an agreement on the transfer of shares or ownership interests) and the registration of the change in the Commercial Register.
In between, it is commonly 4–12 weeks due to regulatory approvals (the Czech Competition Authority (ÚOHS), the Ministry of Industry and Trade for foreign investments).
In some cases, Signing and Closing take place on the same day (simultaneous signing and closing) if there are no conditions precedent (which is rather rare in complex M&A transactions).

In the EU

Similar to the Czech Republic, Signing is the execution of the main agreement and Closing is the moment when ownership is actually transferred.
Under foreign investment screening rules (EU FDI screening regimes), additional delays for governmental approvals may arise, extending the interim period.

Typical issues that arise between Signing and Closing

Problem 1: “The industry landscape has changed”

Example: You are buying a development company and sign the agreement in January. In February, the government unexpectedly pushes through a new Building Act that drastically limits development options, significantly reducing the value of the target company.

Impact: If the agreement contains an effective Material Adverse Change (MAC) clause, the buyer may be entitled to withdraw from the transaction or negotiate a price reduction, as such an event has materially adversely affected the target company’s economic position.

Without such a clause, the buyer bears the risk.

Problem 2: “Uncertainties in the accounting”

Example: During due diligence, it was discovered that the seller’s accounting is not entirely in order and requires adjustments. The share purchase agreement provided that the seller must submit revised financial statements by Closing. The seller fails to do so or submits statements that still contain significant inaccuracies.

Impact: Failure to satisfy this condition precedent prevents Closing. The buyer may demand performance, withdraw from the agreement and request the return of the deposit, or agree to extend the Closing deadline and impose an additional obligation on the seller to remedy the issues, or agree on a reduction of the purchase price.

Problem 3: “Delay in regulatory approval”

Example: The transaction is subject to approval by the ÚOHS (the Czech Office for the Protection of Competition). The usual 30-day period for the first phase of the proceedings expires because the ÚOHS requests additional information and the proceedings are extended for several months, or a second phase of the proceedings is even initiated.

Impact: Delayed approval may result in both the buyer and the seller losing interest in the transaction if the Closing date is pushed too far out.

The agreement should include provisions on how to proceed in the event of extended deadlines and whether either party has the right to withdraw if approval is not obtained by a certain date (long stop date).

Problem 4: “Third-party legal claims”

Example: Between Signing and Closing, a lawsuit is filed against the target company by a former employee or a competitor, seeking substantial damages.

Impact: Such a claim could constitute a breach of the seller’s representations and warranties regarding the absence of disputes.The buyer may either rely on RWI insurance (if arranged), request a reduction of the purchase price, or postpone Closing until the situation is clarified. In serious cases, this may be grounds for withdrawal from the agreement, especially if the dispute qualifies as a Material Adverse Change.

Disclaimer: The information contained in this article is of a general informational nature only and is intended for basic orientation in the matter based on the legal state as of 2026. Although we take the utmost care to ensure accuracy, legal regulations and their interpretation evolve over time. We are ARROWS advokátní kancelář, an entity registered with the Czech Bar Association (our supervisory authority), and for maximum client protection we are insured for professional liability with a limit of CZK 400,000,000. To verify the current wording of regulations and their application to your specific situation, it is necessary to contact ARROWS advokátní kancelář directly (office@arws.cz). We accept no liability for any damages arising from the independent use of the information in this article without prior individual legal consultation.

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