How to Avoid Legal Pitfalls When Getting Acquire’d (March 2024 Webinar Recap)

Today’s webinar topic is all about legal pitfalls. When getting Acquire’d, legal issues are top of mind for most founders. For example, what legal documents will you need? How much tax will you pay? When should you hire an attorney? Questions like these can help you avoid costly disputes after closing.

Today, you’ll learn how to avoid the most common legal pitfalls with help from our CEO, Andrew Gazdecki, and general counsel, James Graves. Watch the full webinar below or skip to the highlights.

Who Are Your Presenters?

Andrew Gazdecki, founder and CEO of Acquire.com

I’m Andrew Gazdecki, founder and CEO of Acquire.com. I’ve been an entrepreneur my whole life. I bootstrapped my first business, Bizness Apps, to $10 million in annual recurring revenue, which I later sold to a private equity firm in a life-changing acquisition. Since then, I’ve sold two more businesses, bought one, and founded the world’s largest startup acquisition marketplace.  

I’ve been on both sides of the M&A table, as a buyer and a seller, so I know how complex and difficult acquisitions can be. I started Acquire.com to fix the complex acquisition process and make it easier for founders to get acquired, and it’s my pleasure to share my knowledge with you today. 

James Graves, General Counsel at Acquire.com

I’m James Graves, and I’ve been the general counsel at Acquire.com for about two and a half years. I’ve been practicing law since 2015, working at F5 Networks, Amazon, and a few private law firms before arriving at Acquire.com. Throughout my career, I’ve worked in defense litigation, M&A transactions, startup law, and more. The biggest transaction I’ve handled was over $170 million.

What Is Acquire.com?

Acquire.com is the best online marketplace to buy and sell SaaS startups. Combining expert M&A advisory and technology, our services help you get Acquire’d fast and maximize your exit. 

Acquire.com Impact

Since 2019, we’ve helped over a thousand founders sell their businesses, closed over half a billion dollars in deal volume, and registered over 400,000 buyers. Live internationally? No problem – we’re active in over 100 countries and every continent except Antarctica. 

You’ll learn the different legal stages of acquisition, possible tax implications, and how to avoid the most common legal pitfalls. After today, you should feel more confident about the legal side of your acquisition and know where to go for expert help whenever you need it (spoiler alert: ask us for help!).

1. Sign a Non-Disclosure Agreement (NDA)

James explains how NDAs work on Acquire.com.

A non-disclosure agreement (NDA), or confidentiality agreement, protects the data buyers and sellers share. If a buyer is interested in your business, let’s call them buyer A, you’ll sign a mutual NDA so neither of you can share sensitive information with third parties or outside of the deal.

For example, you don’t want a buyer poaching your employees, customers, or intellectual property. The NDA reassures you, the seller, that your data is protected legally. Plus, it reassures the buyer that you won’t reveal or exploit their acquisition strategy.

Before a buyer can even view your private listing information, the Acquire.com platform requires them to sign an NDA that does all of the above. Not every NDA includes all the legal protections you might need, but ours does. That way, you’re not worrying about the safety of your data while negotiating your exit. 

2. Accept a Letter of Intent (LOI)

James and Andrew discuss how letters of intent (LOIs) work.

Now, let’s assume you grant access to the buyer and they review your P&L, website, metrics, CIM, and everything else. They’re now interested in making an offer. You get a letter of intent (LOI) in your inbox – what does it mean? Is it a formal offer, and how should you proceed?

A letter of intent (LOI) is a non-binding agreement that describes:

  • The purchase price (how much the buyer plans to spend on your company)
  • Any closing conditions (such as transition services where you stay on to help the buyer for a while)
  • Any post-closing conditions (like holdbacks for indemnity or earnouts)
  • Financing agreements (how the buyer plans to pay – seller financing and so on)

Since an LOI is non-binding, you’re not legally obligated to close. For example, when Elon Musk sent an LOI to acquire Twitter, it was far from final. Think of an LOI as kickstarting negotiations.

The only exception is if your LOI includes a no-shop or exclusivity clause. Once you and the buyer sign the LOI, you then can’t discuss or negotiate your acquisition with any other buyers for a set period. Usually 60 to 90 days, depending on the size of the transaction.

Since you’re married to one buyer for that exclusivity period, don’t sign the LOI unless you’ve got on a call to discuss the LOI’s price and terms and you’re comfortable moving forward. Otherwise you might waste time with the wrong buyer or someone refusing to negotiate closer to your ideal price and terms.

Also, ask them what happens after signing. Confirm how they’re going to finance the deal. Test their preparedness and commitment to closing. Ask about anything important to you. Better yet, ask your acquisition advisor for help reviewing an LOI. It’s all included in your acquisition plan. We’ve helped 1,000s of founders sell so know a good deal (and buyer) when we see one.

When you sign an LOI, you say no to all other interested buyers. It’s a big step, so ensure you get on a call with the buyer and ask for our help to maximize your chances of selling.

3. Pass Due Diligence

James gives an overview of due diligence and what usually scares buyers away.

Your pre-LOI signing call with the buyer went great. You’re happy with the price and terms. You’ve verified they’ve got the funds to do the acquisition. What’s next? Due diligence. 

Due diligence technically starts the moment a buyer visits your listing. At that stage, they’re already evaluating the risk of acquiring your company, which is essentially what due diligence is. But the further your acquisition progresses, the deeper due diligence gets. 

Once you’ve settled on a price and terms, the buyer will now do confirmatory due diligence. The goal is to verify and validate everything you’ve shared, including:

  • Verifying your P&L with bank and revenue statements
  • Reviewing your codebase and IP
  • Checking for any pending legal issues with your attorney  
  • Evaluating tax liabilities
  • And lots more

Buyers often use the phrase: “Trust, but verify” when referring to due diligence. This isn’t about catching you out or searching for ways to hammer you on price and terms. Due diligence ensures no hidden risks and gives buyers and their potential investors the confidence to close on your acquisition.

What Scares Buyers Away During Due Diligence?

Mistakes happen, so always prepare for acquisition before you accept an offer so you can resolve issues before they become a bigger problem. Buyers understand that things can go wrong, and if you’re upfront, honest, and responsive, they’re far more likely to work with you.

The main issues that slow or kill deals are:

  • Mismatching numbers or inconsistencies
  • Suprises you’ve hidden intentionally. Buyers can work with you to overcome most problems, but if you’re not upfront about issues, the buyer’s first thought will be, “What else have they not told me about this business?”

4. Sign an Asset Purchase Agreement (APA)

The APA binds you to the sale so involve your attorney before signing it.

You’ve passed due diligence and created a ton of goodwill by being honest, upfront, and responsive, and now the buyer sends you another legal document: an asset purchase agreement (APA). 

Where an LOI is more about intent, an APA formalizes the buyer’s offer. It’s a binding, definitive document for your acquisition transaction. Once signed, you’re legally obligated to sell your business, and the buyer is legally obligated to buy it. It often includes supplementary documents such as:

  • A seller’s or promissory note (if you agreed seller financing)
  • A bill of sale (for assets)
  • An IP assignment agreement
  • Non-competition and non-solicitation agreements
  • Employment agreements (if your employees stay on to work for the buyer)

Once the APA comes into effect, your acquisition has legally closed. You then move to escrow. Always ask your attorney to review the APA first, so you know what to expect from your acquisition and to move quickly through the closing stages.

5. Closing With Escrow

The best thing you can do for your acquisition is use escrow when closing. Seriously.

You’ve signed the APA. When do you send your assets and how? Is there a way to ensure you get paid? We’ve partnered with Escrow.com to ensure your acquisition closes safely. How does it work? 

  1. First, the buyer sends their funds to Escrow.com for verification. 
  2. Then, once Escrow.com verifies the buyer’s funds, you send your assets to the buyer.
  3. The buyer then inspects the assets are correct and complete before approving them.
  4. Finally, Escrow.com releases the buyer’s closing payment to you.
  5. If you agreed to post-closing conditions, steps 1-4 apply for those too.

Without escrow, you’re flying blind. You can’t guarantee you’ll ever get paid for your assets, no matter how much goodwill you’ve built with the buyer. Escrow keeps everyone honest. If the buyer doesn’t want to use escrow, that’s likely a red flag – why wouldn’t they want to protect their interests as well as yours?

If you skip these steps, you open yourself up to liability. Think of all the extra time, money, and energy you’d have to spend recovering money from the buyer through the courts. Even if it takes a little longer to get Acquire’d, use our escrow services to your advantage – they’re free – and you won’t have any of the worry and stress about getting paid on time and in full for your assets.

6. Meet Any Post-Closing Conditions

James explains how staying on for a while after closing to help the buyer benefits you.

The closing payment has safely landed in your bank account. What about post-closing conditions? 

The most common post-closing condition is transition services. The buyer might ask you to stay on in the business full- or part-time (even as a consultant) to answer their questions and teach them how to run your business. You might offer a six-month or longer transition period where you set them up for success. 

Another common post-closing condition is a non-competition clause. The buyer probably doesn’t want you to immediately set up a competing business and steal all their clients away. 

All post-closing conditions are agreed to BEFORE closing. They’ll be in your APA and likely the LOI too (assuming you didn’t negotiate new terms). Post-closing conditions are always negotiable, but you’re likely to increase your valuation the more flexible you are and if you can shoulder some of the buyer’s risk.

For example, if your business has to hit a 30 percent revenue growth target in its first 12 months for you to get paid in an earnout, it makes sense for you to stay on longer to ensure the goal is met. The same applies if the buyer wants seller financing – if you stay on during the repayment term, you also have a hand in the buyer’s ability to repay you by ensuring the business makes money.

What Are the Tax Implications of Your Acquisition?

James discusses the tax implications of your exit under various organizational structures.

The Deal Structure

If you’re selling a business under $20 million, expect it to be an asset sale every time. Why? If the buyer acquires stock, they also acquire the company’s liabilities such as a pending lawsuit or some other issue. A stock sale is also much more complicated when finalizing the terms. Most buyers prefer asset sales, so start your tax preparation assuming your acquisition will be a 100 percent asset sale.

Company Organization

Is your business organized as a C- or S-Corp? Depending on what your business does, the US government offers some generous tax breaks if you organize as a C-Corp. Likewise, VCs and PEs usually won’t invest in anything other than a C-Corp. Most big tech companies are organized as C-Corps. 

However, in an M&A transaction, C-Corps suffer from double taxation. First, at 21 percent of capital gains, and then again at ordinary income tax rates on the dividends to shareholders (you and your cofounders). The marginal tax rate there can be as much as 40+ percent. (But purchase price allocation can help.)

If your business is organized as an S-Corp or LLC, you’re not normally taxed at the corporate level as these are pass-through entities. It’s usually more tax efficient to be organized this way when selling your business. 

Purchase Price Allocation

When negotiating your purchase price, you and the buyer will normally consider how you want it allocated. For example, allocate some towards tangible assets like property or equipment and intangible assets like goodwill and intellectual property (IP). The latter, intangible assets, are sometimes taxed lower for sellers. 

The goal of purchase price allocation for you, the seller, is to minimize the amount you’re taxed at ordinary income. If you’re a C-Corp allocating 100 percent of the purchase price to tangible assets, you’re likely to pay over 30 percent capital gains tax. But if it’s allocated mostly to intangible assets like goodwill or IP, you’ll pay your ordinary capital gains tax rate, which is usually lower.

Hire a CPA

Tax is complex and we recommend speaking to a CPA to understand how much tax you’d likely pay when getting Acquire’d. You don’t want to get to the end of the process and pull out simply because you didn’t anticipate such a big tax bill. You can also work with your CPA to try and reduce your tax obligation. Once you know roughly how much you’ll need to pay, it can influence your asking price, so it’s worth doing sooner rather than later.

What About QSBS?

To qualify for QSBS, you have to be a C-Corp, held stock for over five years, and there are also capital requirement limits. For example, most venture-backed companies are exempt because they have too much cash on hand. But if you do qualify, you pay less long-term capital gains tax. Again, speak to your CPA.

1. Selling Your Business Without an Attorney

Andrew and James discuss what can happen if you don’t hire an attorney when selling your business.

What happens if you sell without an attorney? 

“I’ve seen people sell without an attorney only to realize they legally hadn’t sold anything,” James, general counsel at Acquire.com, says. “No one had signed anything. I’ve also seen deals where money went to the wrong person.” 

An attorney doesn’t just ensure all the legal documents are robust and enforceable but also acts as psychological insurance for you. The peace of mind you get while running your acquisition is normally worth the fees an attorney charges.

Ask buyers to send offers using the LOI builder on Acquire.com. That way, you get a balanced wording without worrying if the buyer is trying to exploit you, and we can help you evaluate it before you forward it to your attorney, which could save you money on fees. The APA builder also supports all but the most complex transactions. But it’s still worth hiring an attorney to review critical legal documents to give you peace of mind. Bringing in a third party also keeps everyone honest. 

Another benefit of using our legal document builders is that they clearly communicate the price, terms, and deal stages. For example, you see exactly how much you get on closing, how much on completing a post-closing milestone, and which conditions apply. It makes comparing offers super easy. If you move off platform or refuse our guidance, you’re basically selling alone. Involve experts like us and your attorney to maximize your exit.

2. Closing Without Escrow

Escrow protects your exit more than goodwill, as James and Andrew explain.

If you transfer your assets to the buyer without escrow, you might not get paid. Yes, you have a legal document in place (APA) to enforce the sale, but a lawsuit isn’t the same as a successful close. A lawsuit can be a money pit, so you want to avoid it at all costs. Escrow is another kind of insurance that ensures you get the money for your assets. Not using escrow could mean you’re left empty-handed.

Yes, it might extend your acquisition by a week or two, but compare that to the time and money sunk into a lawsuit. Isn’t it better to close a little later than risk a year or more of litigation to get the money for your assets? If there’s one thing you take away from this webinar above all others, it’s always use escrow!

Andrew and James explain the benefits of our legal builders and how our M&A team helps.

When signing legal documents on-platform, we can help you evaluate them. Everything is in one place so offers are easy to compare and evaluate. Plus, you’d be surprised how many signing errors occur in acquisitions, which rarely happens when using our legal document builders.

If a buyer asks you to go off-platform to sign legal docs, it’s a red flag. Why are they asking? Few legitimate reasons exist for going off-platform to sign documents – the only one being that the builders don’t support your deal. But you can upload manual offers into the builders, so that excuse doesn’t carry much weight. Think carefully about dealing with a buyer who wants you to go off-platform. 

Also, when you’re working with an acquisition advisor, we’ll tell you if we see strange things in your buyer’s legal documents (a missing payment schedule, for example). We help close 1,000s of acquisitions and know when a legal document doesn’t follow convention or leaves you open to liability. We’ll point anything strange out to you instantly before you waste time on a dead end. 

4. Closing Off-Platform to Avoid the Closing Fee

If you met your buyer on Acquire.com, you still pay the fee – so let us maximize your exit.

We get it – no one likes paying more than is necessary. But we earn that fee by helping you close securely with escrow, helping you evaluate legal documents, supporting you through legal challenges, finding the right buyer, negotiating the best deal, and so much more. If you go off-platform to avoid the fee, you may lose out much more in the long run and still have to pay the fee. Legally, if you met your buyer on Acquire.com, you still have to pay the fee, so you might as well use our services to maximize your exit.

5. Not Evaluating Your Tax Obligations   

Knowing your tax obligation in advance can influence your target asking price range.

Without evaluating your tax obligations, you might get 30-40 percent less in your pocket after closing. That’s going to be a shock and could put you off selling at all. Instead, hire a CPA, figure out how to minimize your tax obligations, and then factor them into your asking price. Maybe there’s a way for you to restructure your business before going to market to ensure your acquisition is tax-efficient.

6. Not Doing Due Diligence on Buyers

LOIs aren’t exits, so lean on the Acquire.com team to help you find the right buyer and deal.

Imagine you get an offer for your business. Now it’s time to verify that the offer and buyer are legitimate. This is one of our strengths at Acquire.com. We’ll coach you on those pre-LOI calls and help you evaluate offers as they come in. And depending on your deal size, we can do that due diligence for you – we’ll talk to buyers to let them know you’ve had multiple offers and review their due diligence schedule. 

An LOI isn’t a guarantee that you’ve sold your company. Do everything possible to increase your odds of your acquisition closing. Easiest way to do that before signing an LOI is to reach out to our team to have a pre-signing call to ensure you understand the offer, the buyer is capable of closing, has the funds, knows how acquisitions work, and so on.

Andrew and James explain how we help you with legal during your acquisition.

Expert Support

While we can’t act as your attorney, our in-house counsel, James Graves, is happy to answer questions and give an informal opinion on what you should and shouldn’t do. We also have a great professional network of tax advisors, CPAs, due diligence advisors, and M&A attorneys we can refer you to so you can access the best advisors at competitive rates. Many of our attorneys don’t bill by the hour but on a project basis, which is usually cheaper in the long run.

Founder-Friendly and Transparent Process

James drafted our legal document builders after years of reviewing the same documents in his career as an M&A attorney. The wordings are fair, balanced, and work for both buyers and sellers. They’re a great starting point when working with your attorney, and as a base document, work for many deal scenarios.

You also get escrow for free. There’s no reason not to use one! And we don’t just work with Escrow.com but also with other providers to ensure you get a service that works for you. 

Remember, when you keep your acquisition on-platform, everyone stays accountable. Keep us in the loop – tell us how you’re deal is going – and you create a digital audit trail. Every stage of the acquisition process is stripped back to a simple five-step process that helps maximize your exit. 

Q&A

Is a three-year transition as CEO to continue running the business fair?

It depends. Do you want to stay on in the business? Have you agreed to post-closing conditions (earnout, seller financing, and so on) where you staying on could help ensure you get paid?

If the answer is yes to those questions, and the purchase price and other terms are good, you could consider that a fair deal, yes. Always consider your post-acquisition goals first.

How clearly are consultancy agreements usually defined? Is it common to strictly define hours of to work per day or can it be more open-ended? 

You can specify the hours you’ll work in the APA or in a supplementary document or appendix. We recommend you be precise so the buyer knows when they can call on you for guidance. You don’t want to be fielding calls every day after closing while you’re trying to proceed with post-acquisition plans. Like everything else, transition services is a point of negotiation. Be honest about what you want.

Does the corporation tax on a C-Corp differ for an asset versus stock sale?

Your tax attorney or CPA can advise you properly here, but this article is a good start.

If we’re selling through aquire.com, should we still hire an outside attorney?

Yes. We can guide you through the legal stages of your acquisition, but we can’t represent you, and that’s why you must hire an outside attorney to advise you. Fees should be less given you’re starting from a strong position with our help, and if you want a referral to one of our preferred attorneys, contact james@acquire.com and we’ll connect you with a firm with reasonable rates on a project basis. 

I have a business that operates through two separate entities incorporated in different countries. Should I consider selling the business, what guidance could you offer in navigating this situation?

It depends on what you want to do. As they’re legally distinct entities, you might need to run two different exit strategies. Or, if you formed a parent company, you could sell the parent as a single entity. In either case, you still need to find the right buyers, prepare all necessary legal documents, and run your sales process for each business – all of which we can help you with at Acquire.com.

How do legal documents like NDAs, LOIs, and so on vary from country to country?

Our general counsel, James Graves, drafted the wording of our legal documents to be as country-agnostic as possible, In other words, the wordings should be fairly universal and subject to only minor changes. Since you’ll need an acquisition attorney anyway, you can use our builders as your baseline wording and tweak it to the specific rules, conventions, and regulations of your home country.

Can you share more information on how purchase price allocation works?

The best person to speak to is your CPA or tax attorney. However, this article is a good introduction to taxation generally and this one for a more detailed overview of purchase price allocation.

The content on this site is not intended to provide legal, financial, or M&A advice. It is for information purposes only, and any links provided are for your convenience. Please seek the services of an M&A professional before entering into any M&A transaction. It is not Acquire’s intention to solicit or interfere with any established relationship you may have with any M&A professional. 

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