Startup Law 101 Series – Legal Tips to Consider When About to Get Acquired
Legal Tips When Getting Acquired
Here are some high-level legal tips for a seller to consider in anticipation of an acquisition:
1. Talk with your law firm/CPA firm about tax and structural issues up front, before you negotiate a term sheet. If you have a C-Corp with low-basis assets, an asset sale will leave you with a potential double tax hit. A stock sale or tax-free merger (A, B, or C type) is preferable in such situations but each has limits and restrictions on it – understanding the structural points up front will help considerably in how you negotiate the deal.
Term sheets may be legally non-binding but, you can bet, they will shape your deal all the way through to closing. Structure it right in the term sheet, then, and you will not be haunted by inadvertent blunders up-front that prejudice your deal throughout.
2. Watch out for duplicity. Use NDAs and be cautious about how and when due diligence is done to protect against a buyer’s gaining a lot of information about your company and then using it competitively against you after dropping the acquisition.
3. No-shop clauses are standard but keep them short and make sure they can only be extended by mutual consent.
4. In dealing with acquisition teams, make sure to do the primary negotiating with the key decision-makers so as to avoid getting the “two step” shuffle.
5. Beware of buyers who effectively seek an option to acquire your business without a real commitment. Don’t let a buyer inject slippery closing conditions coupled with open-ended opportunities to extend the closing. Make sure you can kill such a deal if it gets abusive.
6. Avoid earn-outs if at all possible – if you go with an earn-out, plan as if all you will see will be what you get at the initial closing. Exceptions obviously exist, but they are exceptions for a reason.
7. Try to limit trailing liabilities on the deal. Limit the size of hold-backs. Keep the reps and warranties as narrow as you or your lawyers can negotiate. Make sure indemnities have a short-term expiration date if possible.
When you want to get acquired, valuation is by far your most important issue. Investment advisors, VCs, and others can advise you on that.
Use these tips, though, to prod your thinking on the legal issues that can be important as well. Arm yourself and then work with a good lawyer to attend to details. These deals get complex and these tips barely touch on the issues that can arise. But they do give you a start.
For a much more detailed discussion of issues relating to the purchase or sale of a small business, see “What are some of the basic legal factors to consider in selling or buying a small business?” in the FAQ – Small Business section.