M&A Contract Checklist: What to Review Before Your Business is Acquired

Deal structure: asset sale vs. stock sale

The first question in any acquisition is how the deal is structured. The two primary forms are:

**Asset sale**: The buyer purchases specific assets and liabilities of the business. The seller retains the legal entity. Asset sales are preferred by buyers because they can cherry-pick assets and leave behind unknown liabilities. They're less favorable to sellers because proceeds may be taxed at ordinary income rates rather than capital gains rates.

**Stock sale (or equity sale)**: The buyer purchases the equity of the company. The seller receives cash or acquirer equity for their shares. Stock sales are generally simpler and more tax-efficient for sellers. Buyers take on all known and unknown liabilities.

**Why it matters**: If the buyer insists on an asset sale, the deal structure has material tax implications for the seller. Founders who expect capital gains treatment for a transaction that ends up as an asset sale can lose a significant percentage of the purchase price to taxes. Negotiate the structure before you negotiate the price.

Purchase price mechanics: fixed, earnout, and escrow

The headline number is rarely what you receive at closing. M&A deals typically involve:

**Closing consideration**: Cash or stock paid at closing. This is the most certain component of the purchase price.

**Earnout provisions**: Contingent payments tied to post-closing performance metrics (revenue, EBITDA, customer retention). Earnouts are the most common source of post-acquisition disputes. Key issues: how is the metric defined? Who controls the business decisions that affect it? What happens if the acquirer changes strategy in a way that makes the metric impossible to hit?

**Escrow holdback**: A portion of the purchase price held in escrow to cover post-closing indemnification claims. Typical holdback: 10–15% of the purchase price for 12–18 months. Negotiate the escrow amount, the release schedule, and the minimum claim threshold.

**Working capital adjustment**: Most deals include a mechanism to adjust the purchase price based on the business's working capital at closing versus a defined target. Sellers should understand exactly how working capital is calculated — it's a frequent source of post-closing disputes.

Representations and warranties: your exposure after closing

Representations and warranties (reps and warranties) are statements you make about the business — that the financials are accurate, there are no undisclosed liabilities, no pending litigation, IP is owned free and clear, etc. If any of these turn out to be false, the buyer can make an indemnification claim against you.

Key provisions to negotiate:
• **Knowledge qualifier**: Reps that are qualified by "to seller's knowledge" limit your liability to what you actually knew (or should have known). Without this qualifier, you're making absolute representations — including about things you didn't know.
• **Materiality thresholds**: Reps with materiality qualifiers limit your exposure to material breaches, not minor technical ones.
• **Survival period**: How long after closing can the buyer make claims? For general reps, 12–18 months is typical. For fundamental reps (title to assets, authority, capitalization), and for tax and environmental matters, the survival period is often longer.
• **Indemnification cap**: The maximum amount you can be required to pay in indemnification claims. Negotiate this as a percentage of the purchase price (10–15% is common for general claims).

Reps and warranties insurance (RWI) is increasingly common in mid-market deals — it shifts buyer indemnification claims to an insurer rather than the seller.

Non-compete and non-solicitation for founders and key executives

In acquisitions, founders and key executives almost always sign non-compete agreements as part of the deal. Unlike employment non-competes, acquisition non-competes are generally more enforceable because they are ancillary to the sale of a business — the buyer is paying for the goodwill, and a non-compete protects that investment.

Key provisions to review:
• **Duration**: 2–3 years is typical for an acquisition non-compete. Longer is aggressive.
• **Geographic scope**: Reasonable scope is tied to where the acquired business operated. Global non-competes for a regional business are overreaching.
• **Activity scope**: Should be tied to the specific line of business acquired, not the acquirer's entire business portfolio.
• **Compensation**: If the non-compete is separately negotiated as part of the deal structure, it may have distinct compensation (often for tax allocation purposes).

Founders should also pay attention to non-solicitation provisions covering both clients and employees — these can limit your ability to hire your own former team after the deal closes.

Employment and transition obligations post-closing

Many acquisitions come with employment obligations for founders and key team members. Review these carefully:

**Employment or consulting agreements**: Some deals require founders to stay for 12–24 months post-closing. If staying is not something you want, negotiate the obligation out before signing the LOI — it's much harder to remove later.

**Retention bonuses**: The acquirer may offer retention bonuses for key employees tied to continued employment for 12–24 months post-closing. Understand whether these are guaranteed or contingent on performance.

**Golden parachute provisions**: For executives, double-trigger change-of-control provisions (accelerated vesting only if employment is terminated following the acquisition) are better than single-trigger provisions (acceleration upon the acquisition alone), which can trigger adverse tax treatment under IRC 280G.

**IP assignment at closing**: Make sure the acquisition agreement — or a separate IP assignment — cleanly transfers all relevant IP at closing, including IP you may have personally developed or owned. Gaps here create post-closing disputes.

The letter of intent: what's binding and what's not

Most acquisitions begin with a letter of intent (LOI) — a non-binding term sheet that outlines the key deal parameters before the parties invest in full due diligence.

What is typically binding in an LOI:
• **Exclusivity / no-shop**: A commitment not to negotiate with other potential acquirers for a defined period (30–90 days). This is binding and should be limited in duration.
• **Confidentiality**: Non-disclosure of deal terms.
• **Break-up fees**: In some deals, the buyer pays a fee if the deal doesn't close due to the buyer's failure to proceed.

What is typically non-binding: the purchase price, structure, representations, and most deal terms. "Non-binding" means the parties can walk away or renegotiate after due diligence.

The risk of exclusivity without adequate protections: signing an exclusivity period allows the buyer to conduct due diligence and find leverage to renegotiate price downward. Once you're deep into due diligence, the practical cost of walking away is high. Sign LOIs carefully.