№ AUSTTX
DS
Attorney
Derek Sullivan
Sullivan & Associates
Business LawIntellectual Property
- City
- Austin
Business Law · Sub-Practice
Mergers & Acquisitions
The deal that looks good at the letter of intent can unravel in due diligence. Structure and disclosure separate successful transactions from costly ones.
§ Overview
What your situation actually involves.
Buying or selling a business is one of the most complex legal and financial transactions an owner or company undertakes. M&A counsel manages the deal structure, due diligence, negotiation, and documentation.
M&A transactions take two primary forms: asset purchases (the buyer acquires specific assets and selects which liabilities to assume) and stock/equity purchases (the buyer acquires the ownership of the entity, inheriting all assets and liabilities). From the seller's perspective, stock sales are often preferred because they're simpler and may generate capital gains tax treatment. Buyers often prefer asset purchases to control which liabilities they assume. The deal process moves from letter of intent (LOI) — a non-binding framework for the key terms — through due diligence (the buyer's comprehensive review of the target's financials, contracts, IP, litigation, real estate, and more), definitive agreement drafting (Asset Purchase Agreement or Stock Purchase Agreement), regulatory review if required, closing conditions and mechanics, and post-closing integration or adjustment provisions like escrow holdbacks, earnouts, and representations and warranties insurance.
§ Key considerations
- ▸Deal structure — asset vs. stock purchase and the tax and liability implications of each
- ▸Purchase price and adjustments — working capital adjustments, earnouts, and escrow provisions
- ▸Representations and warranties — seller disclosures and buyer's reliance on them
- ▸Indemnification — post-closing protection for undisclosed liabilities
- ▸Due diligence — identifying deal killers and negotiating price adjustments or remedies
- ▸Non-compete and transition agreements — seller participation and restriction post-closing
§ How attorneys approach this
- ›Letter of Intent (LOI) — negotiating the key economic and structural terms non-bindingly
- ›Due diligence — reviewing the target's financial, legal, IP, HR, and operational records
- ›Purchase agreement drafting — the definitive agreement with full representations, warranties, and covenants
- ›Ancillary documents — employment agreements, non-competes, transition services, IP assignments
- ›Closing conditions — regulatory approvals, consents, financing, and pre-closing covenants
- ›Closing and post-closing adjustments — purchase price true-ups, escrow releases, and earnout milestones
“Earnout provisions — where part of the purchase price is paid based on post-closing performance — are one of the most litigated aspects of M&A agreements. They create the right incentive in theory (seller gets paid for actual results) but in practice, they are nearly impossible to draft in a way that eliminates disputes. Sellers argue buyers manage the business to minimize earnout payments; buyers argue sellers are unrealistic about post-close performance. The more complex the earnout mechanics, the more likely they are to be disputed. Simple earnouts tied to objective metrics like revenue (not EBITDA, which is subject to too many accounting choices) with short performance periods are the least controversial. If your deal requires an earnout, get a lawyer who has litigated earnout disputes — they draft them very differently.”
§ What to look for in an attorney
- 01M&A experience at your deal size — a $2M small business acquisition is different from a $50M middle-market deal
- 02Buy-side or sell-side experience aligned with your role
- 03Due diligence depth — the ability to identify issues before they become post-closing surprises
- 04Tax structuring coordination with a CPA — M&A is as much a tax transaction as a legal one
- 05Reps and warranties insurance knowledge — common on larger deals, increasingly common on smaller ones
- 06Deal timeline management — M&A deals can die from delay; disciplined project management matters
⚖️
§ Ask these at your consultation
6 questions that matter
- ❓Should this transaction be structured as an asset purchase or stock purchase?
- 💰What are the most significant due diligence risks I should be investigating?
- 🔍How should earnout provisions be structured — and are there common earnout disputes I should avoid?
- 📋What indemnification protections should I have for post-closing liabilities?
- 💬Are there regulatory approvals or third-party consents required to close?
- 💡What happens if the seller's representations turn out to be wrong after closing?
§ Frequently asked questions
Common questions about mergers & acquisitions.
Q 01
What is due diligence and what does it cover?
Due diligence is the buyer's comprehensive investigation of the target before committing to the acquisition. Financial due diligence reviews the quality and sustainability of earnings, balance sheet accuracy, and financial controls. Legal due diligence covers contracts (customer, vendor, IP, employment), litigation history and pending claims, intellectual property ownership and freedom to operate, regulatory compliance, and real estate. HR due diligence examines employment agreements, benefit plans, worker classification, and cultural issues. The goal is to verify what the seller has represented, identify undisclosed liabilities, assess integration risk, and support purchase price negotiations. Significant issues found in diligence can justify price reductions, additional indemnification, or walking away.
Q 02
What is a representation and warranty insurance policy?
Representations and warranty (R&W) insurance covers losses arising from breaches of seller's representations and warranties in the purchase agreement. It allows buyers to make claims against an insurance policy rather than — or in addition to — the seller directly. For sellers, it provides a clean exit with limited post-closing indemnification exposure. For buyers, it provides a deep-pocketed counterparty and longer claim periods. R&W insurance has become standard on middle-market deals ($10M+) and is increasingly common on smaller transactions. Premiums are typically 2-4% of the coverage amount. The policy is negotiated alongside the purchase agreement — a law firm with R&W insurance experience can help structure it efficiently.
Q 03
What is a letter of intent (LOI) and is it binding?
A letter of intent sets out the key economic and structural terms of a proposed acquisition: purchase price, deal structure, earnout framework, exclusivity period, and major conditions. Most LOI provisions are explicitly non-binding — the parties acknowledge that either side can walk away before signing the definitive purchase agreement. However, certain LOI provisions are typically binding: exclusivity (the seller won't negotiate with other buyers during the agreed period), confidentiality, and governing law. Sellers should be careful about agreeing to extended exclusivity periods before due diligence has revealed potential problems, and both sides should be careful about provisions that create implied obligations even in "non-binding" LOIs.
Q 04
Can I buy a business without a lawyer?
Technically yes — but it's one of the highest-risk decisions a buyer can make. Business acquisitions involve complex purchase agreements with representations, warranties, indemnification obligations, and post-closing adjustments that can expose a buyer to enormous post-closing liability if negotiated poorly. Due diligence conducted without legal support misses contract change-of-control provisions, IP ownership gaps, undisclosed litigation, and regulatory issues. Sellers typically have legal representation — a buyer without counsel is at a significant disadvantage in negotiation. M&A legal fees are a small fraction of the purchase price and the potential post-closing liability exposure. Treating legal counsel as optional in a business acquisition is rarely the right trade-off.
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