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Key Issues for Tech Companies Negotiating M&A Agreements

Technology companies negotiating M&A agreements must focus on more than just the final price. A poorly negotiated contract presents significant risks to the seller, and can greatly increase costs. Here are the key terms that sellers must review before agreeing to anything:

  1. Consideration and pricing: How much is the business selling for, and how will the funds be paid? All at once or over time? How is final price calculated? What considerations does the contract require?
  2. Holdback and escrow: An escrow is negotiated to protect the buyer from breaches by the seller. Sometimes there is a second holdback to protect a buyer in the event of issues following closing. You need to know how much this sum is, and under what conditions it reverts to the buyer.
  3. Seller representations and warranties: These cover every aspect of the transaction, and for tech companies, issues related to IP will be especially important.
  4. Financial statement representations and warranties: The representations of the seller regarding its finances are critical. They must be accurate and comprehensive.
  5. Intellectual property representations and warranties: A technology company’s intellectual property is a key source of value, so the seller’s representations and warranties on this subject must be airtight.
  6. IP infringement representations and warranties: The buyer wants to know that it’s getting what it paid for. This means that the seller must offer assurances that it is not infringing on or misappropriating anyone’s IP rights.
  7. Liability representations and warranties: The seller must disclose all areas of liability or potential exposure, and may be required to indemnify the buyer against anything not explicitly disclosed in the agreement.
  8. Contract warranties and representations: This section will outline material contracts as defined in the agreement, and must offer extensive protections to the buyer regarding any restrictive contracts the seller has entered into.
  9. Buyer warranties and representations: The buyer must also make certain warranties and representations, including certifying that they have the power to sign the acquisition agreement and close the transaction.
  10. Pre-closing seller covenants: The acquisition agreement typically includes a number of covenants that will apply between closing and signing, unless the transaction closes immediately after signing.
  11. Pre- and post-closing buyer covenants: Likewise, the buyer’s covenants may parallel many made by the seller, and typically cover both the pre-closing and post-closing period.
  12. Employee and benefits issues: Stock options often incentivize employees to stay on board, so employee benefits figure prominently in tech M&A deals. These issues should be clearly spelled out.
  13. Closing conditions: Which conditions must be met before the transaction can proceed to closing?
  14. Indemnification provisions: Indemnification is the process through which one party agrees to take on legal liability on behalf of another. So who indemnifies whom, and for what?
  15. Allocation of risks: Various qualifiers are used to shift risk to or from the buyer. Read this carefully, and ensure everything in this section is demonstrably accurate.

 

About Solganick & Co.

As an investment banking firm specializing in Technology and Digital Media companies, Solganick & Co. offers an in-depth understanding of each industry sector including macro and micro drivers that lead to a successful transaction. Experienced involvement with industry deals gives Solganick’s expert investment bankers an accurate depiction of current M&A trends and the present deal-making climate. We provide mergers and acquisitions (M&A) advisory services to CEO’s, company founders, board of directors, private equity firms and majority control shareholders.

For more information go to: Solganick.com

    Frequently Asked Questions

    1 What are the key aspects of consideration and pricing I need to focus on when selling my tech company?

    When selling your tech company, it's crucial to understand not just the final price, but also how it's calculated and the payment structure. You need to know if funds will be paid all at once or over time, and what specific considerations the contract requires to ensure alignment with your expectations.

    2 How do holdback and escrow provisions impact the final payment I receive as a seller?

    Holdback and escrow sums are negotiated to protect the buyer from potential breaches or issues that may arise post-closing. As a seller, you must clearly understand the amount held back and the specific conditions under which these funds will revert to you, as they directly affect the timing and completeness of your final payment.

    3 Why are intellectual property representations and warranties so critical for tech companies in M&A agreements?

    For technology companies, intellectual property is a primary source of value, making airtight representations and warranties on IP essential. Sellers must assure buyers that they are not infringing on or misappropriating anyone else's IP rights, which protects the buyer's investment and mitigates future legal liabilities.

    4 Beyond price, what are the most critical contract terms tech company sellers should review in an M&A agreement?

    Beyond the final price, sellers must meticulously review terms such as consideration and pricing details, holdback and escrow provisions, and extensive seller representations and warranties. Special attention should be paid to financial statements, intellectual property, and potential liabilities to mitigate significant risks and ensure a favorable outcome.