Disclaimer: The following is for informational purposes only and does not constitute legal advice. If you require guidance on M&A transactions, please consult a qualified lawyer.
Mergers and acquisitions (M&A) can be transformative for small businesses, offering opportunities for growth, expansion, or a profitable exit. However, small companies often overlook key legal issues that can lead to delays, reduced valuations, or even deal failures. Here are some of the most common legal mistakes and how to avoid them.
1. Poor Record-Keeping & Due Diligence Gaps
Mistake: Incomplete or disorganized financials, contracts, and corporate records slow down due diligence and can raise red flags for buyers.
✅ How to Avoid It: Ensure corporate documents, financial statements, tax filings, IP agreements, and contracts are up-to-date and easily accessible. A virtual data room (VDR) can help streamline the process.
2. Unclear Ownership of Intellectual Property (IP)
Mistake: Not securing proper ownership of IP (e.g., trademarks, patents, software, trade secrets) can jeopardize deal value. This is especially risky when independent contractors develop key IP.
✅ How to Avoid It: Ensure all IP developed for the company is properly assigned and documented in agreements with employees and contractors. Conduct an IP audit before engaging in M&A discussions.
3. Failure to Address Key Contractual Issues
Mistake: Many small businesses don’t realize their client or vendor contracts contain change-of-control or assignment clauses that require consent before transferring agreements in an acquisition.
✅ How to Avoid It: Review all major contracts before negotiations and identify agreements that require third-party approval for assignment. This can help prevent delays or disputes later in the deal.
4. Ignoring Employment & HR Liabilities
Mistake: Not addressing employment contracts, termination clauses, or outstanding liabilities (e.g., severance obligations, pending lawsuits) can create unexpected costs.
✅ How to Avoid It: Conduct an employment compliance review, ensuring proper agreements are in place and that any outstanding HR issues (such as misclassified contractors or unpaid benefits) are resolved before selling.
5. Misunderstanding Deal Structure & Tax Implications
Mistake: Failing to understand the difference between an asset sale and a share sale can have significant tax and liability consequences for both buyers and sellers.
✅ How to Avoid It: Work with legal and tax advisors early to determine the best structure for the deal based on financial, liability, and tax considerations.
6. Not Protecting Confidential Information
Mistake: Sharing sensitive financials, client lists, and trade secrets too early in negotiations without proper legal protections can expose the company to risks if the deal falls through.
✅ How to Avoid It: Use Non-Disclosure Agreements (NDAs) before sharing proprietary information and limit access to critical business data until later in due diligence.
7. Relying on Informal Agreements
Mistake: Many small business owners rely on verbal or informal agreements instead of clearly defined letters of intent (LOIs), term sheets, and purchase agreements.
✅ How to Avoid It: Ensure all key terms are clearly documented in legally binding agreements, and avoid ambiguous terms that can lead to disputes.
Final Thoughts
Navigating M&A transactions requires careful legal planning and due diligence. Small businesses that proactively address these common pitfalls can improve deal certainty, maximize valuation, and ensure a smoother transition.
Considering an M&A deal? If you require guidance, consult a lawyer with expertise in business acquisitions.