Webinar Replay: Avoiding Legal Pitfalls When Getting Acquire'd with Andrew Gazdecki & James Graves.

Foreigner. We're really going to be diving into how to avoid legal pitfalls when getting inquired. And as I'm going through this presentation with James, feel free to put some questions in the chat. We'll have Q and A at the end, but legal is obviously a huge part of acquisition. So we want to educate you to make sure that you're aware of every aspect of legal and really set you up for success when you're looking to get acquired. So as a quick agenda, we're going to do some introductions of ourselves and then again really just remind you why you're here, what you're going to learn. And we're going to be talking a lot about the legal pitfalls, how to avoid them, some things that we've seen in the past, how to navigate certain situations. Also just the basics. Know what is a loi, what's a NDA, what are all these terms? And then also how does acquire.com help with legal? How do we help you during your acquisition to make sure that everything is going smoothly and that you get to the finish line with the least amount of headaches possible. So without further ado, James, passing it over to you.

Yeah, I'll go first. It's nice to meet everybody. My name is James. I work as a general counsel here in addition to several other roles. One of those roles is also on the M and A advisory team. So I look at acquisitions from several different viewpoints. I like to think I have a good perspective on things. I'm coming up on like my ninth year, I want to say of practicing law. I interned at Amazon for about a year during law school. Also worked at F5 Networks in law school and then right out of law school I worked as a commercial litigation associate, which basically means I was, I was handling the defense of like breach of contract claims, complex litigation, multi venue jurisdiction litigation. And then after that I pivoted is actually where I met Andrew. And I worked in M and A, in capital markets startups for about three, four years after which I came to acquire.com about two and a half years ago and have been here happily ever since.

James, I got a question for you. I don't think I've ever asked this. What's the largest transaction that you've helped facilitate on the legal side?

Yeah, I think initially the price was over 200 mil and then it got reduced to like 170 I think. And that was, that was a fishing company, I won't say which, but a very, very large one.

Yeah, so James got some experience here so definitely more than me now. Quick intro on me. I'm Andrew Yazdecki, founder and CEO of Acquire.com In a previous life, I had built two different companies, business Apps and Altcoin, both acquired. And really just through that, that journey of building both those companies, that's, that's why I built acquire.com and really our goal at acquire.com is to be the best online marketplace, helping serve founders and helping you get acquired. And so there's a lot of aspects to that, and legal is probably one of the most important aspects of it. And so really excited to, to dive into that. But that's our mission at Acquire Dot. Again, we want our founders to, when they work with acquire.com to have the best experience possible and most importantly, maximize your exit. And in terms of our impact, we've been in business about four years. We've helped facilitate acquisitions in over a hundred different countries, which is kind of wild when you think about it. We've done acquisitions on every continent except Antarctica. We're still working on that one. We've helped over a thousand startups get acquired, over half a billion in closed transactions. We're getting close to about half a million registered buyers. And then we have thousands of listings on the marketplace today. So lots of activity happening in a short period of time. But moving on to the, the good part. So really, why are you here today? And really what do we want you to take away from this webinar in terms of what learning? So I've put it into three buckets. So at the top, you're going to see legal isn't scary when you know what to expect. And that's true. So we're going to be going over the basic legal stages of an acquisition. Me and James are going to walk you through, step by step, the legal documents and the stages of an acquisition that you can expect to go through from a legal perspective, really just break it down into a simplified manner. We're also going to talk about tax implications because that also has a material impact on the outcome of your acquisition. And then most importantly, how to avoid these pitfalls, how to avoid these common mistakes that we have seen in the past, not just on our platform, but some stories we've heard from other founders that had gone through an acquisition using, you know, a different partner on their own. We've heard a lot of stories, and so we're gonna go over the most common ones and how to avoid those. So, James, as we discussed the legal stages of an acquisition, so in this scenario, me and James Are gonna kind of pretend I have a startup. It's a SaaS startup, James. You're interested in acquiring it. It's a legal startup. Because I know that you're very versed in legal. And we, we. You like the listing on acquire.com and you sign this thing called a non disclosure agreement. Can you break that down for me? What is it?

Yeah, this is the first step in the road to completion for you. It's also known as a confidentiality agreement and it basically says that me, as a person who's interested in your confidential information, isn't going to tell anyone else about it, isn't going to use it, and oftentimes it'll say that I'm not going to try and poach any of your employees, customers and contractors, vendors, stuff like that. It basically will give you legal assurances that besides looking at your company and considering it for a potential transaction or acquisition, I'm not going to mess with it whatsoever. It's, it's really the first road, both for legal rights and building trust with being you both, which hopefully works.

I like that. So you sign the NDA. I sign it. And now this NDA is contained in the acquire.com platform. Does it contain all that language that you just described?

Yeah, it contains everything including the non solicit that I just described, which is sometimes in NDAs and sometimes isn't. It's in ours. Just to be overly protective of the seller's information.

So basically all my information that I share with you is private.

Yep, exactly. It's, it's beyond private. It's legally protected.

Awesome. Okay, so now you, we start talking. You go over the documents I prepared, my profit and loss statement, we have a good conversation and then you tell me you want to submit an offer and I say okay. And then I get this thing in my inbox called a LOI or a letter of intent. What did you just send me?

Yeah.

And why? What is it?

Yeah.

Did I just sell my company?

No. Let's start with the why first. Right. So the why means that I liked what I saw based on everything that you gave me. Usually at this point you'd send me maybe a confidential information memorandum, your, your financials, your casted financials, your, your profit and loss statement. If I see everything that they like, I've got a good feel for the business. If I see some growth opportunities like the revenues, all that, I'll go ahead and submit the letter. The letter of intent or just LOI for short. What that is, is a non binding agreement, except For a few things that I'll just mention here in a second, it'll say how much I plan on spending for the company or slash would like to buy it for. But there's in closing conditions which are like, hey Andrew, you know this company pretty well. I'd like you to stay on for about a year afterwards. Any holdbacks that could be for an indemnity escrow or maybe I'm just not so certain I want to pay everything up front or like to hold it back or you know, potentially there's something regarding the financing in there, how I'm going to pay for it, whether I'd like you to sell or finance any component, any of that. So it basically gives a structure of an offer and what I plan on paying for it. It's non binding. So if I sign this, if you sign this, we're not committing to anything legally with the exception of a no shop. And that means it that when I sign it with you and you sign it with me, you can't speak with any other buyers for usually 60 days. The acquire.com documents have it. So for 60 days for large transactions it's 90, but I'd say 60 is a good mental benchmark for it.

Gotcha. So the best way I could probably think about this is this is you expressing interest in acquiring my company and then we're going to move on to the next step. Due diligence.

Correct.

So you haven't bought my company yet.

Correct? Yeah.

I'm not giving you my source co customers.

A good example just popped into my head. If anyone remembers when Elon Musk bought Twitter, like let's say like a year and a half ago, two years ago, he submitted an loi. Right? And as soon as he signed it, as soon as it became public, everyone said he bought Twitter. But if anyone remembers anything about that transaction, it was far from sold at that point and that ended up litigation before it was eventually acquired. So again, it's not the final step by any means and you're not even legally bound to buy the company or sell it if you sign the document.

So with that in mind, I signed this loi. I can't talk to other buyers. Um, probably a good idea I get on the same page with you before signing an loi. Maybe just talking to you. Hey, I have a few questions about this. Make sure we're on the same page instead of assigning it blindly.

Would you recommend that 1000% we're going to be married for 60 days and you know I could. There's a popping disposally that I'm just not that serious. I could just ghost you at which case you'd be stuck for X amount of days. Just be having to wait for the other offers to come or I should or should sit on ice, rather. We want to get on the same page. And you need to be pretty serious. I'd say even very serious. So I'm actually going to close this with you before you're willing to sign this with me.

Yeah. So my recommendation there. And if you receive a letter of intent on acquire.com and always ask for the letter of intent to be sent through acquire.com because that notifies our team. So we're aware of. But secondly, we can guide you through that process if needed, which we'll talk about more later in this webinar, how we help. But I always recommend having a, what I call a pre loi signing call. So you just got an offer for someone to buy your company, James. Thank you for sending it to me. Let's set up a call just to kind of review it so we're just completely on the same page. And then I'm going to ask you, you know, after I sign this, what happens? Is there a plan in place? And that'll really give you insight into the seriousness of the buyer. Do they have a plan? Do they know what they're doing? What is their experience level? And then I'm probably going to ask you, how are you going to finance this? So having those two questions in place, and there's probably more, but anything that's really important to you definitely clear that before you sign a letter of intent. Because like James says, if you sign one, you're essentially saying no to other interested buyers and you don't want to have a situation. Or put another way, when you sign an loi, you want to do everything you can beforehand to give you confidence that this letter of intent will close and lead to a successful acquisition. So now we're going to move on to the next parts. So due diligence. All right, James, we're on. We're on good terms. That was such a good pre loi call. You really gave me assurances on, you know, what due diligence is going to look like, what we're going to do. I verified that you have the capital to fund this acquisition. Walk me through due diligence. What? Okay, you shared me your plan, but let's talk about it live.

Yeah. So you've already. Or, excuse me, I have already done some due diligence with you before. I said the letter of intent. If I hadn't, I would have never sent it because I don't know what I'm working with, and I'm maybe not that interested. Phase 3 is confirmatory due diligence. That's when the heavy stuff begins. Rather than just believe what you said on your P and L, I'm going to have to look at your bank statements, your revenue statements, and basically tie in every number to that to actual documents showing that you collected money. I'll be taking a look at your code base, my legal team, in which case this, you know, unique scenario is probably just me doing that. We'll take a look at your contracts, see if there's anything that's explosive in there, maybe some other potential liabilities, like a tax liability. Maybe you have some outstanding disputes, maybe you're in litigation. I really have no idea. But the point being is that I need to look all this up, and I will do that. At this stage, I think, like, the phrase that I've heard in the past that I do like is trust but verify. Like, we trust you. We have a good relationship and rapport. But I still need to go in and confirm everything that you've told me.

I like that. That sounds like a ton of fun. So basically, I'm being honest. But you know what? What would scare you away in this part of the acquisition journey?

Yeah, I think mismatching numbers would be the first thing. And any sort of surprises that you haven't been upfront about. That's. I know that's. That's a big word. It's. It's not the fact that. It's not a fact that, like, wards on a company can be overcome or can't be overcome. Rather, it's the fact that you didn't tell me about them. And as soon as I find out something that you've told me about, immediately my first thought is going to be, okay, what else did. Haven't you told me? I'm going to immediately suspect that there's three, four, five things they haven't told me. And no matter how much I do dd, no matter how hard I work or for how long, I probably can't uncover anything. So that makes me nervous that there's something waiting out there that's going to surprise me like a month or two after closing, and that the transaction is either going to be significantly less value to me or is it going to kind of derail my entire portfolio.

Yeah, agree. James, what's your take on take on this? In my opinion, you Know, as you go through due diligence, your goal as a startup founder should be to be honest, have integrity and respond promptly to your requests. To give you confidence that everything that I shared to you prior to the letter of intent is true, I'm able to verify it. And then if there is maybe something I missed, let's just say, I don't know, maybe there's a dip in revenue for the next month or two. I tell you that in advance so you don't find it out as a surprise because surprises truly do kill deals. Would you add anything to that in terms of expectations of me during due diligence?

I think those are great. One thing that I mentioned, and this is sort of a tangent from what you said, is that maybe there's something that you just forgot about. Maybe you missed a pavement a couple years ago, three years ago or something, and you just forgot to bring it up. An honest mistake. If you've been doing those things, if you've been honest and forthright about what things that could be wrong, if you've been prompt, if you've been really supportive and responsive, I'm not going to care as much because I already trust you and we have rapport that we've built over a couple weeks or whatever. And then I know that that's probably the only thing I'm going to find.

I agree. That's why we always say again, with any buyer that you choose to go with, it's really a two way street. You want to get along with the buyer and the buyer needs to get along with you because you are going on this 30, 60, 90 day journey together where you're going to be diving into some, you know, sensitive details about your business. So assuming that all goes well, James, you know, I kind of maybe had a slow month or something, but I came to you, I was honest, I showed integrity. You got through all got through due diligence, you're confident and now you. Now you send me another legal document. Now you send me an asset purchase agreement. Can you walk me through what this is?

I'm just trying to make your life miserable at this point. But no. So the letter of intent, which is non biting, is more of a psychological. Basically what it sounds like, right? Like I'm intending to buy your company.

And James, once I got to. Sorry to interrupt.

No, you're good.

In terms of an Ellawi. Just, just to kind of really simplify, it's basically an offer to buy your company, outlining how they're going to pay. And that's about it. And as we move to that as the purchase agreement, things get a little more serious. That's kind of the tone I'm picking up.

Yeah. So if I like what I see in dd, if nothing comes up, if you, I don't find out that you didn't pay your taxes for 10 years or whatever, well, I'll send you an asset purchase agreement which is a binding document. It's called a definitive document and a transaction. If you sign this and I sign it, it means that we're going to do this thing right. Like I'm going to pay you and you're going to sell me the assets. Unlike the loi, it's not. It is binding. Excuse me. It contains all sorts of good stuff in there. A lot of times there's a seller note, a bill of sale is common. IP assignment agreement agreement is common. A non compete oftentimes is common in M and A transactions in the US at least. So at this point, if you're not serious anymore about selling your company, you should assign it. And if I'm not going to buy your company, I should not sign it because if I do, I'm on the hook for paying you X amount of dollars and it'd be a bad thing to commit to that without that money.

So this is essentially the main document that closes the acquisition. If I sign this, is acquisition essentially closed and now we're moving on to escrow and transferring the assets.

Yeah, that's exactly right. Once this becomes effective, we're essentially closed. And the only thing that we're waiting on is for money to get wired and assets exchange now.

Okay, so I'm really excited to do all this, but there's this like fifth step escrow. After I sign the asset purchase agreement, shouldn't I just send you all the assets right away like and then just wait for your wire transfer? What's escrow? Why should I use it?

Yeah, so escrow. There's not a good metaphor out there. One that I think you've used in the past is it's like a vault. So I'm going to send in my money to them. You're going to send in some sort of security mainly most of the assets. At which point you know that I've committed the money. It's with a secure third party. I know that you've committed the assets because they're also with that third party. At which point we just tell the escrow service on acquire.com and subscriber.com there's a bunch of different other ones. You can use out in the wild. I have some good recommendations. If anyone wants some drop in the chat or just email me when we tell them that money should be released, they'll send you the money. They'll send me the assets. Transaction closed. Without that, you're kind of flying blind, to be honest. Like if I just send you money, I have this document, but how do I know you've actually physically committed the assets and vice versa? Right. Like you don't want to just send me the assets without any sort of assurances that I've committed the money in some way?

Yeah. I would say if you are going through an acquisition and you don't use escrow, you are setting yourself up for just unnecessary liability. Because what escrow does essentially is, in my opinion, it, like James says, it's a vault. But more importantly, it keeps everybody honest. That agreement that you just signed, you have valuable IP and assets that you're going to be transferring over. You want to make sure that there's a third party intermediary making sure that the buyer is going to do what they said, which is send the money. And then the buyer also is protected because you're going to do what you said, which is transferring the assets. So if you get anything out of this whole webinar, I would probably narrow it down to always use escrow.

Yes, that's a, that's a great takeaway.

Like because it's the there as protection and insurance and this is really how acquisitions are done. If you skip any of these steps, you're really just opening yourself up to liability. And if you're going through a life changing acquisition, just do it correctly, even if it takes an extra week or two or whatever. Maybe because the other option could be just, you know, things go completely sideways and you know, again, use these tools to your advantage because they do protect you. And that is really what helps a successful acquisition go through and reduces the, the headaches that can last, you know, months, if not years.

Yeah, I'll just add there. In a former life I was, you know, managing claims like this either for failed acquisitions or finance or what have you, whatever. And trust me, like that is far, far, far more cumbersome and a headache than adding a couple days then your transaction by not using escrow or any of the other steps for that matter.

And I'd even, you know, I would go as far as saying this. If you're, if you're working with a buyer and they say I don't want to use escrow, to me that's Red flag. It's like why, why do you not want to use escrow? Protects both you and me. So definitely again, I'm just repeat myself. You take anything away from this webinar, use escrow. It's there for your protection and it'll get you to a successful acquisition. Okay, so now, okay, I just transferred you. We just use escrow. That took a little bit of extra time, but great. I got the capital from you, James. Thank you. I'm glad I sold my, I believe it was a SaaS legal tech business to you. Post closing.

Can't wait.

Yeah, you're gonna, you're gonna do well with that business. Post closing conditions. What's this?

Yeah, so the super, you know, Webster measurement way of me defining it and expressing it is things that happen to close contractually. Excuse me, things that happen to close for the contract and the deal to actually be effective and close. So just a few examples. I think the most pertinent one is probably some sort of transition period. That's if like Andrew, I'm saying you're the owner operator of this business. I could do all the DD in the world, but I still wouldn't know it as 10 as well as you do. 10% as well as you do. I'd be like Andrew, in order for me to close this transaction and pay you, I need you to commit to 3 months, 6 months, 912 months as either a consultant, maybe just a really informal email answering service. I'll shoot you a question once in a while and he'll answer it pretty promptly. Or even I need you on my exec team and you want to stay on. So I need you to agree to come and stay with the company in order for me to buy it. Some other ones that kind of go in the opposite direction are a non compete. Right. Like I'm not going to agree to buy a company from you if you don't agree to a non compete that says you won't start legal SaaS startup, you know, at number two, the day after close, things are competing with my customers. So those are a couple of really good examples. I'm sure there's others that I'm missing. But the main one I'd say is a transition period and some sort of services agreement going to be completed post close.

Agreed. And usually you know these items, or would you say these items are always discussed before closing? Correct?

Yeah. So theoretically this should be included in the letter of intent. It'll be in the asset purchase agreement, whether in the main body or like a side document. But don't, don't be alarmed. Don't be okay. If it gets discussed post letter of intent, it wasn't letter 10. It may be that I get deep in your company, I realize I need you really badly and I didn't realize that at the time of the letter intent. So if it comes up, you know, it's normal. I'd say very common actually. And not nothing to be afraid of.

Yeah. My, my thoughts on post closing conditions is this can also be, you know, bartering chip for you as a startup founder when you're working with buyers because you got to understand, you know, a buyer doesn't understand your business even to the like smallest degree of which the owner, you do because you've been working on the business for years. You know every customer, you know the entire code base, you know every single part of the marketing strategy. And so this can be a great opportunity when working with buyers to say, hey, you know, and then also keep in mind as an entrepreneur, you probably want whatever you built to live on and be transitioned over to the buyer properly. So this is an opportunity for you to, number one, reduce the risk of that acquisition for the buyer. So that creates James. I'm sure you'll be more comfortable if I say, James, hey, you know, I'm happy to help with, you know, three, six months of transition support. We can agree on how many hours I'm going to be available. Maybe after that you pay me some hourly rate. There's a number of different rate ways to, you know, put that together. But just giving buyers peace of mind that you're not just going to take the cash and then leave. Because when you're selling specifically a SaaS startup, it's not like you're selling a car. You can't just say, here's the keys, good luck. Because there might be some parts that again, you have a team and you kind of need to transition them over to James and introduce them. Or there's parts of your business that are really complex and it takes me five minutes to figure out how to fix it. And James, it'll take him without my knowledge, potentially a month, week. So again, this could be a great way for you to align with the buyer so they see this as a less risky acquisition and that increases buyer interest and then possibly even the valuation and the final sale price of your business. So that's just my take on transitions in terms of how they can be beneficial. I don't know.

Yeah, one thing I'll bolt on there, it's. You touched on how it'll de risk it for the buyer, but I think it also de risk is for the seller. So it can be a really a win win. Right. Like depending on the structure of your deal, you might want to be able to stay on. Like if there's an earn out or something, some sort of earn out component which means you have to hit a certain metric or something has to happen for amount of purchase price to be released to you. You want to have to be able to have. You want to be able to have some effect on that. You know, if there's a stellar financing component, you want to make sure the business is doing well and cash flowing well, so you actually get that money. So it's de risk it for the buyer, but it also be risk for you. And again, just from a legal standpoint too, if you're around to make sure everything's going well, all that, there's significantly less chance that there'll be some sort of dispute or a claim afterwards. So in my opinion, it's a win win and something that everyone should strongly consider.

Yeah, well said. I agreed on on all those points. It is a win win because you get to see what you build, you know, successfully live on and totally go to go to new heights. And then also it helps you close acquisition. So it is truly win win. All right, now we are moving over to taxes. Everyone loves taxes. James, you want to walk through deal structures?

Yeah, sure. So I think just some level setting here is probably a good idea. Just I'll bounce this off you, Andrew. In an SMB space that we work in, let's say those are deals from, you know, 0 to 10 mil. What do you see the most often in terms of structure between asset and stock sales?

I would say probably 99% asset sales. The, the way I typically. Do you care about. Just take this one.

Good.

So if you're, if you're selling a business for less than, let's say $10 million, you can most definitely expect the transaction to be an asset. Sal and James, correct me if I'm, if I'm wrong in any of this, but the reason for that is when you do a stock transaction, essentially the buyer is taking on an immense amount of liability for not a lot of upside. So there could be a situation where your business is, you have a lot of leverage, where you have a lot of buyers and it can be used as a bargaining chip. But typically most buyers are going to be offering asset sales. And so just to kind of level set, like James said, expect an asset sale. When you go to market specifically if you're selling your business for under, even under 20 million. Generally once you get above 20 million that's when you'll start working with buyers that are more comfortable given the scale of the business to acquire the entire entity. So that's, that's my take on asset versus stock acquisitions is across the board we see asset sales being predominantly favored by buyers and it's for good reason as well because if you buy the entire entity the buyer could be on the hook for a co founder that you gave away some stock to back in college or something like that or pending lawsuits. Just a level of liability that it just doesn't make sense. And it's also much more complicated in terms of the final purchase agreement. I personally did a stock transaction given the business was I worked with a multi billion dollar private equity firm and I do remember going through the reps and warranties for maybe two days like just outlining every single thing about the business to be concerned with. So to really simplify it for larger more complex deals stock acquisitions are more common. But for sub 10 million acquisition asset sales are by far the almost. I would go as far as saying the standard.

Yeah I mean I think that hit it totally on its head. Right. Like most of the time the enterprise value of a company beneath let's say 20 million just doesn't have the leverage for a buyer to be really interested in a stock transaction. So I guess that's really the top level way to describe it and how I kind of will close that that point out. So going into organization and purchase price allocation we all want to minimize taxes. Right. And I should say that this is, this is us focused. There are problems if you're organized as a C corp. The main of which let's go back. Why would anyone organize as a C corp? Right. And the reason is that there's some pretty good tax breaks depending on what your business does. And the second is that most venture capital angel investor really any sort of investment money won't really invest in anything but a C corp for ease of use for tax rates for a number of things. So, for example acquire.com is a C corp. I'm sure Uber is a C Corp. Any really technology company in the last 20 years, 30 years is a C Corp. But if you're not taking on that money it can be troublesome in an M and A transaction because there's what's called two layers of two layers of taxation. Right. So what happens if. If Andrew's company right. Legal Tech SAS is a C Corp and sells to me. What will happen is that Andrew's company will get taxed 21% at the corporate level and then that money is inside the corporation. Then it has it distributed to the shareholders which are Andrew, that money is taxed typically at ordinary income, which is you depend on your tax bracket pretty high, like over 30%. So the marginal tax right there is in the 40s or something like that. So that definitely poses some problems. There is purchase price allocation there and what that is at a very high level, it's agreement with the buyer between the buyer and seller that they'll allocate certain parts of the purchase price towards certain things like it can be tangible assets, intangible assets, the latter. The best description is probably goodwill or IP which is typically tax lower for a seller. So there are parts that, that could be tax lower to capital gains for entering that same circumstance. But it mainly be the higher rate to avoid that in your organization in the United States. And I should say that these are United States entities, but there are equivalents in other parts in the world. I should say the S Corp and llc, those are pass through entities which means that you recognize any gain and loss on your personal income tax. Andrew can jump in here anytime, please let me know. And so for those, if Andrew was organized an LLC or an S Corp, what happened is that he would only have the single layer of taxation and he would avoid the 21% of the corporate level. So it's just a lot more tax efficient. And tax efficient is just a really fancy way of saying that you spend way less money on taxes. The purchase price allocation in there, how that functions and the benefit it gives is that it does its best to allocate the most to things that will not be taxed at ordinary income. So let's say that Andrew's company is taxed 100% on tangible assets. That means you're going to be paying let's say 35, 37% on that gain. But if it's all attributed and allocated towards intangibles like goodwill again IP, stuff like that, it'll be super low. And whatever your personal income tax bracket for capital gains is. So depending on near your income net worth, it could range from, I'm just throwing out numbers, maybe like 5 to 20, 25%. So lower than ordinary income in any case. Nice.

So I think, you know, really the main, the main takeaway I'm getting from this and that was, that was awesome detail James is just know what you're at least have when you go to market. And we've seen this with a number of, you know, different founders, and it's, it's really easily avoidable. Just reach out to a CPA and just kind of get a ballpark of what you're going to pay in taxes. If you sell your business under whichever structure you are and whichever type of acquisition structure, you're going to sell the business because you don't want to get to the end of the road and then that tax bill scares you off or something like that. Like you want to know that up front. That's just good deal management and that's just smart thinking in terms of if I sell my business, what am I expected to pay in terms of taxes? And keep in mind, there is no way out of taxes. So if you want to sell your business, you unfortunately have to pay taxes. So, yeah, it's not everyone's favorite thing, but it's just part of getting a part. I paid a bunch in taxes when I've sold my companies. You know, I'm not going to give my opinion on, on taxes, but again, it's part of acquisition. So really, you know, if I had. One takeaway from everything that James just went over is just understand what your tax implication is going to be and make sure that you're comfortable with that tax implication and work in advance on if there are any possible ways to reduce your tax implications. That's essentially what I did when I sold my companies. I knew specifically what I would do to reduce my, my tax liability. And by doing that, preparation in advance can be very material. So I don't know if you have anything else to add, James.

And yeah, I think that's. Everything you said is great. Get ahead of it as quickly as you can, because if you're not, you may be disappointed in the number that you accepted over total purchase price. But if you're ahead of it, it's really going to factor into what you're comfortable accepting. You know, maybe you want a little bit more than you thought you would. And it's best to know that at the outset rather than see at a spreadsheet on, you know, day 59 out of 60 and realize you're going to make 30% less than you thought you were going to. So get ahead of it. Be aware of the intricacies of the entity choice, deal structure, any specific tax, you know, tax that may apply to you if you're in California, unfortunately it's going to be higher, stuff like that. And just be really mindful of it because it's going to. It may be rail your acquisition at the very end if you're not aware. And then it's just going to be a lose lose for you and the buyer in that situation.

Yeah. And I'm seeing some questions about qsbs and I can speak to that because I benefited from qsbs. To benefit from qsbs, you have to be a C corp. You have to have held your stock for over five years. There's also some capital requirement limits. For example, most venture backed companies are typically exempt because you have too much cash on hand.

I'm.

I'm not. I don't know the exact specifics to qualify because there has been some changes.

Yeah, it's basically, it's basically just the thing about tech. Tech companies and not. Not services companies is a good way to think about it.

Yeah. And so the biggest benefit of qsbs is you essentially pay a lower federal tax gain on the long term compared to if you don't have QSBs. So another great thing to bring up with your CPA like if you're planning to sell, you know, in, in five years because that's the waiting period. Like you only will qualify for qsbs if you plan for it now. So if that's something you're interested in learning more about, definitely prepare in advance. And that kind of weaves back into my one takeaway from this slide on taxes is start understanding what your tax implications are going to be today. So it's not a surprise when you do get an offer that could potentially be life changing. All right, we're going to keep this moving. Okay. Common fit pitfalls. James. So what happens if I sell without an attorney or legal or I just, you know, we just kind of just. We just do a handshake deal.

What.

What happens on that?

Yeah, a bad idea. I. I think just as a start.

We might even be able to just leave it there. Y. But keep going.

Yeah. You know what? I've seen all sorts of stuff. I've seen people go through a transaction without an attorney and realize that they didn't legally sell it and they legally didn't buy it because they just never signed anything. And it's, it's that outside or within the statute of frauds. Oh God. What else? I've seen money go into the wrong hand. I've seen money get wired to the wrong person. Not only does an attorney make sure everything's correctly papered and anything that beginning odd. What else? I've seen money go into the wrong hand. I've Seen money get wired to the wrong person. Not only does an attorney make sure everything's correctly papered and everything that we think compliance and risk wise is going to be managed, but they add a sort of level of psychological insurance to anything and in my opinion worth the fees for the peace of mind that you'll get. Compliance and risk buys can be managed, but they add a sort of level of psychological insurance to anything and in my opinion worth the, the fees for the, the peace of mind that you'll get if you hire one on your transaction.

Yeah, I would agree with that. And I again I, I rec.

If you hire one on your transaction.

Yeah, I would agree with that. And I again I, I Recommend using the acquired.com LOI builder, you know, recommend have buyers send offers using that tool. And then also we have an asset purchase agreement builder which is sufficient for pretty much all types of transactions. Recommend using the acquire.com LOI builder, you know, recommend have buyers send offers using that tool. And then also we have an asset purchase agreement builder which is sufficient for pretty much all types of transactions but for an extra 5, 10k to have an attorney review those docs give me the assurances that everything is okay. And then there's, there's also an element when you bring a third party legal expert involved. It keeps everybody honest. So selling without an attorney is just again you're opening yourself up to liability that you can avoid. And I would just think of it as insurance so everything goes smoothly and as, as planned.

Yeah. And just to touch on that point really quick before you move on Andrew, the, the keeping everyone honest is I think is a great point like no one's gonna, no one's going to mess with you, try and give you super out of market terms or price or really anything like that if you have an advocate in your corner which is hiring an attorney.

Yeah. And, and not, not to you know one, one thing too about you know like one, one situation we had happen in terms of when you receive, you know, a letter of intent. This is why I always say have the letter of intent sent on acquired.com so we can actually review with you. We can give you high level advice. We can't be your representing attorney but here's a story for you. So there was a transaction where basically we weren't necessarily involved in the transaction. Seller gets a letter of intent and it has a really high purchase price. And so that obviously is really exciting and the next time we hear about it is when the purchase agreement comes in the acquire.comloi builder, we make sure that the distributions of funds are laid out very specifically. For example, James, you're going to send me 80% on the day of closing, and then 20 is going to be held back through self financing, earn out, conditional hold back, what have you. But in this scenario, the asset purchase agreement said, I'm only going to send you 10% of the cash on close. And this is after we've gone through 60 days of due diligence. So again, the next slides are going to be more on how we help prevent these issues. The long story short of that is, you know, staying on platform, working with us. And I'm probably going to repeat that quite a bit because these are the issues that we, we help stop, but we need to be aware of them. If you keep us out of the loop, you're kind of on your own. All right, James, closing without escrow. Okay, you just, I just sent you all my assets and, and we're not using escrow. What, what can happen?

Yeah, I mean, I could just bail, right? Like, you have a legal document in place, but what. Like my law professor told me one time, if, if you have a lawsuit, that's not a win, right. That's just a sort of a money pit. So the idea is to avoid a lawsuit, keeps people honest, make sure that you're going to actually receive the money. You have. A third party is going to be communicating again, just one more layer of security and protection, slash insurance, that's going to ensure that the transaction closes smoothly.

Yeah. Again, if you take one thing away from this webinar, use escrow, please, for the love of startups and acquisitions. Because. Yeah, like, when in a situation like that, sure. You know, we've, we've heard complaints on, you know, escrow agents, you know, taking, you know, an additional week or two, but your other option, so you wait a week or two and close safely and securely with estro.com or an escrow agent or whomever, or you can not use escrow and put yourself at risk for a much longer journey. And that much longer journey is what James described, which is, yeah, you can sue someone, but again, it's gonna take you a bunch of time, a ton of headaches. So always use escrow. It keeps everybody honest and it ensures that whatever is signed in the asset purchase agreement, the buyer is going to send the funds as promised and you're going to send the assets as promised, and then that's when it's going to be released. So just such a simple way to keep everything going as Smoothly as possible. So again, going to repeat it one more time. If you take anything away from this webinar, you please, please use escrow. Okay, moving on to number three. James not signing legal docs on platform. What, what can go wrong there?

Yeah, you touched on this a couple minutes ago. We can see them, I think is the biggest thing. Make sure everything looks good at a high level. If something's super out of market, we can let you know, you know, having everything at one year place I think is really, anything in one place is really powerful as well. And just to make sure that they're actually getting signed correctly, which happens probably way more than one might think.

And also if a buyer asks you to go off platform to sign like legal docs and stuff like that, ask them why. Like ask them, you know, what are they trying to do. Because again, when you're on platform with us, we have visibility to help you with the letter of intent. We can tell you if the deal structure is egregious or if it's a great deal. We can give our candid opinion on it. We usually take a neutral stance in terms of, you know, this is a, a great deal, a bad deal or just completely ignore that deal. Because like, for example, if we saw an LOI with no schedule of how you're going to be paid, we'll tell you that right away and avoid you going through due diligence for two months only to find out that the buyer basically wants to pay nothing at close and seller financing it. And to give perspective, that's basically a bait and switch where, you know, and unfortunately these things happen in acquisitions. And so a lot of what we do at acquire.com is again, we also can help just keep both parties honest so we can save a ton of headaches. But if we're not in the loop, we unfortunately cannot. So that kind of ties into the next one. James closing on platform to avoid the closing fee.

Yeah, I mean, I think you already, you covered it pretty well in detail just, just now again, if they want to. Why, there's really no reason to. It signals a lot of weird things, right? Like they don't want to use escrow. Maybe they don't want to use legal docs. They don't want anyone else else to really know about it. Which confidentiality is one thing, but being sort of strange and circumventive about transparency is another. So again, we can provide security and, you know, psychological insurance for what it's worth, but we can only do that if you close on platform. We're not going to be able to see anything. We can't really be held responsible and we can't help at bottom is probably the most important thing. We don't know what's going on.

Yeah. And in terms of like you know, obviously any time, you know, you sell a business or really anytime there's a additional fee in place, you know, no one wants to pay extra money. But the best way to think about it@acquired.com is we earn that fee. And what I mean by that is we help the acquisition close securely. We help you secure the best price for your startup. We help create a process where you get the most interest from buyers. When you receive legal docs, we give you confidence or we can give you recommendations to third parties if need. Just basically that the small fee that we, that we charge to help close acquisitions, we actually show you a higher return on investment because we help you sell your business for more money with less headaches when it's out all the stress by just skipping it. And again keeping you on platform helps ensure that you avoid just all of these potentially life altering, completely derailing your company problems that we can stop very, very quickly. But again if we're not in the in the loop, we can't see him and then we can't help you. And then on top of that too, when you sell on acquire.com you still owe the closing fee so you're legally bound to pay the closing fee. And so you might as well use our services and lean on us as your support. So when you sell an acquire.com, you're not alone. We'll help you through everything from negotiations in this webinar we're specifically talking about legal and that's also a big part of what we help with to again ensure you maximize your exit and then you have a successful outcome without headaches. So moving on to some more common pitfalls. Okay, I think I kind of hit on this quite a bit. Not evaluating tax object obligations. Where's, where's kind of the pitfall there.

James, you know I think we, we touched on this not about your tax obligations means you could be considering 30% somewhat even like a 40% some circumstances reduction to what you'll actually receive. So the just be mindful of purchase price. Think of that as like a top line and then money in the bank as the bottom line and you want to plan for that accordingly as tax efficiently as you can. Again like you mentioned Andrew, there's, there's no way around taxes and I'm certainly Not going to tell anyone not to pay their taxes unless you care to go the way of Al Capone or I think Wesley Snipes too.

The IRS will come out.

Yeah, yeah, yeah. But just know, be mindful, it might affect how what you're willing to sell for. Maybe a number's too low, just knowing if you're going to get hit with double taxation. Maybe there's an opportunity before you even go to market to change your corporate structure, figure out some way to reduce your taxes and do it intelligently. I mean, there's a whole probably multi billion dollar industry built around this about helping people not avoid their taxes because that implies that you're actually not going to pay ones you owe, but trying to be as efficient and smart about it as you can.

Yeah, I agree. Well said. I completely agree with all that. All right. Not doing due diligence on bars. Do you care if I take this one, James?

I was literally about to recommend that you take it because this is a particular passion project of yours.

Yeah, this is. This also is part of, you know, a lot of what we do@acquire.com I mean, just yesterday I was due diligencing buyers. And what this means is loi comes in. How do you know the buyer's legit? How do you know they have the funds? So, number one, we'll coach you on how to go through those calls, and then depending on the deal size, we'll actually do it for you. So we'll go and we'll speak with buyers and we'll kind of tell them the situation. Hey, you know, there's multiple offers on the table. You know, we'd like to review your due diligence schedule, which is essentially, if we sign this loi, what's the plan? And then how are you going to fund this acquisition? We need that in writing. So my point being is not doing due diligence on buyers before you sign a letter of intent really just decreases the chances of your acquisition closing. Because not an LOI is not a guarantee that you've sold your company. So you want to do everything you can to increase the odds of your acquisition closing. And the easiest way to do that before signing an LOI is reaching out to the Quad.com team, having a pre LOI signing call with the buyer, just making sure that you completely understand what you're entering into and that you're confident with the buyer's experience to actually close on the acquisition, run a smooth process, and then most importantly, they have the capital. Whether that's through some sort of loan, they have the capital on hand or they have equity investors. So due diligence buyers, it just can take an extra day or two. But again, it's much better than signing an LY and then finding out two months later the buyer has no idea what they're doing and they don't have the capital. Okay. All right, James, this one, this, this one's kind of all you. We, we help make legal a breeze@acquire.com. do you want to break down just how we do this?

Yeah, yeah, for sure. So my standard disclaimer is that I can't be everyone's attorney of record. I, I wish I could. I'm professionally subject to a lattice work of professional ethical rules, which is unfortunate because if I could, I'd be everyone's attorney. But I can't. So what I can do is basically advocate for you, right? That's where the line is sort of conceptually drawn. I can't negotiate on your behalf. I can't redline documents. I can't, you know, defend you or whatever in front of a counterparty or whatever it may be. But what I'm super happy to do, you know, really at all times is give you high level information. I can answer questions, I can give you my uninformal opinion on what I think things are like, you know, maybe some, some things you should do, things you shouldn't do. Whether terms are super out of market, whether I think they're in market or think they're actually a really good deal, stuff like that. Another thing I really wanted to emphasize is that although I can't be your attorney, we have a great network of attorneys, escrow providers, CPAs, due diligence providers that we've cultivated over the years, last four years or so that we know we trust. Oftentimes their price structures are really advantageous and transparent for deals like this. We have a lot of attorneys that we work with that don't build by the hour, but rather by product on a per project basis, which most people refer since you don't get hit with the massive fee that you didn't know was coming on the day of close by your attorney. So just keep that in mind. And again, if you want any recommendations there, please do let me know. And I'm super happy to make those introductions.

Yeah, and just, you know, kind of echo, James. A lot of this is really just we help, you know, make the whole closing process a breeze from, you know, verifying funds of buyers, making sure that your data is protected under loi with our LOI builder and our asset purchase agreement. Those docs were actually, actually drafted by James himself. So he actually, through his years of M and A experience, helped us really create, you know, basically standardized legal docs at a very simple standard to use. James, I don't know if you want to add anything on that point. Yeah, I'll, I'll add there.

I, you know, I drafted those after probably looking at hundreds if not thousands of people same document over the years. They're, they work great. They're, they're protective, both parties, interest, middle of the road, get the job done. You know, I see similar documents and smaller transactions all the time. If there's something really specific you may want, you know, just add to it. It's really not that difficult if you're using their attorney. Certainly it can be used as a base document if you have an attorney working with you and they can just add or take away as they see fit. But I definitely recommend great starting point. We'll get the job done on acquire.com in 90% of the situations.

And then also in terms of escrow, I'm just going to keep saying it you, please you. If you get anything out of this webinar, use escrow because it's also included completely free within the fee that we charge to help close your transaction. So not only do we help you secure a buyer, we help you with negotiations, preparation, everything in between legal. We also all offer escrow for free at the very end. So definitely use escrow and then just understanding when you keep everything on platform. So this is the third box. So transparent process that keeps everybody accountable. Keep us in the loop, let us have insight into how things are going because it does create a digital audit trail in case things do not go correctly. And then we also have a clear instructional stage by stage acquisition process that keeps you and the buyer aligned on okay, NDA loi asset purchase agreement or excuse me, due diligence, asset purchase agreement and so on. Escrow close. So use all of this to your advantage. And we built this to make founders lives easier after again personally going through acquisitions and seeing just such a messy process. So we've really brought, you know, some level of standardization to this to make your life easier and to help you again maximize your exit with the least amount of headaches as possible. James, is there anything you want to add on on this slide?

No, I mean just besides that. I, I wish I'd. My former clients, my law firm had some sort of process or structure that we've built. Right. Like kind of acquisition process Having everything in one place, be able to follow it, have an audit trail. So helpful. And people kind of get lost. Like, it's really easy to get lost if you don't think of it sequentially. And that helps do it.

Yeah, no, completely agreed. All right. We're. We're at time. I was hoping to do Q and A, but I want to keep. I want to be conscious of everybody's time here. So we'll get all the questions that have been typed into the chat answered on the recording of this. So keep, keep an eye out for that. But in the meantime, if you need help evaluating a letter of intent or an asset purchase agreement, please feel free to reach out, get in touch for expert support. And keep in mind our. Our goal is to maximize your acquisition. That's what we're all about@acquire.com so that said, how do we do? I love to get feedback at the end. Did everybody enjoy this? Thumbs up, thumbs down. We can take the feedback. We're going to be doing these webinars. We've been on a cadence of every other week. All right, we're getting thumbs up.

Thanks, Roger, for the thumbs up.

Thanks, Chris. Super insightful, helpful. All right. I'm glad this was. And again, if you have any questions as you're going through your acquisition, we are available to help. We do have your back. You are not alone on acquired.com because we want to see you be successful just as much as you do. So I'll end it on that note. Thanks again, everybody, for joining. Hope you have a great week. And if you're going through an acquisition right now, reach out if you need help because that's, that's what we're here for.