Mergers and acquisitions (M&A) can accelerate growth, unlock succession plans, or enable strategic exits. They also introduce legal and financial complexities that can materially affect value, timing, and risk allocation. This guide walks through the most common issues owners face using practical examples to illustrate why points like letters of intent, due diligence traps, purchase price mechanics, and deal structure matter and how to navigate them.

1) Letters of Intent: Setting the Deal’s Roadmap

A letter of intent (LOI) frames business terms early and guides the definitive agreement. It can be non-binding overall while making certain provisions binding.

• Non-binding terms: Typically include purchase price range, structure (asset vs. stock), high-level timeline, and key conditions. These are expressions of intent and not enforceable commitments to close.

• Binding terms: Commonly include exclusivity/no-shop, confidentiality, access to information, allocation of transaction expenses, and governing law. Breaching these can carry real consequences.

Why it matters:

A carefully drafted LOI narrows negotiation issues later, reduces surprises, and protects leverage. An imprecise LOI can lock you into unfavorable constructs (e.g., overly broad exclusivity) or omit critical concepts (e.g., working capital targets), forcing costly renegotiation.

Practical example: A seller signs an LOI stating a $10 million price “subject to working capital adjustment” without defining target working capital or the accounting principles. At closing, the buyer asserts a $1.2 million downward adjustment. If the LOI had specified the target, methodology, and example calculation, the dispute risk and price leakage could have been mitigated.

Owner Tip:

• Clearly designate which provisions are binding and for how long.

• Define headline economics with enough specificity: price, earn-out framework, working capital mechanics, escrow size/duration.

• Limit exclusivity length and include milestones for buyer diligence and financing.

2) Due Diligence Traps: Where Value Leaks and Deals Stall

Diligence validates the business you think you are buying or selling. The most frequent traps involve employment, intellectual property (IP), and taxes.

Employment Agreements and Workforce Matters

Key issues:

• Classification: Misclassified contractors can trigger wage, tax, and benefits liabilities.

• Non-competes and non-solicits: Are restrictive covenants enforceable and properly assigned? Are key employees bound?

• Transition services agreement: temporary support the seller provides to the buyer after closing, ensuring business continuity while the buyer integrates systems, processes, and personnel. Scope, duration, standards of service, and pricing.

• Change-in-control and retention: Hidden bonuses, acceleration of equity, or severance can alter deal economics.

• Compliance: Overtime, meal/rest statutes, pay equity, and immigration status issues can create contingent liabilities.

Example: A target relies on “contractors” who function as employees. On integration, the buyer must convert them to employees, incurring back taxes and penalties and increasing ongoing costs, effectively reducing the purchase price after the fact.

Example 2: In a carve‑out acquisition, the seller continues running payroll and IT for six months while the buyer builds independent systems. Without a TSA, employees could miss paychecks or lose system access, jeopardizing operations.

Preparation tips:

• Audit classifications and update offer letters and handbooks.

• Inventory all employment agreements, compensation plans, and bonus practices.

• Negotiate transition services agreement terms during the LOI stage to avoid last‑minute disputes and ensure smooth transition.

• Identify change-in-control triggers early and consider retention packages.

Intellectual Property Ownership and Protection

Key issues:

• Chain of title: Did employees and contractors assign IP to the company? Are invention assignment and confidentiality agreements signed?

• Open-source software: Use without proper licenses can require disclosure of source code or impose distribution obligations.

• Trademarks, patents, and domain names: Are registrations current and owned by the company (not founders personally)?

• Customer and vendor agreements: Do they contain IP ownership or license restrictions?

Example: A software company used a contractor for core code but lacks an assignment agreement. The buyer demands a price reduction and an escrow until ownership is corrected, delaying closing.

Preparation tips:

• Implement and collect signed IP assignment and confidentiality agreements for all contributors.

• Conduct an internal code scan for open-source and document licenses and usage.

• Confirm registrations and align ownership across corporate entities.

Tax Liabilities

Key issues:

• Sales and use tax nexus: Remote sales may have created state tax exposure.

• Payroll and withholding: Late filings and miswithholding can produce penalties.

• Income tax positions: Aggressive positions without support can become purchase price adjustments or indemnity claims.

• Unfiled jurisdictions: Growing into new states or countries without registering or filing.

Example: A multi-state e-commerce seller failed to collect sales tax in several states post–economic nexus rules. Buyer demands a special indemnity and a larger escrow, tying up proceeds for 12–24 months.

Preparation tips:

• Commission a sell-side tax review to quantify exposures.

• Voluntarily disclose and resolve material issues before buyers discover them.

• Reconcile and document tax filings by jurisdiction for the past 3-4 years.

3) Purchase Price Mechanics: How Dollars Move

Beyond the headline number, mechanics can shift millions. Understand these three components early.

Earn-Outs

An earn-out defers part of the price based on future performance (e.g., revenue or EBITDA targets over 12–36 months).

Why it matters: Aligns price with performance but invites disputes over measurement, accounting policies, and post-closing operational control.

Example: Seller agrees to a $3 million earn-out tied to EBITDA but buyer changes expense allocations post-closing, depressing EBITDA. Without guardrails on accounting consistency and operational covenants, the earn-out becomes uncollectible.

Drafting tips:

• Define metrics precisely, provide example calculations, and require consistent GAAP and historical practices.

• Include information and audit rights, dispute resolution mechanisms, and baseline operating covenants.

• Consider caps/floors, acceleration on change of control, and protections if buyer ceases investment in the business.

Working Capital Adjustments

Purpose: Ensure the business delivers a “normal level” of short-term assets and liabilities at closing.

Key elements:

• Target working capital: Often based on a trailing average; specify components, excluded items, and accounting principles.

• True-up: Post-closing calculation and adjustment (up or down) within 60–120 days. Generally shorter is better.

Example: Inventory obsolescence policies differ between parties. If not aligned in the LOI and definitive agreement, the post-closing true-up can swing the price by hundreds of thousands.

Drafting tips:

• Attach a sample calculation and detailed definition of current assets/liabilities.

• Address seasonality and unusual items.

• Provide a dispute process and selection of an independent accountant.

Escrow Holdbacks

Purpose: Secure the buyer for indemnified losses (e.g., breaches of reps, tax liabilities).

Common terms:

• Size: Typically 5% in smaller deals to 15% of purchase price for [12–24] months; separate “special escrows” for known risks (e.g., tax, litigation).

• Release: Scheduled partial releases; immediate offsets for resolved claims.

Example: A known sales tax exposure is covered by a dedicated tax escrow of $500,000 for [3] years, preventing an oversized general escrow.

Seller tips:

• Negotiate caps, baskets, survival periods, and exclusions (e.g., fraud).

• Consider representation and warranty insurance to reduce escrow size, factoring in premiums, retention, and excluded risks.

4) Deal Structures: Asset Purchase vs. Stock Purchase

Choosing structure affects taxes, liabilities, contracts, and closing complexity.

Asset Purchase

Buyer acquires selected assets and assumes specified liabilities.

Pros:

• Liability control: Buyer avoids most historical liabilities unless assumed.

• Tax benefits: Buyer typically gets a step-up in asset basis, increasing depreciation/amortization.

• Flexibility: Exclude unwanted contracts or risks.

Cons:

• Consents and transfers: Contracts, permits, and licenses may require third-party consent.

• Assignment complexity: Customer/vendor relationships can be disrupted during assignment.

• Seller tax: Potential double tax for C corporations and complexities in allocating purchase price.

Best for: Carve-outs, riskier targets, or where step-up is critical.

Stock (or Equity) Purchase

Buyer acquires ownership interests; company remains intact.

Pros:

• Continuity: Contracts, permits, and employees generally remain with the entity; smoother operational transition.

• Speed: Fewer transfer consents in many cases.

Cons:

• Historical liabilities: Buyer inherits the company’s obligations subject to negotiated indemnities.

• Limited tax basis step-up: Unless structured as a deemed asset sale (elections available in some cases*).

• Minority and shareholder approvals: May require navigating drag/tag and dissenters’ rights.

Best for: Businesses with numerous non-assignable contracts, regulated licenses, or where continuity is paramount.

Practical example: A government contractor with non-assignable contracts may require a stock purchase to avoid novation risks; the buyer counters by demanding stronger indemnities and a larger escrow to cover legacy liabilities.

Note, however alternative techniques, such as an F-reorganization, can be useful in asset purchase situations related to s-corporations. A merger is also a type of acquisition, but is outside the scope of this post.

Process Roadmap: How to Prepare and Execute

• Pre-sale readiness: Clean up cap table and IP, shore up financials, address tax exposures, organize data room, and lock down key employees.

• Thoughtful LOI: Set binding/non-binding terms clearly; define key economics; calibrate exclusivity.

• Diligence discipline: Anticipate red flags; respond promptly with organized, accurate materials.

• Definitive agreements: Align reps and warranties with diligence; calibrate indemnities, escrows, and survival periods; lock in price mechanics with examples.

• Closing and post-closing: Confirm consents, deliverables, and funds flow; calendar working capital and earn-out milestones; implement integration covenants.

Why This Matters to Owners

Every point above affects certainty of close, net proceeds, timeline, and ongoing risk. Small drafting choices can produce outsized economic consequences. Engaging advisors who understand market norms and the practical realities of running a business helps you protect value, avoid delays, and close on your terms.

Consult with an experienced Florida Business Attorney Today

We guide owners and acquirers through each stage: from LOI strategy and readiness assessments to diligence, price mechanics, and closing. If you are considering a sale or acquisition in the next 6–18 months, we can help you prepare now to maximize value and minimize surprises.

At Tarro Law Associates, our Rhode Island mergers and acquisitions attorneys and Florida business transaction lawyers provide the sophisticated counsel you need to protect value, manage risk, and close on favorable terms. Call us today at 401‑272‑8300 or complete our form to schedule a strategy session with our experienced M&A team.