Whether you’re getting ready to sell the company you’ve built from the ground up or considering acquiring a business to expand your portfolio, understanding the legal landscape of business deals isn’t optional – it’s essential. M&A transactions are complex deals that must be built on careful legal planning, risk management, and airtight documentation.
In this article, we’ll cover the seven most important legal matters to be aware of before diving into any M&A deal:
7 Key Legal Considerations for M&A Transactions
Deal Structure and Tax Implications
One of the first – and most important – decisions in any M&A transaction is how to structure the deal. This decision sets the foundation for everything that follows.
Most transactions fall into one of three categories:
- Asset Purchase: The buyer selects specific assets to acquire.
- Stock Purchase: The buyer purchases shares directly from the business owners.
- Merger: Two entities legally combine into a single organization.
Each of these structures comes with distinct legal and tax consequences. For example, sellers often favor stock sales for capital gains treatment, while many buyers prefer asset sales for the tax benefits of depreciating assets and avoiding unknown liabilities. Choosing the right structure is a strategic move and should always involve input from your attorney and tax advisor.
Due Diligence and Disclosure
Once both parties express serious intent, the due diligence phase begins. This is where the buyer investigates the business in depth to confirm its financial health, assess potential risks, and ensure that what’s being promised matches what’s really being offered.
Due diligence typically reviews:
- Financial statements and tax filings
- Contracts and lease agreements
- Employee records and benefit plans
- Pending litigation or compliance issues
- Intellectual property (IP) ownership and key assets
During this phase, transparency is crucial for sellers. Hiding liabilities or problem areas can result in serious legal consequences later. The key phrase for buyers during the due diligence process is “take your time and be thorough”. Rushing through due diligence is a gamble that often leads to regret.
Legal Agreements: From LOI to Closing
Behind every successful deal is a stack of legal documents, not just the final purchase agreement. These documents protect both sides of the deal and guide the process from early discussions through closing.
The key documents involved are:
- Letter of Intent (LOI): A LOI is usually the first formal document in the process, and it outlines the basic terms of the proposed deal. This usually includes the initial price offer, deal structure, due diligence timeline, and any exclusivity or confidentiality agreements. While LOI’s are generally non-binding, they set the framework for what’s to come.
- Non-Disclosure Agreement (NDA): NDAs are signed to protect sensitive business data and confidential information before it’s shared. This is especially important when the potential buyer is a competitor or investor within the industry.
- Purchase Agreement: The Purchase Agreement is the core legal contract that finalizes the sale. It includes the purchase price, payment terms, lists of assets or shares being transferred, and closing conditions.
Depending on the specifics of the deal, there may also be additional documents like:
- Transition Services Agreements
- Employment or Consulting Agreements
- Escrow or Holdback Agreements
- Non-Compete Agreements
Regulatory Compliance
Some M&A transactions require regulatory approvals before closing, depending on the size, industry, and parties involved. This could include:
- Antitrust Laws: Large deals may need approval from agencies like the Federal Trade Commission (FTC) to ensure they don’t reduce market competition.
- Industry-Specific Regulations: Healthcare, financial services, education, and other regulated industries may require licenses to be transferred or reissued.
- Foreign Ownership or Investment Rules: If one party is a non-US entity, foreign investment review boards (like CFIUS in the US) may get involved.
Addressing these legal hurdles early avoids unnecessary delays, fines and litigation, or tanking the deal entirely.
Employee and Labor Law Issues
M&A deals don’t just involve numbers and contracts; it involves people, as well. Employees are often one of the most valuable (and sensitive) aspects of a business. How they’re handled can affect morale, retention, and legal exposure.
- In asset sales, employees are often terminated by the seller and re-hired by the buyer under new contracts.
- In stock sales or mergers, employment usually continues uninterrupted.
Regardless of the deal structure, both parties must:
- Comply with federal, state, and local labor laws
- Handle benefit plans, accrued PTO, and severance
- Address union contracts or collective bargaining agreements (if applicable)
Failing to manage these issues properly can lead to lawsuits or mass resignations.
Intellectual Property and Contracts
For many businesses, intellectual property (IP) is their crown jewel. IP may include trademarks, patents, proprietary software, or trade secrets. Contracts are also incredibly important assets that a business may have with clients, vendors, suppliers, their landlord, etc.
Buyers need to ensure:
- The business truly owns the IP (not an individual employee or third party)
- The IP can be transferred legally
- Key contracts are transferable or that consent is obtained
Post-Closing Protections
Even after the ink dries on the final closing, the legal responsibilities aren’t over. Well-structured deals include post-closing protections to safeguard both sides.
Some key protections include:
- Escrow or Holdbacks: Part of the purchase price is held back to cover potential future liabilities.
- Non-Compete Clauses: Prevent the seller from opening a similar business that could compete directly, usually within a certain geographic area or timeframe.
- Consulting or Transition Agreements: Keeping the seller involved for a period of time can ensure everything transitions smoothly.
These tools help preserve the value of the business and reduce post-deal risks.
M&A transactions involve much more than simple negotiations and handshake deals. If you’re planning to buy or sell a business, surround yourself with the right team – legal counsel, tax advisors, and an experienced business broker. To see how the FBB Group can assist you through the M&A process – from preparations to final closing – contact us online today.