# M&A deals: what tech startups need to know
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2016-11-25
Category: BUSINESS
Category URL: https://financedigest.com/category/business
Meta Title: Navigating M&A Season with Christina Wojcik: A Legal
Meta Description: Discover essential legal considerations for M&A deals in 2016 with insights from Christina Wojcik, VP of Legal Services at Seal Software. Stay informed to
URL: https://financedigest.com/ma-deals-what-tech-startups-need-to-knowhtml

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By-lined to Christina Wojcik **,** vice president of legal services at Seal Software

**_Christina Wojcik, vice president of legal services at Seal Software, breaks down the steps to consider throughout the M&A process._**

With over [$5tn in deals signed in 2015](http://www.marketwatch.com/story/ma-activity-tops-5-trillion-in-record-2015-2015-12-28), it was a record breaking year for M&A activity. However, 2016 does not appear to be following suit.

Over the first eight months of this year global M&A [dropped to $2.2tn](http://www.reuters.com/article/us-britain-eu-m-a-intsight-idUSKCN11I262) with 28,720 deals compared to $2.9tn with 30,894 deals at the same time last year.

In fact, 2016 appears to be a record year for broken deals instead. Between Brexit concerns and antitrust regulations in the US, an increasing number of deals are [breaking down](http://fortune.com/2016/06/30/broken-deal-mergers-acquisitions-2016/) before they become official.

**The Unknown**

M&A deals are complex events that require overcoming a hefty number of obstacles, including corporate governance, form of payment, legal concerns, contractual issues, regulatory approval and tax issues. It is very challenging to fully assess and understand the kinds of contractual risks, restrictions, obligations, and exposure companies will take on after the deal is closed.

Uncovering this information requires many hours of manual contract review work from either a law firm or lower-cost legal [service provider](https://www.financedigest.com/can-companies-minimise-their-dependency-on-cloud-service-providers.html "Can companies minimise their dependency on cloud service providers?"). Before they can even begin reviewing the documents, organisations first must find and centralise all the relevant contracts. This may sound simple, but tracking down thousands of contracts, which have been created in varying formats, across different departments, and stored in various locations over the years is an arduous and sometimes overwhelming undertaking.

**The [Real Work](https://www.financedigest.com/get-real-how-to-be-your-authentic-self-at-work.html "Get real: How to be your authentic self at work")**

Once all contractual documents are collected, the [real work](https://www.financedigest.com/real-estate-brokers-vs-agents-which-one-should-you-work-with.html "Real Estate Brokers vs. Agents: Which One Should You Work With?") begins of extracting contract data, and having that data be useful before closing a deal. Legal teams must review a host of provisions, and not fully understanding assignment or change of control provisions can be especially detrimental to the dynamic of the acquisition. If your contracts cannot be assigned or if change of [control triggers automatic](https://www.financedigest.com/automatic-door-control-market-2022-outlook-current-and-future-industry-landscape-analysis-2026.html "Automatic Door Control Market 2022 Outlook, Current and Future Industry Landscape Analysis 2026") termination for cause, the strategic value of the acquisition may be called into question, leading to many hours of renegotiation.

In addition to assignment and [change of control](https://www.financedigest.com/the-automation-control-system-market-to-see-through-the-probable-sea-change-through-digitization.html "The Automation Control System Market to see through the probable sea change through digitization"), here are a few more to consider:

- **Be aware: Auto-renewal**


  Many sales organisations work to negotiate auto-renewals and every procurement department dreads tracking auto-renewal provisions. If the goal is to terminate a contract within the specific notification period, you [must know](https://www.financedigest.com/must-know-facts-about-the-protection-class-rating-on-your-home.html "Must-Know Facts about the Protection Class Rating on Your Home") which contracts contain the provision and the window for cancellation. A missed auto-renewal can result in [hidden costs](https://www.financedigest.com/the-hidden-costs-of-property-investment.html "The Hidden Costs of Property Investment") that most companies will not have considered. One of our customers, a large [energy company](https://www.financedigest.com/luc-remont-proposed-as-new-boss-of-french-energy-company-edf.html "Luc Remont proposed as new boss of French energy company EDF"), discovered they were auto-renewing a lease costing $400,000 per year on property they didn’t use, three years after a takeover.

- **No nonsense: Non-competes & non-solicits**


  Monetary damages can also occur if a company breaks a non-compete or non-solicit clause. It’s important to know whether contracts include these provisions, as a non-compete is a promise from both the buyer and seller to refrain from engaging in activities with competitors. A non-solicit clause prohibits a company from trying to lure or hire the other [company’s customers or employees, and this is particularly relevant when two companies in the same industry merge, as many of each company’s existing](https://www.financedigest.com/diabetic-nephropathy-market-to-generate-profitable-avenues-for-existing-companies-as-well-as-new-players.html "Diabetic Nephropathy Market to Generate Profitable Avenues for Existing Companies as Well as New Players") customers or partners are likely competitors.

- **Identify: Indemnity**


  The acquiring company should clearly understand what the target company has agreed to indemnify, and these limitations of liability can be very complex and should be heavily [negotiated prior to closing an M&A deal](https://www.financedigest.com/s-africa-negotiates-deal-with-eu-to-clear-citrus-blockage-at-ports.html "S.Africa negotiates deal with EU to clear citrus blockage at ports").These are often the most negotiated provisions and typically have cross-references which makes them especially difficult to fully comprehend. Careful review of the indemnification provisions of each contract is needed to [ensure that these provisions align](https://www.financedigest.com/how-can-we-ensure-that-africas-energy-transition-aligns-with-its-development-ambitions.html "How can we ensure that Africa’s energy transition aligns with its development ambitions?") with the combined entity’s indemnification standards and practices.

- **Limit: Unlimited liability**


  When startups are motivated to close a new deal, especially with big, recognisable brands, they will often accept potentially unacceptable provisions. This is commonly seen with limitation of liabilities. Accepting unlimited liability does not necessarily [pose a large risk](https://www.financedigest.com/omicron-poses-very-high-risk-but-data-on-severity-limited.html "Omicron poses ‘very high’ risk but data on severity limited") to a startup, because they have much less to lose. However, it can pose a significant [risk to an established organisation with much higher](https://www.financedigest.com/dollar-higher-on-risk-aversion-euro-revisits-parity.html "Dollar higher on risk aversion; euro revisits parity") exposure if they accept that unlimited liability. It becomes very important that the [acquiring company](https://www.financedigest.com/hospital-acquired-infection-control-market-global-leading-companies-analysis-revenue-trends-and-forecasts-2027.html "Hospital Acquired Infection Control Market Global Leading Companies Analysis, Revenue, Trends and Forecasts 2027") quickly identifies the contracts containing unlimited liability and look to renegotiate amend or possibly terminate the contract. We worked with a software giant which bought a startup and discovered it had inherited numerous unlimited liability provisions – a small problem for the $1.5 million startup, but a much bigger problem for the $1 [billion company](https://www.financedigest.com/analysis-u-s-companies-spend-billions-on-stay-at-home-tech-boding-ill-for-office-properties.html "Analysis-U.S. companies spend billions on stay-at-home tech, boding ill for office properties").

**The Silver Lining**

[As M&A activity](https://www.financedigest.com/historic-ma-activity-will-peak-in-2022.html) increases, especially within the startup world, knowing what’s in contracts is more important than ever, and having easy access to and visibility into contracts data is essential. Due to the [time sensitivity on many M&A deals](https://www.financedigest.com/italys-cdp-and-partners-ask-tim-for-more-time-for-network-deal.html "Italy’s CDP and partners ask TIM for more time for network deal") and the manual labour often required to analyse contracts, most companies resort to sampling just a small portion of the target company’s contracts with the assumption that if the sample passes the test, the rest will as well. But, countless cases prove that this [approach exposes the acquiring company with risk](https://www.financedigest.com/demystifying-us-feds-approach-on-systemic-climate-risk-stress-testing.html "Demystifying US Fed’s approach on Systemic Climate Risk Stress Testing") they had not anticipated. Luckily, [current contract technology offers machine](https://www.financedigest.com/deburring-machine-market-2022-scope-of-current-and-future-industry-2031.html "Deburring Machine Market 2022 | Scope of Current and Future Industry 2031") learning and natural language processing solutions so that organisations going through the M&A process can streamline the due diligence process to consolidate contracts, pinpoint and understand risk, and uncover vendor consolidation opportunities.

Contract intelligence solutions can also help to alleviate some of the M&A concerns companies have when it comes to Brexit. By [gaining full insight into the terms impacted](https://www.financedigest.com/oil-gains-as-investors-see-limited-omicron-impact-on-demand.html "Oil gains as investors see limited Omicron impact on demand") by the separation from the EU, such as governing law, currencies, and other commercial terms, companies may find that the merger, acquisition, spin-off, etc. will actually give them a [competitive advantage or provide for growth](https://www.financedigest.com/industrial-catalytic-converters-market-competitive-growth-strategies-based-on-type-applications-end-user-and-region.html "Industrial Catalytic Converters Market Competitive Growth Strategies Based on Type, Applications, End User and Region").By extracting metadata and clauses through a sophisticated search and analytics, [businesses can quickly understand the risk and opportunities](https://www.financedigest.com/title-gallium-68-market-research-methodology-business-opportunities-and-analysis-report-by-2031.html "Gallium-68 Market Research Methodology, Business Opportunities and Analysis Report by 2031") in those contracts and determine if there is still value to the deal.This will help facilitate closures with the added security of fully knowing what is being acquired. So no need for extra water or paracetamol, because understanding contract terms will prevent the post-deal hangover that so many rushed deals result in.


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