SaaS Seller Legal Due Diligence Cheat Sheet: Six Things You Will Be Asked

Sourcing deals is hard. Valuations swing wildly, money is pouring into the space, and there are lots of buyers out there competing for the right businesses to buy. But you have found an appealing target company and the target company is now under an exclusive letter of intent. You have seen preliminary data, but now it is time to really dig into your target company so you can be sure you want to close the transaction. This due diligence process isn’t the most fun part of the deal, but it is important and the more you know about and are prepared in advance for the process, the less painful it will be. This guide presents you with six things you as a buyer should ask for during legal due diligence. Your business diligence is just as important, but business diligence varies more depending on the type of target company.

1. Ownership of the Assets

Every buyer is going to insist that you list out all of the open-source licenses in your code base. Many of the common open-source licenses permit incorporation of such code into software and for that software to be sold commercially. There are a few open-source licenses that are copyleft licenses and require under their terms that any software incorporating that code must be distributed as freeware. Most buyers will insist that you as the seller guarantee that there is no code in your code base that could affect the buyer’s ability to sell the software. This guarantee means that you as the seller will be financially responsible (even after the transaction closes) should there be a copyleft license in the code base, so it is very important that you have an accurate listing of the open-source licenses you used.

2. Open Source Licenses in Code

Almost all software has bugs in it. Buyers know this, but you as the seller should expect Buyers to ask for your support tickets going back for a period of time. Buyers want to know they are buying a product that works like it is supposed to work, and this sort of customer feedback is a key datapoint for that sort of validation. These support tickets and bugs will bleed into a discussion about the ongoing support you as the seller will provide the buyer after the transaction closes to ensure that everything works as the buyer expects. You as the seller should be prepared for this discussion about transition services and should expect to be available to at least answer questions for several months after the transaction closes.

3. Support Tickets

Depending on the nature of your SaaS product (i.e. enterprise SaaS products), certain customers can drive an outsized portion of revenues. If a single customer provides 5% or more of your total revenue, a buyer will want to take a close look at your contract with that customer. The buyer may even want to speak with someone at that client to make sure that the client won’t jump ship after you sell the company. It is also important that all of your subscription agreements have the magic legal language letting you assign or transfer those contracts in the event you sell your business. Otherwise, you could face some headaches and it may delay your ability to sell your SaaS business.

4. Contracts to Assign

Buyers will want to make sure that your corporate house is in order. This means they will need to see your articles of incorporation, bylaws, and certificates of good standing. Buyers are also going to want to see financial statements, but how extensive these will need to be varies with the size of the transaction and the industry vertical.

5. Corporate Documents

No one wants to buy into a lawsuit. Lawsuits are expensive and time-consuming. Buyers are going to want to know if your company is involved in any litigation, and they are also going to want to know if there is any threatened litigation that could take place soon after the transaction closes. So long as there aren’t any lawsuits against your company, there won’t be any problems. If you are embroiled in litigation, then you will need to communicate this to the buyer and don’t be surprised if the buyer loses interest in your company or insists that the purchase price be dropped.

6. Ongoing Litigation

Lawsuits are expensive and time-consuming. Don’t buy into a lawsuit when you purchase a business. Make the seller represent that there is no ongoing or threatened litigation that impacts the seller or the assets you plan to purchase. If there is ongoing or threatened litigation, then you as the buyer may wish to not close on the deal or to renegotiate the price down based on the clouds of uncertainty that litigation causes.

Armed with some knowledge and preparation, you will be able to successfully navigate the due diligence process and close on a successful sale of your SaaS business. If you would like assistance in preparing for the due diligence process or guidance through the entire process of selling your SaaS business, contact us at info@barlowwilliams.law and we’ll be happy to meet with you to discuss your needs.

Get Proven M&A Experts For Digital Businesses

More Resources

Buy-Side

Purchase Price Adjustments in Asset Purchase Agreements

By: James David Williams

Sell-Side

Asset Sales vs. Stock Sales

By: James David Williams

Operations

Working with Offshore Developers

By: James David Williams