How a business acquisition actually works
- Letter of Intent (LOI)Non-binding outline of the proposed deal terms — purchase price, structure (asset vs stock), key conditions, exclusivity period. Usually signed before serious legal work begins. Important: some provisions (exclusivity, confidentiality) are binding. An M&A attorney should review the LOI before you sign it.
- Due DiligenceThe buyer's systematic investigation of the target business. Covers financials, contracts, employees, IP, litigation, regulatory compliance, and more. Typically 30-90 days for middle-market deals. The goal: find problems before you own them.
- Purchase Agreement NegotiationThe definitive legal document governing the transaction. Includes representations and warranties, covenants (what the seller promises to do before closing), conditions to closing, indemnification provisions, and escrow arrangements. This is the most important document in the deal.
- Ancillary DocumentsNon-compete and non-solicitation agreements (binding the seller), transition services agreement (if seller will help run the business), employment agreements (key employees), IP assignments, lease assignments, and closing certificates.
- Regulatory ApprovalsLarger deals may require HSR Act filings with the FTC/DOJ (for transactions above the HSR threshold), state regulatory approvals (banking, insurance, healthcare), or industry-specific approvals. Your M&A attorney manages this process.
- ClosingThe actual transfer of ownership. Funds are released, documents are executed, the deal is done. Post-closing obligations (indemnification periods, escrow holdbacks, earnout payments) continue for months or years.
Due diligence: what buyers look for
Due diligence is not just about verifying the numbers — it's about discovering liabilities you're about to own. Key areas:
Financial due diligence
- Three to five years of financial statements (audited preferred)
- Tax returns (federal and state)
- Quality of earnings (QofE) analysis — normalizing out one-time items, owner perks, related-party transactions
- Working capital analysis — what level of working capital is needed to run the business
- Customer concentration — is one customer 40% of revenue?
- Off-balance sheet liabilities — contingent obligations, lawsuits, environmental issues
Legal due diligence
- All material contracts — customer, vendor, lease, employment, licensing
- IP ownership — are all trademarks registered? Is source code properly assigned?
- Pending and threatened litigation
- Employment matters — wage and hour exposure, discrimination claims, benefit plans
- Regulatory compliance — licenses, permits, environmental compliance
- Corporate records — formation documents, ownership records, meeting minutes, consents
- Real estate — owned or leased, conditions, assignments required
Asset sale vs stock sale: what it means for you
The deal structure is one of the most important and most negotiated points in any M&A transaction:
- Asset sale: The buyer purchases specific assets and assumes specific liabilities. The seller retains the legal entity and any liabilities not assumed. Buyers generally prefer this structure — they get a clean start without unknown liabilities. Sellers typically face less favorable tax treatment (ordinary income on certain assets).
- Stock sale / membership interest sale: The buyer purchases ownership interests in the entity itself. The buyer gets everything — including all liabilities, known and unknown. Sellers typically prefer this structure (often results in capital gains treatment). Buyers require extensive reps and warranties and robust indemnification provisions to protect against unknown liabilities.
The tax implications alone can change the effective purchase price by 10-20% or more. A tax attorney working alongside your M&A attorney is essential for significant transactions.
Representations, warranties, and indemnification
Reps and warranties are the seller's factual promises about the business. If they turn out to be false, the buyer's remedy is indemnification — the seller compensates the buyer for losses caused by the breach.
Key negotiating points in the indemnification provisions:
- Survival period — how long after closing can the buyer make indemnification claims? Typically 12-24 months for general reps, longer for fundamental reps (title, authority, capitalization) and tax/environmental matters.
- Indemnification cap — the maximum amount the seller must pay for indemnification claims. Often the purchase price or a percentage of it for general reps.
- Basket / deductible — the buyer must accumulate losses above a threshold before making claims. Protects the seller from de minimis claims.
- Escrow — a portion of the purchase price (typically 10-15%) is held in escrow for 12-24 months as security for indemnification claims.
- R&W insurance — increasingly common, especially in private equity deals. Shifts indemnification obligations to an insurance policy rather than the seller.
How much does an M&A attorney cost?
| Deal Size | Typical Legal Fees (buy side) | Typical Legal Fees (sell side) |
|---|---|---|
| Small business ($500K – $2M) | $10,000 – $30,000 | $7,500 – $20,000 |
| Lower middle market ($2M – $10M) | $25,000 – $75,000 | $20,000 – $60,000 |
| Middle market ($10M – $50M) | $75,000 – $200,000 | $50,000 – $150,000 |
| Upper middle market ($50M – $250M) | $150,000 – $500,000 | $100,000 – $400,000 |
| M&A attorney hourly rate | $300 – $700/hour (varies by market and firm size) | |
For a full breakdown of legal costs, see our how much do lawyers cost guide.
Find an M&A attorney in your city
Request a Free Consultation
Buying or selling a business? An M&A attorney in your city will follow up within one business day. Early advice on deal structure can save significant money.
Related legal needs
Business Formation
How your business is structured affects how it can be sold and for what tax outcome.
Tax & IRS Issues
Deal structure has enormous tax implications — both sides need tax counsel.
IP & Trademarks
IP due diligence and proper IP assignment is critical in every acquisition.
Business Contracts
The purchase agreement is the most complex business contract you'll ever sign.
Frequently asked questions
Do I need an M&A attorney to buy or sell a business?
Yes, for virtually any business sale or acquisition of meaningful size. The purchase agreement, representations and warranties, indemnification provisions, non-compete agreements, and escrow arrangements are complex documents where small differences in language can mean millions of dollars. An M&A attorney protects your interests, identifies risks in due diligence, and ensures the deal is structured correctly for tax and liability purposes. The cost is typically 1-3% of the transaction value — cheap insurance for the largest financial transaction most business owners ever complete.
What is due diligence in a business acquisition?
Due diligence is the buyer's investigation of the target business before closing. It covers financial statements and tax returns (3-5 years), contracts and customer agreements, employment matters and obligations, intellectual property ownership, pending litigation and contingent liabilities, regulatory compliance, real estate, and corporate records. The goal is to identify problems before the deal closes — because after closing, the buyer typically owns those problems.
What is the difference between an asset sale and a stock sale?
In an asset sale, the buyer purchases specific assets and assumes specific liabilities. Buyers generally prefer this structure — cleaner, no unknown liabilities. In a stock sale, the buyer purchases ownership interests in the company, getting the whole entity with all its liabilities, known and unknown. Sellers typically prefer stock sales for tax reasons. Deal structure is one of the most negotiated points, with significant tax implications for both sides.
What are representations and warranties in an M&A deal?
Reps and warranties are statements of fact the seller makes about the business — that financials are accurate, no material litigation exists, all contracts are in effect, all IP is properly owned, etc. If a rep turns out to be false, the buyer can seek indemnification for resulting losses. The scope and survival period of reps and warranties is one of the most heavily negotiated aspects of any M&A deal.
How much does an M&A attorney cost?
M&A attorney fees vary by deal size. For small business acquisitions ($1-5M), expect $15,000-50,000 in total legal fees. For mid-market deals ($5-50M), legal fees typically run $50,000-200,000. For large transactions, legal fees can reach $200,000-1,000,000+. Fees are almost always hourly at $300-700/hour for M&A attorneys at quality firms. Some smaller firms offer flat fee structures for straightforward transactions under $2M.