James David Williams
SaaS Seller Legal Due Diligence Cheat Sheet: Six Things You Will Be Asked
After the exciting early phases of selling a business—deciding to sell, receiving offers for the business, deciding which letter of intent to sign—there is a period that almost all sellers dread. That period is due diligence, a necessary part of the process that lets the buyer explore the inner workings and status of the business before closing on the transaction. For sellers, the due diligence period can be a nerve-wracking time of uncertainty. 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 every buyer will ask for during due diligence, things you can get ready so that you are able to sell your business faster.
1. Ownership of the Assets
The single most important thing a buyer wants to verify during the due diligence process is that you own what you are selling. This sounds very simple, but it can become more complicated quickly. The most common way issues could arise is if someone else contributed to the code base. This could be employees or freelance developers. In either event, you will need to collect your agreements with these individuals and read the language carefully to make sure that they won’t have any ownership claim over the code base. If there is ambiguity or your agreements weren’t worded properly, then that will need to be addressed before most buyers will close on a transaction.
2. Open Source Licenses in Code
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.
3. Support Tickets
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.
4. Contracts to Assign
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.
5. Corporate Documents
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.
6. Ongoing Litigation
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.
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 email@example.com and we’ll be happy to meet with you to discuss your needs.