Selling Your e-Commerce Company in 2011

Together, these two series of annual reports (sorted in different versions by characteristics of the parties ' public or private, strategic investors, private equity funds, and even certain international deals) provide a menu for buyers ' and sellers ' of reasonably current “market” conditions for sales of companies. Of course, all this assumes that the business owner can find a buyer in today's troubled economy ' and that the buyer's lender doesn't block the purchase, and that the buyer has cash, or the seller is willing to take back a note from the buyer. From a buyer's perspective, in contrast, we are in an era when tech firms selling at depressed prices are “on sale.”

The studies provide exhaustive analysis ' the SRS study runs for more than 100 pages ' of virtually every clause in the indemnification and post-closing claims portions of a typical business-acquisition agreement. I will not try to summarize their lengthy findings, but will instead highlight the implications of this data for the owner of a tech company contemplating a sale. Knowing what buyers will likely demand can help you prepare the company (and its financial reporting) well in advance of negotiation of the key deal points the studies cover.

What Really Happens

Most important, today's seller must understand that in the current market, a deal “ain't over 'til it's over”; sellers of tech firms remain at risk long after a sale has “closed” (see, www.law.com/jsp/article.jsp?id=1202473457515&rss=newswire). And “over” doesn't mean the closing of a deal. Fifty percent of the deals left the seller at risk for three years or more, and an astonishing 32% for five years or more. As that survey data shows, sellers today don't get fully paid, and cannot be comfortable that they won't have to give back some or all of the price they received, until long after a traditional “closing.”

Even worse, sometimes that point doesn't arrive until after the seller is long out of the company and unable to protect its position against the buyer. In fact, most deals in the sample where the seller was paid through an earnout did not include any obligation on the buyer to operate the company so as not to affect the earnout. In my experience, in the sale of a closely held company to a large, publicly traded one with a significant earnout component, that clause made all the difference. A “routine” agreement for the buyer to provide operational support to the target company (which it owned entirely after the deal) became critical, because it prohibited amendments to it without our seller client's consent. When the buyer tried to shift costs onto the target company (which would have devastated the earnout computation) and provide significantly less marketing support, our client was able to renegotiate the earnout into a cash payout; while that amount was less than the earnout potential, our client was pleased to take cash in hand over the risk of an unpredictable payout based on sales by a company no longer under the seller's control.

Moreover, the common entrepreneurial goal of “cashing out” has little meaning today, with 95% of the deals in the sample subject to survival period “carveouts” ' exceptions to the limits on when the buyer can try to collect money back from the seller, such as for unpaid trust-fund taxes or breaches of fundamental warranties about capitalization and basic legal requirements to close the deal. This statistic should be very troubling to the “serial entrepreneur,” who builds and sells a company and moves on to a new deal. Notwithstanding typical claims-limitations periods of one to three years, the executives ' and their former companies ' could be forced to address problems from prior deals well into the future. (Such later claims would also likely have to be disclosed when negotiating future employment agreements, or in SEC filings at future employers.)

Risk Wariness Grows

Buyers also simply will increasingly not accept a growing set of risks ' in a clear majority of deals where the sellers' indemnification liability was capped, sellers remained on the hook to the buyer, above the cap, for a wide variety of claims (even broader than those in the carveouts to the survival limitation described in
the prior paragraph). Ninety-one percent of the deals studied had an exception for fraud, which is not surprising. But large numbers of deals also had cap exceptions for claims relating to such matters as:

• Title to the shares sold (65%);
• Proper approval of the deal (66%);
• Taxes (51%);
• Intentional breaches of representations (70%); and
• Covenant breaches (51%).

In an area of critical importance for e-commerce and technology companies, 28% did not allow any cap on damages for intellectual-property misrepresentations. (Curiously, to me, significantly lower percentages of the deals had exceptions for what I consider equally important problems, which are much more likely to arise in practice ' 8% for ERISA and benefits misrepresentations, and 10% for environmental misrepresentation.)

Perhaps this trend is just the karmic revenge for years of “vaporware” (products announced far in advance of delivery, to deter competitors). Instead, sellers today are paid in “vapor earns” ' promises of future payments that never materialize because the sale agreements give the buyer years to make a variety of claims against the deferred purchase price. (In fact, at some point, if a seller is happy with the cash it receives at closing, it may find that the expense ' in legal fees ' of negotiating an earnout or deferred payment, and all of the post-closing provisions and legal tricks described in these surveys, more than outweigh what it is likely to get after all the buyer take-backs they describe.)

From the perspective of a seller who bargained in good faith for a full sale price, the real-world data in the study provides ample reason for the “tears” and “pain” that Lenny Kravitz bemoaned in his song “It Ain't Over 'til It's Over.” Longer payouts, with broad grounds for creative lawyers to avoid them, leave tech sellers at particularly great risk of never seeing what they bargained for (or at least thought they had) ' a level of risk that (due to the nature of the sector) can be much greater than for sellers in comparable “non-tech” deals.

For example, frequent (and often unexpected) changes in technology could quickly render an acquired firm much less valuable than at the time of the sale. While that would normally be a buyer's risk in traditional deals, in today's market, sellers no longer will accept that risk. Consider: 68% of the deals in the SRS sample had post-closing purchase-price adjustments (and 79% in the ABA study), and 95% had escrows or holdbacks of the purchase price. Similarly, the widespread use of so-called “true-ups” (post-closing price adjustments to account for changes near closing in relatively liquid assets, such as inventory and accounts receivable) in deals where the price is based in whole or in part on balance-sheet asset values, make it nearly impossible for an opportunistic seller to take advantage of short-term spikes.

Get Your Head Out of the Sand

Another example of a clause that may particularly affect tech and e-commerce firms is what I sometimes call the “no head in the sand” clause. Often, sellers prefer to limit their “representations and warranties” ' promises ' about the target company to just the “knowledge” of all or certain key executives. Many billable hours are routinely wasted debating whether that means what the executives actually know, whether they should know more or not (my “head in the sand” reference”), their “constructive knowledge” (what they should know about the company, whether by virtue of their management position), or (as buyers prefer) because they made a reasonable inquiry with their managers and key operational personnel expressly for the deal.

In the e-commerce context, however, where business managers may not be conversant with the “hands-on” aspects of the company's operating technology, crucial facts about actual or potential problems may legitimately be outside the normal duties of management. The COO signing the deal agreement truly may not be familiar with problems waiting to happen in the company's code, or the next big development from the research labs (or a competitor's) that could devastate its business model. Therefore, the finding that only 13% of the SRS sample deals (25% in the ABA study) allowed the seller to disclose based only on “actual” knowledge, rather than constructive knowledge, reflects that sophisticated buyers in this sector know what questions must be asked to avoid potential problems.

What About Disclosures?

In a related concern, again going to how much a seller's executives have to ask the company's line personnel about potential future problems, fully 97% of the SRS deals included a warranty against undisclosed liabilities. (Only 1% of those deals allowed the seller to hide behind a “knowledge” limit described in the last paragraph on this representation.) Similarly, in a world where frequent (if not constant) changes in technology make certainty about compliance with the law, well, “uncertain,” especially in such areas as privacy and disclosure of tracking practices, more than 80% of the SRS deals used broad, exhaustive compliance with law formulations. Sellers generally had to warrant past and current compliance. Even receipt of mere notices of possible violations (and in which cases violations may never occur) and, to a lesser extent, notices of investigations, had to be disclosed. Continuing the general trend described above against limiting a seller's disclosure obligation, only 14% of the SRS deals allowed sellers to protect themselves on this warranty with some type of knowledge qualification.

Flips and Earnouts

Another area deserving attention by an e-seller is whether it expects the buyer to hold the business, or “flip” it in a future sale. One disturbing finding was that online firms forced to accept earnouts in today's economy were able to have the payments accelerate only on a change of control of the buyer in 32% of the deals in the sample. In other words, extending credit to a buyer ' the practical effect of settling for an earnout ' may really mean extending credit to several unknown buyers down the line, if they do not structure the next deal to avoid the payment to the original seller.

Wielding Data

So how can tech buyers and sellers use these reports to their advantage in negotiations?

Know the Deal's Terms

First, the ready availability of objective evidence of actual deal terms should be a check on lawyers' posturing over “legal” provisions that their clients may not fully comprehend, such as indemnity caps and baskets, and carveouts (rights of buyers to collect claims from sellers notwithstanding other limitations in the agreement). Clients can also move to closing with greater comfort that they are getting a reasonable deal, even if it may not be the “best deal.” (The programmer's motto, “done is better than perfect,” existed even before legal fees had to be taken into account.)

For example, the traditional dance of negotiating an indemnity cap somewhere between the full purchase price and a portion of it can be condensed when everyone knows where deals typically come out (absent unusual circumstances in a particular deal). In a recent sale I handled, the clients quickly agreed on a cap midway between the mean and median indemnity-cap amounts reported by the ABA survey, a significant savings in negotiating time and client involvement, in what is essentially a pure exercise in bargaining power ' and an avoidance of legal fees on both sides.

Negotiate the Fine Stuff

Next, the broad array of negotiable points provides sellers and buyers alike with a vast menu of negotiating positions. That flexibility helps the parties to allocate risk, to resolve the challenges of a changing economy and uncertain future and, particularly, look out and plan ahead for the fact that technology always changes in ways that cannot be predicted.

Moreover, perhaps the many variations described in the studies on how a buyer can protect itself against changes in a deal long after the closing will, paradoxically, encourage buyers to get off the fence and resume the deal-making that has stalled with the economy in recent years

While sellers obviously prefer greater certainty on what they will be paid, without the risk of getting less (or even giving something back) because of events that happen long after closing, certainly a deal that is completed is often preferable to never closing, especially once a company is “in play.”

Find the Right Buyer for the Right Deal, and Vice Versa

Perhaps the most impressive reading of the statistics in these reports, however, comes from looking at the inverse of many of these statistics. Consider the large numbers of deals closed without one of the strongest protective devices surveyed in the report ' 75% of the deals in the sample did not force the seller to settle for an earnout. In other words, for the right deal, there are still buyers in the market, and even room for sellers to negotiate for more favorable terms, just like in the boom days.

Playing It Close to the Vest

Not all the implications are positive, though. The overwhelming reality that claims against a seller can drag out a deal and, therefore, increase the number of deals that may never close, reminds sellers in this sector of the importance of planning the timing of disclosures of confidential information.

In other words, if a deal could be undermined at many steps along the way, a seller should not reveal its “crown jewels” early in the process, even if that would be the “normal” due-diligence process. Buyers have too many opportunities to walk away from a deal through conditions precedent that must be satisfied at multiple stages of the deal.

Instead, delaying disclosures until it appears more likely that the deal will occur makes great sense. In one deal I handled, albeit not involving a tech firm, the critical commission splits with the top sales reps were not turned over until the wire transfer of the purchase price had been initiated.

Sift Through the 'Soft Issues'

Finally, remember that the survey did not address many heavily negotiated post-closing topics that may ultimately determine the success (or failure) of a deal. Such so-called “soft” issues as the ability to assign employment contracts with key employees (often restricted if the non-competition covenants are not made expressly assignable), the assignability of critical contracts and licenses to preserve a favorable bargain for the buyer, and simply whether the buyer can reach agreements to employ key workers, should be part of both sides' due diligence and transition planning early in the deal.

Open, Closed and Getting Paid

The trend toward keeping deals open (or at least subject to post-closing adjustment of the price) also affects how payment of the purchase price is structured. Sellers naturally will prefer to be paid at closing, subject to a right of indemnification ' the buyer has to take affirmative steps to get money back, regardless of how long that process may take. Cash in hand, even if subject to a claim, is always better than having to get it from a buyer hold-back or, even worse, hoping that the buyer will be able to pay the deferred portion of the price.

Buyers, in contrast (as the study shows), will prefer to use an escrow or holdback, whether labeled as for indemnity claims, breaches of warranties or simply to pay unpaid payables, coupled with a right to setoff claims against any such funds. (Setoffs were prohibited in only 9% of the sample, and expressly permitted in 59% of the deals.)

Investing In Extra Protection

A seller anticipating a buyer's use of the techniques described in the report to protect itself can (at a potentially significant cash cost) invest in representations and warranties insurance (see, www.abanet.org/rppt/meetings_cle/2002/2002spring/RealProperty/Thursday/EmergingRoleofInsurance/Chilcote.pdf; www.chartisinsurance.com/us-representations-and-warranties-insurance_295_182184.html), even though such insurance may not eliminate the seller's risk. Instead, the seller's payment of the insurance premium turns an unknown, off balance-sheet future contingent liability into a fixed current amount ' at the cost of accelerating a payment that may never have had to be made, if the claim never arises. Because the cost is typically quite high, and sellers rarely like to change a future, contingent, liability into a present one payable from the proceeds of closing, such policies are rarely used. But for sellers seeking the repose of a known obligation and truly closed deal, especially given the hostile post-closing environment seen in the SRS study, it may be worth consideration.

Is the End Here, Or Is It Near?

So when is the sale of your tech company really over? Certainly not when you close, and not even when you finally get paid the last earnout installment ' if you ever get it.

Instead, the seller should not spend the sales proceeds until the expiration of the claims-survival period in the agreement, which could be several e-business cycles after the sale, and a virtual eternity in the ever-changing online economy.

The serial entrepreneur who plans to build a company (only to sell it to start another one), and the e-commerce veteran accustomed to cashing out on his or her own terms to buyers willing to meet them, should heed Bob Dylan's timeless warning from an earlier era of unsettling disruption: “The first one now will later be last, for the times they are a-changin'.”

There can be no clearer sign that the dot-com era is over than the results of the 2010 elections. The resounding defeats of tech icons Meg Whitman (of eBay) and Carly Fiorina (of HP) ' despite spending (Whitman spent more than $141 million of her own money on her campaign) ' showed that our society no longer believes (if it ever did) that the stars of Silicon Valley, self-styled modern-day “masters of the universe,” could solve all our problems (at least until the next revolution, because they come so predictably in the tech world).

Another sign of how times have changed for tech entrepreneurs hit much closer to home with the release of the 2010 SRS M&A Deal Terms Study by Shareholder Representative Services, “an analysis of deal terms in private target M&A transactions” from 2007 to 2010. (SRS assists firms in managing such post-closing processes.)

The study revealed that entrepreneurs once able to cash out on their own terms, to eager buyers unwilling to risk negotiating lest a competitor get the deal, now must accept markedly less favorable terms. (A 12-page summary of the 101-page report is available at www.shareholderrep.com/files/summary.pdf. The full report is also available.) This real-world data on the negotiated terms of sales of privately held companies was not limited to tech firms, but the sample, in fact, had a very high percentage of them. (An American Bar Association (“ABA”) committee has issued similar “Deal Points” studies for many years, but those reports are available only to members of that committee, at www.abanet.org/dch/committee.cfm?com=CL560003. For those unable to access the ABA studies, the SRS study includes selected comparative data.)

Together, these two series of annual reports (sorted in different versions by characteristics of the parties ' public or private, strategic investors, private equity funds, and even certain international deals) provide a menu for buyers ' and sellers ' of reasonably current “market” conditions for sales of companies. Of course, all this assumes that the business owner can find a buyer in today's troubled economy ' and that the buyer's lender doesn't block the purchase, and that the buyer has cash, or the seller is willing to take back a note from the buyer. From a buyer's perspective, in contrast, we are in an era when tech firms selling at depressed prices are “on sale.”

The studies provide exhaustive analysis ' the SRS study runs for more than 100 pages ' of virtually every clause in the indemnification and post-closing claims portions of a typical business-acquisition agreement. I will not try to summarize their lengthy findings, but will instead highlight the implications of this data for the owner of a tech company contemplating a sale. Knowing what buyers will likely demand can help you prepare the company (and its financial reporting) well in advance of negotiation of the key deal points the studies cover.

What Really Happens

Most important, today's seller must understand that in the current market, a deal “ain't over 'til it's over”; sellers of tech firms remain at risk long after a sale has “closed” (see, www.law.com/jsp/article.jsp?id=1202473457515&rss=newswire). And “over” doesn't mean the closing of a deal. Fifty percent of the deals left the seller at risk for three years or more, and an astonishing 32% for five years or more. As that survey data shows, sellers today don't get fully paid, and cannot be comfortable that they won't have to give back some or all of the price they received, until long after a traditional “closing.”

Even worse, sometimes that point doesn't arrive until after the seller is long out of the company and unable to protect its position against the buyer. In fact, most deals in the sample where the seller was paid through an earnout did not include any obligation on the buyer to operate the company so as not to affect the earnout. In my experience, in the sale of a closely held company to a large, publicly traded one with a significant earnout component, that clause made all the difference. A “routine” agreement for the buyer to provide operational support to the target company (which it owned entirely after the deal) became critical, because it prohibited amendments to it without our seller client's consent. When the buyer tried to shift costs onto the target company (which would have devastated the earnout computation) and provide significantly less marketing support, our client was able to renegotiate the earnout into a cash payout; while that amount was less than the earnout potential, our client was pleased to take cash in hand over the risk of an unpredictable payout based on sales by a company no longer under the seller's control.

Moreover, the common entrepreneurial goal of “cashing out” has little meaning today, with 95% of the deals in the sample subject to survival period “carveouts” ' exceptions to the limits on when the buyer can try to collect money back from the seller, such as for unpaid trust-fund taxes or breaches of fundamental warranties about capitalization and basic legal requirements to close the deal. This statistic should be very troubling to the “serial entrepreneur,” who builds and sells a company and moves on to a new deal. Notwithstanding typical claims-limitations periods of one to three years, the executives ' and their former companies ' could be forced to address problems from prior deals well into the future. (Such later claims would also likely have to be disclosed when negotiating future employment agreements, or in SEC filings at future employers.)

Risk Wariness Grows

Buyers also simply will increasingly not accept a growing set of risks ' in a clear majority of deals where the sellers' indemnification liability was capped, sellers remained on the hook to the buyer, above the cap, for a wide variety of claims (even broader than those in the carveouts to the survival limitation described in
the prior paragraph). Ninety-one percent of the deals studied had an exception for fraud, which is not surprising. But large numbers of deals also had cap exceptions for claims relating to such matters as:

• Title to the shares sold (65%);
• Proper approval of the deal (66%);
• Taxes (51%);
• Intentional breaches of representations (70%); and
• Covenant breaches (51%).

In an area of critical importance for e-commerce and technology companies, 28% did not allow any cap on damages for intellectual-property misrepresentations. (Curiously, to me, significantly lower percentages of the deals had exceptions for what I consider equally important problems, which are much more likely to arise in practice ' 8% for ERISA and benefits misrepresentations, and 10% for environmental misrepresentation.)

Perhaps this trend is just the karmic revenge for years of “vaporware” (products announced far in advance of delivery, to deter competitors). Instead, sellers today are paid in “vapor earns” ' promises of future payments that never materialize because the sale agreements give the buyer years to make a variety of claims against the deferred purchase price. (In fact, at some point, if a seller is happy with the cash it receives at closing, it may find that the expense ' in legal fees ' of negotiating an earnout or deferred payment, and all of the post-closing provisions and legal tricks described in these surveys, more than outweigh what it is likely to get after all the buyer take-backs they describe.)

From the perspective of a seller who bargained in good faith for a full sale price, the real-world data in the study provides ample reason for the “tears” and “pain” that Lenny Kravitz bemoaned in his song “It Ain't Over 'til It's Over.” Longer payouts, with broad grounds for creative lawyers to avoid them, leave tech sellers at particularly great risk of never seeing what they bargained for (or at least thought they had) ' a level of risk that (due to the nature of the sector) can be much greater than for sellers in comparable “non-tech” deals.

For example, frequent (and often unexpected) changes in technology could quickly render an acquired firm much less valuable than at the time of the sale. While that would normally be a buyer's risk in traditional deals, in today's market, sellers no longer will accept that risk. Consider: 68% of the deals in the SRS sample had post-closing purchase-price adjustments (and 79% in the ABA study), and 95% had escrows or holdbacks of the purchase price. Similarly, the widespread use of so-called “true-ups” (post-closing price adjustments to account for changes near closing in relatively liquid assets, such as inventory and accounts receivable) in deals where the price is based in whole or in part on balance-sheet asset values, make it nearly impossible for an opportunistic seller to take advantage of short-term spikes.

Get Your Head Out of the Sand

Another example of a clause that may particularly affect tech and e-commerce firms is what I sometimes call the “no head in the sand” clause. Often, sellers prefer to limit their “representations and warranties” ' promises ' about the target company to just the “knowledge” of all or certain key executives. Many billable hours are routinely wasted debating whether that means what the executives actually know, whether they should know more or not (my “head in the sand” reference”), their “constructive knowledge” (what they should know about the company, whether by virtue of their management position), or (as buyers prefer) because they made a reasonable inquiry with their managers and key operational personnel expressly for the deal.

In the e-commerce context, however, where business managers may not be conversant with the “hands-on” aspects of the company's operating technology, crucial facts about actual or potential problems may legitimately be outside the normal duties of management. The COO signing the deal agreement truly may not be familiar with problems waiting to happen in the company's code, or the next big development from the research labs (or a competitor's) that could devastate its business model. Therefore, the finding that only 13% of the SRS sample deals (25% in the ABA study) allowed the seller to disclose based only on “actual” knowledge, rather than constructive knowledge, reflects that sophisticated buyers in this sector know what questions must be asked to avoid potential problems.

What About Disclosures?

In a related concern, again going to how much a seller's executives have to ask the company's line personnel about potential future problems, fully 97% of the SRS deals included a warranty against undisclosed liabilities. (Only 1% of those deals allowed the seller to hide behind a “knowledge” limit described in the last paragraph on this representation.) Similarly, in a world where frequent (if not constant) changes in technology make certainty about compliance with the law, well, “uncertain,” especially in such areas as privacy and disclosure of tracking practices, more than 80% of the SRS deals used broad, exhaustive compliance with law formulations. Sellers generally had to warrant past and current compliance. Even receipt of mere notices of possible violations (and in which cases violations may never occur) and, to a lesser extent, notices of investigations, had to be disclosed. Continuing the general trend described above against limiting a seller's disclosure obligation, only 14% of the SRS deals allowed sellers to protect themselves on this warranty with some type of knowledge qualification.

Flips and Earnouts

Another area deserving attention by an e-seller is whether it expects the buyer to hold the business, or “flip” it in a future sale. One disturbing finding was that online firms forced to accept earnouts in today's economy were able to have the payments accelerate only on a change of control of the buyer in 32% of the deals in the sample. In other words, extending credit to a buyer ' the practical effect of settling for an earnout ' may really mean extending credit to several unknown buyers down the line, if they do not structure the next deal to avoid the payment to the original seller.

Wielding Data

So how can tech buyers and sellers use these reports to their advantage in negotiations?

Know the Deal's Terms

First, the ready availability of objective evidence of actual deal terms should be a check on lawyers' posturing over “legal” provisions that their clients may not fully comprehend, such as indemnity caps and baskets, and carveouts (rights of buyers to collect claims from sellers notwithstanding other limitations in the agreement). Clients can also move to closing with greater comfort that they are getting a reasonable deal, even if it may not be the “best deal.” (The programmer's motto, “done is better than perfect,” existed even before legal fees had to be taken into account.)

For example, the traditional dance of negotiating an indemnity cap somewhere between the full purchase price and a portion of it can be condensed when everyone knows where deals typically come out (absent unusual circumstances in a particular deal). In a recent sale I handled, the clients quickly agreed on a cap midway between the mean and median indemnity-cap amounts reported by the ABA survey, a significant savings in negotiating time and client involvement, in what is essentially a pure exercise in bargaining power ' and an avoidance of legal fees on both sides.

Negotiate the Fine Stuff

Next, the broad array of negotiable points provides sellers and buyers alike with a vast menu of negotiating positions. That flexibility helps the parties to allocate risk, to resolve the challenges of a changing economy and uncertain future and, particularly, look out and plan ahead for the fact that technology always changes in ways that cannot be predicted.

Moreover, perhaps the many variations described in the studies on how a buyer can protect itself against changes in a deal long after the closing will, paradoxically, encourage buyers to get off the fence and resume the deal-making that has stalled with the economy in recent years

While sellers obviously prefer greater certainty on what they will be paid, without the risk of getting less (or even giving something back) because of events that happen long after closing, certainly a deal that is completed is often preferable to never closing, especially once a company is “in play.”

Find the Right Buyer for the Right Deal, and Vice Versa

Perhaps the most impressive reading of the statistics in these reports, however, comes from looking at the inverse of many of these statistics. Consider the large numbers of deals closed without one of the strongest protective devices surveyed in the report ' 75% of the deals in the sample did not force the seller to settle for an earnout. In other words, for the right deal, there are still buyers in the market, and even room for sellers to negotiate for more favorable terms, just like in the boom days.

Playing It Close to the Vest

Not all the implications are positive, though. The overwhelming reality that claims against a seller can drag out a deal and, therefore, increase the number of deals that may never close, reminds sellers in this sector of the importance of planning the timing of disclosures of confidential information.

In other words, if a deal could be undermined at many steps along the way, a seller should not reveal its “crown jewels” early in the process, even if that would be the “normal” due-diligence process. Buyers have too many opportunities to walk away from a deal through conditions precedent that must be satisfied at multiple stages of the deal.

Instead, delaying disclosures until it appears more likely that the deal will occur makes great sense. In one deal I handled, albeit not involving a tech firm, the critical commission splits with the top sales reps were not turned over until the wire transfer of the purchase price had been initiated.

Sift Through the 'Soft Issues'

Finally, remember that the survey did not address many heavily negotiated post-closing topics that may ultimately determine the success (or failure) of a deal. Such so-called “soft” issues as the ability to assign employment contracts with key employees (often restricted if the non-competition covenants are not made expressly assignable), the assignability of critical contracts and licenses to preserve a favorable bargain for the buyer, and simply whether the buyer can reach agreements to employ key workers, should be part of both sides' due diligence and transition planning early in the deal.

Open, Closed and Getting Paid

The trend toward keeping deals open (or at least subject to post-closing adjustment of the price) also affects how payment of the purchase price is structured. Sellers naturally will prefer to be paid at closing, subject to a right of indemnification ' the buyer has to take affirmative steps to get money back, regardless of how long that process may take. Cash in hand, even if subject to a claim, is always better than having to get it from a buyer hold-back or, even worse, hoping that the buyer will be able to pay the deferred portion of the price.

Buyers, in contrast (as the study shows), will prefer to use an escrow or holdback, whether labeled as for indemnity claims, breaches of warranties or simply to pay unpaid payables, coupled with a right to setoff claims against any such funds. (Setoffs were prohibited in only 9% of the sample, and expressly permitted in 59% of the deals.)

Investing In Extra Protection

A seller anticipating a buyer's use of the techniques described in the report to protect itself can (at a potentially significant cash cost) invest in representations and warranties insurance (see, www.abanet.org/rppt/meetings_cle/2002/2002spring/RealProperty/Thursday/EmergingRoleofInsurance/Chilcote.pdf; www.chartisinsurance.com/us-representations-and-warranties-insurance_295_182184.html), even though such insurance may not eliminate the seller's risk. Instead, the seller's payment of the insurance premium turns an unknown, off balance-sheet future contingent liability into a fixed current amount ' at the cost of accelerating a payment that may never have had to be made, if the claim never arises. Because the cost is typically quite high, and sellers rarely like to change a future, contingent, liability into a present one payable from the proceeds of closing, such policies are rarely used. But for sellers seeking the repose of a known obligation and truly closed deal, especially given the hostile post-closing environment seen in the SRS study, it may be worth consideration.

Is the End Here, Or Is It Near?

So when is the sale of your tech company really over? Certainly not when you close, and not even when you finally get paid the last earnout installment ' if you ever get it.

Instead, the seller should not spend the sales proceeds until the expiration of the claims-survival period in the agreement, which could be several e-business cycles after the sale, and a virtual eternity in the ever-changing online economy.

The serial entrepreneur who plans to build a company (only to sell it to start another one), and the e-commerce veteran accustomed to cashing out on his or her own terms to buyers willing to meet them, should heed Bob Dylan's timeless warning from an earlier era of unsettling disruption: “The first one now will later be last, for the times they are a-changin'.”