Heads-Up Before You Sell

June 01, 2024

The worst deal killers for business owners looking to exit sneak up when diligence has already progressed to a late stage - but are really hard, expensive, or even impossible to resolve. 

Two of these killers are IP ownership and contract assignability. 

When selling a SaaS business, any confusion about who owns the codebase or whether contracts can be transferred can ruin the whole deal. Buyers want to know they’re getting what they paid for, and that everything will transfer smoothly - in terms of both these items. If there’s any doubt, even the best deals can fall apart fast. 

So why are both of these items so essential?

Deal Killer #1: IP Ownership 

Owning and operating a SaaS business involves more than just having a great product; it also means you need to secure your intellectual property (IP). This includes owning the code that runs your application, patents, trademarks, copyrights, and trade secrets related to your software. Think of IP as the legal shield that protects your unique ideas, brand, and technology from being copied or used without permission. When you own your IP, you're in control of your software's future, you can prevent competitors from replicating your product, and you can enhance your business's value. Plus, having clear IP ownership makes your company more attractive to potential buyers or investors, as it shows you have solid legal foundations and exclusive rights to what makes your business special.

Why is it so essential a founder has full IP Ownership?

Without clear IP ownership, your business is vulnerable to infringement claims and disputes over IP rights, which can scare off buyers due to potential legal battles and associated costs. Legal uncertainty is one of the fastest deal killers, uncovered in legal diligence if not disclosed earlier. Even if infringement claims are baseless, they still cost a lot to deal with. So preparing for potential claims and documenting the company’s full ownership of all IP in employee agreements and contractor relationships is a requirement to get a deal done.  

Key Issues in IP Ownership- Custom licenses and records on use of open source code

Custom license agreements that impair IP / letting others build into code - very occasionally customers might ask for custom license agreements.  When this happens, make sure to consult a seasoned software IP attorney to make sure that your custom license agreement doesn’t yield full ownership or control of the code.

The use of open source libraries is a big and growing topic in software deals.  Use of open source code continues to grow, but owners need to keep records of what code they used, how it was used, and what license the code was accessed under.  This is a real pain - full stop.  But it’s also a requirement for building value in a software company today.  For more on tools to document use of open source code, you might check out this article.

Clear IP Ownership is the end goal for any seller because it ensures there aren't any lingering legal threats hovering above a potential buyer’s head. Founders love to build, but if you haven’t done these things already, prioritize them now because fixing them later gets harder and harder: 

  • Clear employee contracts so that all IP created is assigned to the business

  • Clear, counsel-approved licensing agreements

  • Clearly defined and enforced policy on using and documenting open source code

Deal Killer #2: Contract Assignability 

Contract assignability is the ability to transfer your contracts from one party to another without needing further approval from the original contracting parties. When selling a SaaS business, it's crucial because it ensures that all existing customer agreements, vendor contracts, and service licenses can seamlessly transfer to the new owner even if the new owner is just buying the assets of the business, not the legal entity. (An asset purchase is often the preferred legal structure of buyers, especially for smaller acquisitions.) Without assignable contracts, the seller and the buyer have to ask for specific approval from customers to assign the contract to the buyer.  Doing this is a headache, creates churn risk, and is logistically difficult or even practically impossible if you have a lot of customers.

The good news is that literally a single sentence in your customer contracts can prevent this headache.  Get your lawyer’s help to make sure contracts are assignable if someone buys the business - even as an asset sale - and if they aren’t today try to roll out updated contracts with every renewal.  Sometimes customers push back on this one-way assignability, but it’s important that you know that keeping this part of your contracts is critical to getting a lot of deals done - and done efficiently at a good price.  

TLDR: Ask for Legal Help Long Before a Sale

The outcomes of both unclear IP ownership and contract assignability are depressed valuations or deals that completely fall through. Due to the risks associated with litigation and overall perceived value, buyers may significantly deflate valuations or simply walk away. Having a trusted lawyer - who knows how deals are done in software - as a resource long before you sell is critical. Note: The attorney is probably not the same person you consulted to set up your company unless you sought out a software attorney with deal experience. If you’re looking for a few ideas, please let us know or reach out to other founders for ideas.  The right counsel can be expensive, but it’s better than having your exit path killed because of questions about your IP or contracts.

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