Mergers & Acquisitions Archives - Petersen

Cybersecurity Due Diligence M&A Checklist in 9 Phases for 2026

Mergers & Acquisitions, News, Technology

Cybersecurity Experts going over a Cybersecurity Due Diligence M&A Checklist

In the modern deal-making landscape, a company’s digital perimeter is as critical as its balance sheet. For mid-market business owners and executives, the stakes have never been higher. Cybersecurity has evolved from a siloed IT concern to a primary board-level priority that can—and often does—derail significant M&A transactions.

When you enter a merger or acquisition, you are not just acquiring customers and intellectual property; you are inheriting every vulnerability, every piece of technical debt, and every potential regulatory fine within the target’s infrastructure. Without a clear plan, you risk walking into a “Trojan Horse” scenario where the cost of remediation exceeds the value of the deal. As you are preparing to sell your business, taking proactive steps to maximize value must include a thorough digital audit.

At Petersen Landis, we serve as your guide through these complexities. Our background in global environments allows us to provide the robust protection you need, ensuring that cybersecurity risks are identified, priced, and mitigated before you sign on the dotted line.

Why Cyber Diligence is Non-Negotiable in 2026

The regulatory environment has shifted aggressively. Data breaches now result in massive financial penalties under frameworks like the GDPR, CCPA, and evolving state-level mandates. Ransomware attacks can halt operations for weeks, leading to catastrophic revenue loss.

Undiscovered vulnerabilities destroy post-closing value through expensive remediation, regulatory actions, and friction during system integration. Recent deal cycles have seen an uptick in purchase price disputes and indemnification claims specifically tied to cybersecurity failures. To protect your investment, you must move beyond a cursory review and conduct a deep-dive assessment. Often, these issues can be mitigated by addressing important deal points in your Letter of Intent to ensure technical transparency from the outset.

Phase 1: Preliminary Cybersecurity Assessment

The first step in our guided plan is the initial evaluation of the target organization’s overall posture. This vulnerability pulse check determines the inherent risk of the transaction.

Policy and Control Review: We evaluate the target’s existing cybersecurity policies and incident response plans to ensure they are current and practiced, rather than just “paper policies.”
Standards and Certifications: Does the target meet ISO 27001 or SOC 2 compliance? Reviewing third-party audit reports and recent penetration tests provides an objective view of their risk profile.
Infrastructure Overview: A high-level audit of the IT infrastructure and architecture helps identify obvious security gaps, such as a lack of physical security measures at data centers or outdated vulnerability scan protocols.

Phase 2: IT Infrastructure and Architecture Security

We then move to the technical engine room of the business. Sophisticated buyers look for modern security principles that facilitate easier integration.

Identity and Access Management (IAM): We assess the target’s use of multi-factor authentication (MFA) and least-privilege principles. A robust Zero Trust Architecture is a strong indicator of a high-value, secure asset.
Network and Cloud Security: Our team reviews network architecture and segmentation practices, ensuring that a single breach cannot compromise the entire system. We also evaluate cloud security configurations and the management of open-source code and libraries, which are common entry points for malware.
Maintenance and Patching: We investigate patch management practices and technical debt. A target that is years behind on security updates represents a significant post-closing expense.

Phase 3: Data Governance and Asset Management

Data is often the primary value driver in a tech or manufacturing deal, but it is also the primary liability.

Asset Inventory: The target must provide a comprehensive inventory of physical assets, logical assets, and managed services. You cannot protect what you have not identified.
Encryption and Management: We verify data encryption at rest and analyze the data flow across the organization. This includes evaluating data governance practices and the security of code management systems.
Legacy Systems: Old hardware and software (legacy systems) often lack modern security hooks. We help you identify these “relics” so they can be factored into the valuation or integration timeline.

Phase 4: Employee Awareness and Insider Threats

Technology alone cannot secure a business. Human error remains the leading cause of security incidents.

Cybersecurity Training Programs: We review the frequency and quality of cybersecurity training programs and phishing simulations.
HR and Governance: We examine information security policies and HR policies regarding policy acknowledgements. Effective insider threat mitigation requires both technical controls and a culture of security.

Phase 5: Incident Response and Breach History

Past performance is often indicative of future risk. A clean record may simply mean a breach hasn’t been detected yet. When drafting the purchase agreement, it is critical to focus on defining a seller’s knowledge regarding past security events to allocate risk appropriately.

Security Incident Review: We perform a deep-dive into records of past breaches and any active breaches. This includes reviewing remediation actions taken and whether public disclosure was handled correctly.
Continuity Planning: We assess the business continuity plan and disaster recovery plan. In the event of an attack, how quickly can the target return to operations?
Regulatory Exposure: We calculate the risk of regulatory fines based on the target’s information security risk assessment and historical compliance.

Phase 6: Third-Party and Supply Chain Risk Management

In a global economy, a target is only as secure as its weakest vendor.

Vendor Management: We review the target’s vendor management program and vendor management policies. This includes assessing critical vendors and their security certifications.
Contracts and Agreements: Carolyn Landis and our team scrutinize contracts and agreements for liability clauses and third-party risk management requirements to ensure you aren’t inheriting someone else’s negligence.

Phase 7: Regulatory Compliance and Legal Considerations

For companies in highly regulated sectors like financial services or healthcare, compliance is the deal.

Data Privacy Standards: We verify strict adherence to GDPR, CCPA, HIPAA, and GLBA. This involves reviewing data protection policies, data classification and retention policies, and the handling of personal identifiable information (PII).
Governance, Risk, and Compliance (GRC): We evaluate the target’s breach notification procedures and their history with regulatory audits.

Phase 8: Cyber Insurance Coverage

Insurance is your final safety net. We ensure that the transfer of risk is actually functional.

Policy Adequacy: We review the existing cyber insurance policy, looking specifically at coverage limits, deductibles, and exclusions.
Transaction Impacts: We determine if the policy will carry over post-closing or if new coverage is required. We also assess the potential for financial risk and legal costs stemming from ransomware attacks that might occur during the transition period.

Phase 9: Post-Merger Integration (PMI) Planning

The guide doesn’t stop at the closing table. The integration period is when systems are most vulnerable.

Integration Blueprint: We help develop a post-closing cybersecurity integration plan. This includes the integration of cybersecurity teams, systems, and processes.
Gaps and Redundancies: We conduct a gap analysis and a post-acquisition security assessment to identify security gaps. Part of this plan involves the retirement of redundant systems to reduce the attack surface.
Monitoring and KPIs: We establish key performance indicators (KPIs) and ongoing evaluations through external auditors. Establishing a clear reporting structure and audit and compliance plans ensures that the new entity remains secure as it grows.

Structuring Your Deal Protection

Once risks are identified, Jeff Petersen and our transactional team work to reflect these findings in the purchase agreement. If technical debt or high-risk vulnerabilities are found, we often suggest negotiating indemnity deductibles and caps that specifically account for the potential fallout of a breach.

This protection includes:

Specific cybersecurity representations.
Dedicated indemnification provisions for remediation and fines.
Purchase price adjustments or escrows for identified technical debt.
R&W insurance with specific cyber endorsements.

Secure Your Transaction with Petersen Landis

Don’t let an undisclosed breach or an outdated server room destroy the value of your hard-earned deal. Whether you are a founder in San Diego or an executive in Chicago, you deserve sophisticated, efficient, and transparent legal counsel.

Contact Petersen Landis today to ensure your next M&A transaction is protected by robust cybersecurity due diligence.

What Does a M&A Lawyer Do? 8 Key Responsibilities You Need

Mergers & Acquisitions, News

An M&A lawyer working with clients and finalizing a deal, smiling because he was able to ensure it was a smooth process.

Buying or selling a business is one of the most significant milestones in an entrepreneur’s journey. It’s also one of the most complex. Every merger, acquisition, or investment transaction involves dozens of moving parts, financial, legal, operational, and human. That’s where a Mergers & Acquisitions (M&A) lawyer comes in. Far from just “papering the deal,” a good M&A attorney acts as strategist, project manager, negotiator, and risk mitigator, all rolled into one. Here’s what that really means in practice.

What Does an M&A Lawyer Do? 8 Key Responsibilities

An M&A lawyer performs several key responsibilities when you are buying or selling a business. An M&A lawyer has 8 key responsibilities that you need to be aware of:

Translating the Business Deal Into a Legal Framework
Managing Due Diligence
Drafting and Negotiating the Deal Documents
Coordinating the Deal Team
Identifying and Allocating Risk
Negotiating to a Practical, Market-Based Result
Closing the Deal
Post-Closing Support and Integration

1. Translating the Business Deal Into a Legal Framework

Every transaction starts with a business agreement between the buyer and seller: the price, the timing, and what’s being sold. The M&A lawyer’s first job is to turn that handshake into a binding legal structure. This means advising on:

Deal structure: Should the buyer purchase the company’s stock or its assets? Should the seller roll over equity or retain a minority stake?
Tax implications: Asset sales and stock sales are taxed differently. M&A counsel coordinates with tax advisors to minimize the total tax burden.
Liability management: In a stock sale, the buyer assumes all company liabilities; in an asset sale, they can often exclude unwanted ones.
Entity setup: Sometimes the deal requires creating new holding companies or subsidiaries to accommodate financing, rollovers, or earnouts.

A seasoned M&A lawyer helps clients understand not just what structure is possible, but why it matters to the economics, taxes, and future flexibility of the business.

2. Managing Due Diligence

Due diligence is the deep dive into a target company’s financial, legal, and operational conditions. M&A lawyers lead and coordinate this process.

They prepare, review, and analyze:

Corporate records (charters, bylaws, board consents)
Key contracts (customer, vendor, lease, financing, and employment agreements)
Litigation, regulatory, and environmental matters
Intellectual property, permits, and licenses
Employee and benefit plans
Compliance with state and federal laws

For sellers, the lawyer organizes this information into a virtual data room and ensures it’s complete, accurate, and well-presented. For buyers, the lawyer reviews the materials to identify risks, obligations, or deal-breakers.

Ultimately, diligence findings drive negotiation of the purchase agreement, shaping representations, warranties, indemnities, and sometimes the price itself.

3. Drafting and Negotiating the Deal Documents

This is the part most people picture when they think of M&A law: the mountain of documents that make up the transaction. But it’s not just paperwork; it’s the blueprint for the entire deal. Core documents include:

Letter of Intent (LOI): Establishes key terms before legal expenses mount.
Purchase Agreement: The main contract setting price, structure, representations, warranties, covenants, indemnities, and closing conditions.
Disclosure Schedules: Attachments that qualify representations and list specific exceptions.
Employment, Consulting, and Non-Compete Agreements: Retaining management post-closing.
Promissory Notes, Security Agreements, and Guaranties: For transactions involving seller financing.
Transition Services Agreements: When sellers temporarily provide support after closing.

Each provision in these documents balances competing interests, like seller protection vs. buyer certainty, flexibility vs. enforceability.

An experienced M&A attorney doesn’t just “mark up” documents. They understand market norms, where to compromise, and when to hold firm.

4. Coordinating the Deal Team

A single transaction can involve accountants, tax advisors, investment bankers, lenders, and insurance brokers, often across entities or time zones. The M&A lawyer is the hub of that wheel, balancing competing objectives against a single preferred outcome. They:

Manage the flow of drafts, diligence, and closing deliverables.
Track key deadlines (financing commitments, regulatory filings, notice periods).
Coordinate signatures and escrow logistics.
Ensure compliance with confidentiality and exclusivity terms.

In middle-market deals, this coordination is critical. One missed consent, one unsigned resolution, or one late closing certificate can delay funding. Or, worst case scenario, it could even kill the deal entirely.

5. Identifying and Allocating Risk

Every deal carries risk, whether it’s tax exposure, contract defaults, environmental issues, or customer concentration. M&A lawyers identify those risks and allocate them through contract provisions. Examples include:

Representations and warranties that disclose the true condition of the business.
Indemnification clauses that determine who pays if something goes wrong post-closing.
Escrows and holdbacks that secure those obligations.
Material Adverse Effect clauses that protect buyers from major pre-closing events.

A strong M&A attorney helps clients understand which risks are theoretical and which are real, and it ensures the contract assigns responsibility accordingly.

Related Article: The M&A Market is Poised for an Uptick

6. Negotiating to a Practical, Market-Based Result

Good M&A lawyers are deal-makers, not deal-breakers. Their goal isn’t to “win” every point—it’s to close a transaction that achieves the client’s objectives with acceptable risk. That requires balancing advocacy with pragmatism:

Knowing when a term is truly market-standard and when it’s aggressive.
Understanding which issues lenders or investors will accept.
Recognizing when pushing too hard could jeopardize trust between the parties.

Experienced counsel brings not only legal skill but also judgment, which boils down to the ability to calibrate how far to push, when to concede, and how to keep momentum.

7. Closing the Deal

As closing approaches, the M&A lawyer manages the final sprint:

Assembling signature packets and execution versions.
Confirming payoff amounts for debt and liens.
Coordinating wire instructions, escrow accounts, and closing certificates.
Reviewing final calculations of purchase price adjustments.
Ensuring all regulatory or third-party consents have been obtained.

Once the transaction closes, the lawyer oversees post-closing deliverables such as UCC filings, employment transitions, and escrow releases.

8. Post-Closing Support and Integration

After the confetti settles, the M&A lawyer helps the client navigate integration and compliance:

Advising on contract assignments and renewals.
Handling post-closing disputes or indemnity claims.
Ensuring employment, insurance, and tax registrations are properly updated.
Assisting with earnout calculations or rollover equity documentation.

Because M&A lawyers understand the deal’s full structure, they’re often the client’s ongoing point of contact for corporate governance and future transactions.

The Human Side of M&A

Deals aren’t just about numbers; they’re about people. Owners are often selling their life’s work; buyers are betting their capital and reputation. An effective M&A lawyer recognizes that emotional context and helps manage it.

They keep negotiations professional when tension rises, ensure communication remains constructive, and protect relationships so the parties can work together post-closing.

In middle-market transactions, this empathy and composure are as valuable as technical skill.

Why Experience Matters with an M&A Lawyer

Every deal is different, but patterns repeat. The more transactions an attorney has handled, the better they can:

Spot red flags early.
Anticipate buyer or seller tactics.
Simplify complex structures.
Close efficiently.

That’s why choosing the right M&A lawyer isn’t just about hourly rates; it’s about value. An experienced, pragmatic attorney can often save multiples of their fee by avoiding delays, disputes, and tax missteps.

Get Premier Counsel from an M&A Lawyer. Contact Us Today.

An M&A lawyer is more than a contract drafter. They’re a strategist, negotiator, and advisor who ensures that when the ink dries, the deal truly works as intended, for today and for the future.

At Petersen + Landis PC, our M&A attorneys handle transactions across industries and deal sizes, from founder-led business sales to multi-entity acquisitions. We focus on practical solutions, efficient execution, and protecting what our clients have built.

If you’re considering a sale, acquisition, or investment, start by understanding what an M&A lawyer really does, and why the right one can make all the difference.

Big-firm experience. Boutique responsiveness. Shared success.

The Year-End M&A Sprint: Why Rush to Close Deals Before the End of the Year?

Mergers & Acquisitions, News

An image of two people closing a deal after deciding to embark on a year-end M&A sprint and answering the question: Why Rush to Close M&A Deals Before the End of the Year?

As we approach the final weeks of 2025, deal teams across the country are working around the clock to get transactions closed before year-end – often called an M&A sprint. The combination of expiring tax provisions, accounting considerations, and strategic imperatives is creating powerful incentives for both buyers and sellers to cross the finish line before December 31. To determine if an end-of-year M&A sprint and rush to close deals before the end of the year, we are more than happy to provide you with everything you need to know, whether you are a buyer or seller.

The Year-End M&A Sprint: Why Rush to Close Deals Before the End of the Year? A Guide for Buyers and Sellers.

The decision that you need to get on your financial mark, get set, and go in a year-end M&A sprint is one that many buyers and sellers alike make because of the numerous benefits that ensure you will start 2026 on the right financial footing.

So, why rush to close M&A deals before the end of the year? Here’s what to know.

The Tax Cliff: Why Timing Is Everything

You need to ensure you are prepared for the coming tax year. Several provisions from the Tax Cuts and Jobs Act (TCJA) are scheduled to sunset at the end of 2025, creating a potential tax cliff that’s forcing dealmakers’ hands and spurring year-end M&A sprints.

For Sellers: The Qualified Business Income Deduction (QBID), allowing pass-through entity owners to deduct up to 20% of business income, expires December 31. For a seller with $10 million in qualified business income, that 20% deduction could mean hundreds of thousands in tax savings that vanish in January. Similarly, bonus depreciation drops from 40% to 20% in 2026, affecting deal valuations for asset sales.
For Buyers: The same bonus depreciation phase-down makes asset acquisitions less attractive from a tax perspective in 2026. Changes to the SALT deduction could also impact deal structures, particularly for pass-through entities.
The Uncertainty Factor: No one knows what 2026 tax legislation will look like. For both sides, certainty today beats speculation about tomorrow.

Accounting and Reporting Benefits

Closing in 2025 means clean year-end financials without partial-year consolidation headaches. This simplifies financial reporting, earnings calls, and analyst presentations for public companies and PE portfolio firms.

It also means cleaner earnout calculations, simpler administration of retention bonuses and equity acceleration provisions, and avoiding disputes about how to allocate partial-year results.

Strategic Imperatives Driving the Rush

It’s important that you understand the urgency and reasoning behind an end-of-year M&A sprint, which often make it a strategic business necessity for improved decision-making:

Regulatory Clarity: Many dealmakers are executing under today’s known framework rather than waiting to see how antitrust enforcement and industry regulations evolve in 2026.
Private Equity Pressure: PE deployment reached its highest quarterly level in over three years in Q3 2025. Financial sponsors face immense pressure to demonstrate activity before year-end reports go out, creating more motivated buyers willing to be flexible on terms.
Competitive Dynamics: For sellers running competitive processes, multiple buyers trying to beat the December 31 deadline creates urgency that often translates to better valuations and terms.

The Case for Waiting (If You Can Afford To)

Not every deal should be rushed to close before year-end. You should always take time to ensure you are making the right decision. Reasons to pump the brakes on a year-end M&A sprint include:

Valuation Gaps: Forcing a December close could mean leaving money on the table or buying at an inflated price if buyer and seller are still meaningfully apart on price.
Integration Readiness: Closing a transformational deal without proper integration planning is a recipe for value destruction.
Tax Law Optimism: Some sellers are gambling that Congress will extend favorable provisions, but this is a risky bet with your largest financial transaction.
Market Momentum: Robust US deal volume growth is predicted through 2026. If you believe Q1 2026 will bring even better market conditions, more buyers, higher valuations, better financing terms, waiting might pay off.

Related Article: The M&A Market is Poised for an Uptick

Making the Call: Should You Sprint or Wait?

If you have made it this far, it’s time to truly weigh the pros and cons of a year-end M&A sprint. Here’s how to decide:

For Sellers:
- Model your after-tax proceeds under both 2025 and 2026 scenarios. The QBID alone could justify accepting a slightly lower purchase price to close this year.
- Consider earnout alternatives or seller financing that allow you to capture upside while locking in 2025 tax treatment on the base purchase price.
- Engage experienced M&A tax advisors who can model scenarios and structure the deal optimally.
For Buyers:
- Use the urgency strategically in negotiations, but judiciously, as pushing too hard could kill a good deal.
- Staff up diligence teams now and be ready to work through the holidays for a serious December close.
- Consider bridge structures like earnouts, working capital adjustments, or indemnification escrows to close now and true-up later if full diligence can’t be completed by December 31.

The push to close deals before December 31, 2025, is driven by concrete financial and strategic considerations that could add up to millions of dollars and significant competitive advantages. Whether the M&A sprint to year-end is right for you depends on your specific circumstances. Making an informed decision requires understanding exactly what you stand to gain or lose. Make sure your timing is a deliberate choice rather than a default.

Related Article: Sandbagging Clauses in M&A Agreements

We Can Handle Your Year-End M&A Sprint Without Breaking a Sweat. Call Us Today to Learn How We Can Help.

The difference between closing before December 31 and waiting until January could mean hundreds of thousands or even millions in tax consequences alone, which is why a year-end M&A sprint is often a desirable option. Petersen + Landis PC specializes in guiding clients through the endlessly complex M&A closing process with a focus on maximizing value while minimizing tax exposure and legal risk. We can help you:

Model tax scenarios under both the 2025 and 2026 laws to quantify the real cost of waiting.
Structure deals creatively to meet year-end deadlines without sacrificing diligence or value.
Navigate regulatory requirements efficiently to accelerate closing timelines.
Negotiate bridge provisions like earnouts and escrows when year-end closing isn’t feasible.
Minimize risk through comprehensive due diligence, even on compressed timelines.

Ready to discuss your M&A transaction needs?

Contact Petersen + Landis PC today. We’re working through the holidays to help clients capitalize on year-end opportunities.

San Diego Office
12264 El Camino Real, Suite 109
San Diego, CA 92130
Phone: 858.925.7084

Chicago Office
444 West Lake Street, 17th Floor
Chicago, IL 60606
Phone: 312.583.7488

Negotiating Indemnity Deductibles and Caps in M&A Deals

Mergers & Acquisitions, News

People during an M&A deal shaking hands and smiling because they have learned ho0w to navigate Indemnity Deductibles and Caps successfully.

In M&A transactions, indemnity provisions serve as the primary mechanism for allocating post-closing risk between buyers and sellers. While these provisions cover numerous aspects of potential liability, the negotiation of indemnity deductibles and caps often becomes the most contentious element of deal structuring. Recent market data reveals why: with actual indemnification claims appearing in roughly one-third of all transactions, getting these terms right isn’t theoretical; it directly impacts deal outcomes.

Here’s what you need to know to successfully navigate and negotiate indemnity deductibles and caps in M&A deals.

Understanding the Framework of Indemnity Deductibles and Caps in M&A Deals

Indemnity deductibles (sometimes called “baskets”) function as the buyer’s initial absorption of risk before indemnity coverage kicks in. Think of them as the equivalent of an insurance deductible: the buyer bears losses up to this threshold amount.

Caps, on the other hand, establish the seller’s maximum exposure, providing certainty around total financial risk. The interplay between these mechanisms creates different risk profiles. A “true deductible” means buyers can only recover losses exceeding the threshold amount.

A “tipping basket” structure allows buyers to recover all losses, including amounts within the deductible, once the threshold is breached.

Current Market Data

Recent studies provide concrete benchmarks for structuring these provisions:

Indemnity Deductible Trends: Most baskets equal 0.5% or less of transaction value, with 56% falling at or below this threshold. For deals over $10 million, true deductibles appear in more than 60% of transactions, making them the dominant structure. Current market data shows approximately 70% of deals use true deductibles, 26% employ tipping baskets, with hybrid approaches comprising just 4%.
Cap Analysis: Cap ranges span from 1% to 100% of purchase price, though the average has declined due to increased use of RWI. Deals with RWI consistently show lower indemnity caps compared to uninsured transactions. This correlation reflects how insurance shifts traditional buyer-seller risk allocation.
Claims Reality: Analysis of over 850 recent transactions reveals that indemnification claims occur frequently enough to make these negotiations business-critical rather than academic exercises.

Related Article: Sandbagging Clauses in M&A Agreements

The Fundamental Rep Exception of Indemnity Deductibles and Caps in M&A Deals

Most agreements carve out “fundamental representations” from standard deductible and cap structures. These core representations, covering ownership, authority, capitalization, and similar foundational matters, often carry higher caps or unlimited liability.

The rationale is straightforward: if a seller cannot validly transfer what they claim to own, standard risk allocation principles shouldn’t apply.

We regularly see disputes over what constitutes a fundamental representation, particularly regarding tax compliance, regulatory matters, and certain operational liabilities. The classification can dramatically impact potential exposure, making precise drafting essential.

Leveraging Market Intelligence for Better Outcomes

The most effective negotiations start with comprehensive market data, not theoretical risk preferences. Recent ABA studies, SRS Acquiom claims reports, and other industry analyses provide the foundation for data-driven negotiations that both parties can respect.

Our approach centers on translating this market intelligence into deal-specific strategies. When representing sellers, we demonstrate how proposed deductibles align with the 56% of deals at 0.5% or below, particularly when enhanced due diligence or RWI coverage exists. For buyers concerned about meaningful protection, we point to the one-third claims frequency rate to justify positions within established market ranges.

This data-driven approach produces faster negotiations with more durable results. Rather than arguing theoretical fairness, parties can focus on where their specific deal sits within documented market practice.

Tailoring Terms to Transaction Reality

Market benchmarks provide the starting point, not the ending point. Each transaction carries unique risk characteristics that should influence the final structure. A technology company with potential intellectual property issues presents different considerations than a manufacturing business with environmental exposure.

We work with clients to conduct thorough risk assessments that inform negotiation strategy. This might mean accepting higher deductibles in exchange for specific carve-outs, or agreeing to lower caps when paired with comprehensive RWI coverage.

The key is ensuring that the indemnity structure actually addresses the risks most likely to materialize. We’ve seen too many deals where parties fought extensively over theoretical scenarios while overlooking more probable exposure areas.

Strategic Use of Risk Transfer Tools for Indemnity Deductibles

Modern M&A practice offers several mechanisms for managing indemnity risk beyond traditional buyer-seller allocation. Escrow accounts provide immediate claim satisfaction but tie up seller capital. RWI shifts risk to third-party insurers while often reducing direct seller exposure. Earnout structures can incorporate indemnity setoff rights that streamline dispute resolution.

Each tool carries trade-offs that affect negotiation dynamics. For instance, RWI policies typically require buyers to retain the first 1% of losses, but may allow sellers to accept much lower direct caps. Understanding these interactions allows for more creative deal structures that serve both parties’ core interests.

Dispute Resolution Mechanics Matter

The best indemnity provisions mean little if disputes cannot be resolved efficiently. We focus significant attention on notice requirements, investigation periods, and resolution mechanisms.

Simple improvements, like requiring specific claim documentation or establishing clear timelines for seller responses, can prevent minor disagreements from escalating into major disputes.

Many agreements now include mandatory negotiation periods before formal dispute resolution, which we’ve found reduces both the frequency and cost of post-closing conflicts.

Practical Negotiation Strategies

Successful indemnity negotiations require balancing multiple competing interests while maintaining deal momentum. Based on our experience across hundreds of transactions, several principles consistently drive better outcomes:

Lead with market data. Positions supported by objective market evidence carry more weight than theoretical arguments about fairness or risk.
Focus on materiality. Not every representation breach deserves the same treatment. Distinguish between fundamental issues that could destroy deal value and operational matters that represent normal business risks.
Consider the total deal structure. Indemnity terms should align with other transaction elements like purchase price mechanisms, due diligence scope, and post-closing integration plans.
Plan for the future. The best indemnity provisions are ones that both parties hope never to use but feel confident will work fairly if needed.

Expert Guidance to Navigate Indemnity Deductibles and Caps in M&A Deals

Effective indemnity negotiations require both market sophistication and deal-specific judgment. With documented claims appearing in roughly one-third of transactions and clear market patterns emerging around deductible and cap structures, the negotiation process for indemnity deductibles and caps has, in many ways, become more predictable, but it is no less important.

At Petersen + Landis, we combine current market intelligence with transaction experience to help clients navigate these negotiations efficiently. Whether you’re working within the 70% of deals that use true deductibles or structuring something more tailored to your specific risk profile, our goal is to achieve terms that protect your interests while maintaining deal momentum.

Ready to discuss your M&A transaction needs?

San Diego Office
12264 El Camino Real, Suite 109
San Diego, CA 92130
Phone: 858.925.7084

Chicago Office
444 West Lake Street, 17th Floor
Chicago, IL 60606
Phone: 312.583.7488

Visit us at petersenlandis.com

Preparing to Sell Your Business: 4 Steps to Maximize Value

Mergers & Acquisitions, News

A smiling entrepreneur just like you as you're preparing to sell your business.

Selling your business is one of the most significant decisions you’ll make as an entrepreneur. After years of building something from the ground up, the stakes are high–both financially and personally. Success depends on adequately preparing to sell your business and having the right legal strategy from day one.

At Petersen + Landis, we’ve guided countless business owners through successful exits. The difference between deals that exceed expectations and those that fall apart often comes down to preparation. Here’s how you can prepare.

Preparing to Sell Your Business: 4 Steps to Maximize Value

Preparing to sell your business is exciting, but it can be intimidating, especially as you consider what you want to sell it for. Here are 4 steps you can take to maximize value when preparing to sell your business:

Know Your Exit Strategy
Get Your House in Order
Market Timing and Competition
The Due Diligence Process

1. Know Your Exit Strategy

Strategy buyers (competitors, suppliers, adjacent companies) typically pay premium valuations for synergies they can’t achieve organically. Private equity firms focus on growth potential, often keeping management in place and offering “two bits at the apple” through rollover equity.

The key question: What do you want post-sale? Complete exit with maximum cash, or continued involvement with upside potential? Your answer drives buyer selection.

2. Get Your House in Order

Financials First: Buyers dissect your numbers with surgical precision. Ensure three years of clean, audited statements. Address revenue concentration–if one customer represents over 20% of revenue, expect intense scrutiny. Consider a sell-side quality of earnings analysis to identify issues before buyers do.

Legal Infrastructure: Nothing kills deals faster than legal surprises. Corporate documents must reflect current ownership, key contracts need review for change-of-control provisions, and employment agreements require attention for retention planning.

Operational Excellence: Buyers invest in businesses, not jobs for sellers. Begin transitioning key responsibilities months before going to market. Document processes, diversify customer relationships, and build management depth.

3. Market Timing and Competition

Create competitive tension among multiple buyers – this typically drives 10-30% higher valuations. Avoid granting exclusivity too early, and understand that deal structure often matters more than headline purchase price.

4. The Due Diligence Process

Sophisticated sellers prepare comprehensive data rooms before engaging buyers. Organize documents logically and anticipate questions. The goal is making due diligence feel confirmatory rather than investigative.

Why Petersen + Landis Makes the Difference when Preparing to Sell Your Business

We serve as your strategic partner throughout the entire process when preparing to sell your business:

Preparation Phase: Comprehensive legal audits to resolve issues before they derail deals.
Buyer Engagement: Structure competitive processes while protecting your interests.
Due Diligence: Coordinate responses efficiently while maintaining deal momentum.
Closing & Beyond: Ensure documentation protects your interests and coordinate post-closing obligations.

Our clients consistently achieve better outcomes because we combine deep M&A expertise with genuine partnership in their success. We’ve guided sales from $5 million to over $100 million, understanding that each transaction is unique.

Ready to explore your options? Your business represents your life’s work. Let us help you realize its full value. Contact Petersen + Landis today to discuss your exit strategy.

SANDBAGGING CLAUSES IN M&A AGREEMENTS

Mergers & Acquisitions, News

Agreement For The Sale Of A Business

In an agreement for the sale of a business, there will be a number of representations and warranties by the seller across the spectrum of the company’s business, including its ownership of assets, its financial condition, its compliance with a variety of laws (among others, employment and environmental laws), and the existence of any adverse material events. If an issue arises post-closing that violates the representations and warranties, then the indemnity provisions in the agreement will dictate that the seller must compensate the buyer for any resulting loss, including payment of attorneys’ fees, settlements, judgments, etc.

What Is A Sandbagging Clause?

A sandbagging clause refers to a provision in an M&A agreement that addresses whether a buyer’s pre-closing knowledge about the cause of a subsequent loss will have on the buyer’s indemnity claim. The colloquial term “sandbagging” refers to whether or not the buyer can know about the facts giving rise to the loss and still claim indemnity, or “sandbag” the seller by moving ahead with knowledge of a material issue.

There are two types of sandbagging clauses, a pro-sandbagging clause that allows the buyer to have knowledge of the facts giving rise to the loss and still receive indemnification, or an anti-sandbagging clause, which prohibits buyer from receiving indemnity if it knew of the facts giving rise to the loss.

Although it may seem counter-intuitive to allow for pro-sandbagging clauses where a buyer can recover despite closing with knowledge of the problem, there are good reasons for such a clause to be included. One is that prohibiting buyer from recovering would provide a disincentive to conduct thorough due diligence, as the buyer would not want to discover facts that could later bar indemnification. Anti-sandbagging clauses will also give rise to disputes regarding buyer’s knowledge before closing. Perhaps the buyer’s best argument, however, is that listing the problematic matter in the disclosure schedule is the best way to address any post-closing issues, as the parties can negotiate appropriate provisions ahead of time if necessary, e.g., buyer can either accept the disclosure and bear the risk going forward, or require that seller provide express indemnity for the matter so listed.

A seller’s rebuttal on this issue is that a pro-sandbagging clause would allow the buyer to discover an issue in due diligence and not inform the seller, which could provide a disincentive to the buyer to raise the issue ahead of time and address with the seller in the agreement.

M&A Agreements & Pro-Sandbagging Clauses

In terms of market prevalence, pro-sandbagging clauses are far more common in M&A agreements, generally due to the fact that buyers hold the keys (i.e., money) to the deal and are generally not inclined to restrict their rights on important issues like indemnification. Although recent statistics show that it is quite common for M&A agreements not to address sandbagging at all, that should not be taken as an indicator that the concept is often ignored. Many state laws themselves provide an answer as to whether a buyer can “sandbag” the seller if the agreement does not address the issue, and buyers will generally choose a state law that is pro-sandbagging.

Although a seller will generally be faced with an agreement that will allow for sandbagging, either by express clause or application of state law, being armed with that knowledge will help the seller focus more intently on its due diligence process, and negotiate appropriate provisions for any items that do arise. And those sellers in a strong negotiating position can look at an anti-sandbagging clause as a good “get” in negotiating the transaction.

DEFINING A SELLER’S KNOWLEDGE IN AN M&A AGREEMENT

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Representations and Warranties

In an agreement for the sale of a business, there will be a number of representations and warranties by the seller across the spectrum of the company’s business, including its ownership of assets, its financial condition, its compliance with a variety of laws (among others, employment and environmental laws), and the existence of any adverse material events. If anissue arises post closing that violates the representations and warranties, then the indemnity provisions in the agreement will dictate that the seller must compensate the buyer for any resulting loss, including payment of attorneys’ fees, settlements, judgments, etc.

Because a breach of the seller’s representations and warranties can result in a costly indemnification obligation, the seller will be keenly interested in limiting its exposure to the extent possible. One way to do this is with a knowledge qualifier for certain representations and warranties, i.e., language which limits the extent of the representation and warranty on a specific matter to the actual or constructive knowledge of the seller.

Actual vs Constructive Knowledge

As an initial matter, the distinction between actual and constructive knowledge standards is an important one in this context. Actual knowledge of course means that the seller must actually know about the circumstances giving rise to the breach of the representation and warranty in order to be held liable for that breach. Constructive knowledge, on the other hand, will dictate that a breach will occur if seller either knew or should have reasonably known about the facts giving rise to a breach. Obviously, a seller much prefers an actual knowledge standard, as it precludes delving into the factual circumstances to determine whether a reasonable party should have known about the underlying facts of a breach.

To examine the effect of knowledge qualifiers in the M&A context, we’ll use the example a representation and warranty pertaining to existing lawsuits against a company, as well as any present basis for a legal claim to be brought in the future. This very common representation and warranty is generally bifurcated by a knowledge qualifier as follows: (1) the first clause relating to existing lawsuits is unqualified with regard to sellers knowledge; and (2) the second clause, pertaining to any current facts giving rise to a basis for a potential claim, is qualified or limited by the actual or constructive knowledge of the seller.

Breaking Down the Knowledge Qualifiers

Let’s begin by analyzing the first clause and the lack of any knowledge qualifier. If there is an existing lawsuit against the seller as of the time of closing, whether seller knows it or not, the seller will have breached the representation and warranty on absence of lawsuits unless that lawsuit is listed on a disclosure schedule to the agreement. The allocation of risk in this regard makes logical sense, because the suit has been filed before closing based on conduct of seller, and should be seller’s responsibility. In addition, with regard to the issue of knowledge, a lawsuit is a public record and generally needs to be served promptly after filing, so in most circumstances, seller is going to be aware of such litigation. And, if due to a quirk of timing, the seller is not so aware, a buyer is not willing to take on that liability by using a knowledge qualifier.

As for the second clause, however, the existence of any basis for a future claim, generally speaking this clause will be subject to an actual or constructive knowledge qualifier. The allocation of risk here is that if the seller did not actually know (under an actual knowledge standard) or reasonably know (under a constructive knowledge standard) of the basis for a subsequent claim, the seller will not have breached the representation and warranty, and will not owe an indemnity obligation. The reasoning behind the general use of the qualifier here is that a seller cannot be held to know everything about the company, and that some dividing line should be drawn with respect to unasserted claims.

The trend in M&A is for a constructive knowledge standard to be used as the knowledge qualifier. The buyer’s argument in this regard is straightforward: they are unwilling to make the substantial investment in purchasing a company or its assets while allowing a seller to avoid liability based on lack of actual knowledge of its errors or misconduct. Indeed, buyer
will argue, such a standard rewards neglect, in that an unknowing seller will escape liability while a more diligent company would have been aware of the
issue.

Defining Constructive Knowledge

There are a variety of ways to define constructive knowledge in an agreement. One common way is to define knowledge by connecting it to what specific individuals in the company, often the selling principals and officers or directors, knew or should have known in the exercise of reasonable diligence. A seller will want to pay careful attention to this definition to ensure that the constructive knowledge standard does not become overly broad so as to open the door too wide to potential liability. Seller and its attorney should also carefully review the agreement to confirm that knowledge qualifiers are being used appropriately throughout the representations and warranties to limit their scope.

A seller’s indemnity obligation is generally the chief source of liability after closing, so careful review of knowledge qualifiers during the drafting process is a key way for seller to effectively manage this potential exposure.

MATERIALITY SCRAPES IN M&A AGREEMENTS

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Consequences of violations of Representations and Warranties

What is a materiality scrape?

A materiality scrape is a provision in the agreement that provides that when determining either: (1) whether a representation or warranty in the agreement has been breached; and/or (2) the amount of any loss resulting from such breach, all materiality qualifiers in the agreement are disregarded (i.e., “scraped”). The practical effect of such a provision is to “read out” any materiality qualifiers in the seller’s representations and warranties, such that seller will be liable for any breach and/or any loss resulting therefrom.

Obviously, a seller would prefer to have materiality qualifiers in the agreement to limit its indemnity obligations. The buyer’s argument in favor of a materiality scrape, however, is generally twofold: (1) if the agreement has an indemnity “basket” (i.e., a threshold amount of loss which must be reached before seller has a duty to indemnify), then a materiality threshold is already in the agreement, and the scrape prevents doubling up on materiality hurdles; and (2) excluding the materiality threshold precludes future disputes over what is and is not material.

Arguments against a materiality scrape

The seller has two chief arguments against the use of a materiality scrape. The first is that utilizing such a provision will result in both buyer and seller getting in the weeds about every possible flaw in the company. Pre-closing, seller will be incentivized to list every matter it can think of in the disclosure schedules, not matter how minor, while post-closing, buyer will be incentivized to assert every claim no matter how trivial to reach the basket amount. Seller can also argue that a materiality scrape leads to absurd results. A typical M&A agreement contains a number of provisions that utilize a materiality standard, for instance, a representation and warranty that the seller has made no material misrepresentations in conjunction with the agreement. Reading that qualifier out of the agreement essentially nullifies the governing legal standard for stock purchases that has been in place for decades.

How can buyers and sellers compromise?

The last point segues nicely into how a buyer and seller can compromise on the matter. One way to do so is to exclude the materiality scrape from applying to certain representations and warranties. Another is to use an indemnity basket which excludes the entirety of the basket threshold amount from seller’s indemnity obligation, rather than a “tipping basket” which requires that, once the threshold amount is met, seller indemnify buyer from dollar one of the loss. Lastly, the parties can agree to use a “single scrape”, i.e., nullifying any materiality qualifier in determining the amount of damages, but not when determining whether a breach has occurred in the first instance. Using one or more of these types of provisions will better allocate the risk among the parties, and a seller coming into a deal prepared to negotiate this issue will be in a far better position to achieve a more desirable result.

INDEMNITY PROVISIONS IN AGREEMENTS FOR SALE OF A BUSINESS

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Business Agreements

When business owners receive an agreement for the purchase of their business, it is easy to feel lost in a sea of legalese. The agreement generally can be anywhere from 40 to 100-plus pages, covering a broad range of representations and warranties, tax matter procedures and so on.

Although it is obviously imperative to have experienced counsel guide a business owner through this process, it is also helpful for the owner to understand certain fundamental components of the deal, to be able to analyze the risk profile and assist the attorney in negotiating a final agreement that protects the owner to the fullest extent possible.

Indemnity Provision Component

One such fundamental component of the deal is the indemnity provision, which is a mutual obligation of the buyer and seller to defend and hold one another harmless from certain acts or breaches of the agreement. When a party’s indemnity obligation is triggered, that party will have to pay attorney fees and costs of defending any claim, as well as paying for any monetary loss, arising from that claim, including a settlement, judgment, fine or penalty. In other words, the indemnity provision is (generally speaking) the one way that a seller will have to pay money back to the buyer from the sale of the business. Because of this, it is vital for a seller to understand the mechanics of indemnity, and the ways in which indemnity obligations may be limited.

As an initial matter, a seller’s indemnity obligation generally applies to the following: (1) a breach of the seller’s representations and warranties in the agreement; and (2) a breach of the seller’s contractual obligations in the agreement.

The first prong is the source of most post-closing indemnity claims. In the sale agreement, a seller will typically make a lengthy series of representations and warranties, from basic items such as attesting to full and unimpaired ownership of the equity and assets of the company, to highly detailed representations and warranties regarding compliance with employment or environmental laws, and an absence of claims for violating any such laws. If there is any legal violation that seller is aware of, that will be listed on a disclosure schedule to the agreement. In typical sale agreements, there are twenty to thirty such representations and warranties, covering the full spectrum of the business. Therefore, unless an item of potential liability is specifically excluded, any breach of the representations and warranties that the business has been run in compliance with the laws, is not encumbered, and is not subject to any claims, can serve as the basis for an indemnity claim by the buyer.

Because of this, it is important for a seller to thoroughly review all the representations and warranties with counsel and identify any potential gaps in compliance and/or future claims. Once identified, seller and counsel can address the matter with buyer’s team and negotiate provisions to address the matter. In most cases, the parties are able to reach agreeable terms on the issue, but identifying it ahead of time and being able to decide whether or not to proceed is invaluable for a seller. It is far better to decide to proceed with a known risk than it is to be surprised later.

Indemnity Protections

A seller can also have certain protections built into the indemnity section of the agreement to limit the indemnity obligations in most instances. For example, the use of baskets and caps are typical in sale agreements, both of which limit a seller’s obligations.

Indemnity Basket

An indemnity basket functions like a deductible of sorts; i.e., until the amount of buyer’s loss reaches X dollars, the seller does not have to make payment for any indemnified loss. Most agreements use what is called a tipping basket, so that when the loss threshold is met, the seller owes indemnity on the entirety of the loss from dollar one.

Indemnity Cap

An indemnity cap is an even more important tool for the seller. A cap will limit the amount of money a seller has to pay for indemnified claims post-closing, subject to certain exclusions. In most mid-market deals, the typical indemnity cap ranges from 5-15% of the total purchase price. Say for instance the indemnity cap is 10% of the purchase price; in such event, if the purchase price is $20 million, the seller’s total indemnity obligation would be limited to $2 million, again subject to certain exceptions. The logic behind this limitation is that the seller needs a certain level of assurance that once it sells the business, the buyer is not going to come back with a slew of claims to essentially claw back the entirety of the purchase price, while still remaining in control of the business.

The limited exceptions to the applicability of the cap track this logic as well. For example, fraud is the main exception to applicability of the indemnity cap. This makes logical sense in that, if the seller has actively defrauded the buyer about the state of the business, the seller should not be able to hold buyer to an indemnity limit that was negotiated on the presumption all parties were dealing in good faith. The inapplicability of the cap to what are deemed “fundamental representations” like unencumbered ownership of equity and assets is logical as well – if the seller does not truly own what it is purporting to sell, then the buyer should not be bound by any cap, as it truly did not receive what it paid for.

Important Provision For The Seller

Lastly, a common protection for the seller in the indemnity section is that indemnity will be set forth as the exclusive remedy for breaches of the agreement, subject to common exceptions for fraud or for a party seeking equitable relief. This is an important provision for seller, because it prevents a buyer from making an “end run” around the carefully-negotiated indemnity provisions and seeking relief from the seller which is not subject to the baskets and caps, among other things.

The various permutations of an indemnity section in an agreement for sale of a business are too involved to address fully here, but identifying some fundamental components of how indemnity works can help facilitate communications with counsel when that large stack of deal documents hits the seller’s inbox.

NEGOTIATING FAVORABLE TAX TREATMENT OF EARNOUTS

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What is an earnout?

If a company’s owners are negotiating a sale of their business, one facet of compensation the buyer may propose is an earnout, i.e., a contingent payment tied to a benchmark for the company’s performance post-sale.

An earnout is generally a tool of compromise between buyer and seller – if the parties cannot agree on a purchase price, using an earnout is a way to protect the buyer on the downside if the company does not perform as well as anticipated post-closing, while providing an upside in earnings for the seller if the agreed benchmark is met. The range of calculations for arriving at an earnout is infinite, but in general, the earnout will be some multiple of a financial metric or a fixed or variable number based on some measure of company performance. A seller, if confident about the company’s future, may view an earnout as a way to realize more money on the sale of the business than settling for a fixed number that is lower than what seller is willing to accept.

Risk Factors

With all that being said, there is always a degree of risk involved in agreeing to contingent compensation which may or may not be realized, so most sellers are not inclined to agree to an earnout that will comprise too substantial a portion of the overall purchase price (with exceptions, as with all things). Another potential drawback to using an earnout is that it can result in less favorable tax treatment. If the transaction documents provide that the entirety of the earnout constitutes ordinary income to the seller receiving the payment, then seller will be taxed at an ordinary income tax rate, rather than at the preferred capital gains rate that could otherwise be available to seller.

Restructuring The Earnout Benefits

In light of this, it is important for a selling owner of a company to consider structuring the earnout so that the preferred capital gains rate can be attained on as much of the post-closing proceeds as is allowable under applicable law. A common method by which a buyer and seller do so is by agreeing on a separate payment that will constitute reasonable compensation to the individual for his or her post-closing services, and will thus be taxed at an ordinary income rate. Then the earnout monies that are separate from such reasonable compensation amount will be categorized in the deal documents as “deferred purchase price” being paid for the company’s equity or assets, and thus will be taxed at the same rate for the initial payment at closing. Taxation for a sale of equity will be at the capital gains rate, and for a sale of assets, as the facts allow and when structured correctly, the capital gains rate will predominate as well. Thus, the selling party will attain a preferred tax rate on the post-closing compensation that is separate from the set ordinary income.

As with most facets of a large-scale M&A transaction, the legal considerations in structuring the earnout terms correctly are far too varied and involved to cover in depth here, but there is great benefit in knowing beforehand that the structure of the earnout can result in vastly different tax treatment, and that advance planning and utilizing proper terms can help a seller achieve a much better position with regard to after-tax proceeds on a sale.