The Founder’s M&A Field Guide: From First Call to Final Earnout

Most of the value you can protect is protected before a buyer ever calls.

Buyers pay for certainty. The fastest way to lose price, or a deal, is a problem that surfaces in diligence and could have been fixed months earlier. The most common problems are:

• IP chain of title: contractors or early founders who never signed IP assignments.
• Cap table problems: unsigned option grants, missed 83(b) elections, SAFEs and notes that convert in ways nobody modeled.
• Consent traps: customer, vendor and landlord contracts that let the other side terminate or consent on a change of control.
• Worker classification: contractors who are really employees.

Decide early

• Who needs to approve the sale? Map board, stockholder, preferred and drag-along approvals before you talk price.
• What structure fits? A stock sale, an asset sale and a merger each carry different tax and consent consequences. Frame the tax question before the LOI fixes the structure.
• Do you need a banker? For a competitive process, usually yes. For an inbound offer from a single buyer, maybe not.

Florida Florida note. In a Florida corporation, a merger generally needs board adoption and then “a majority of the votes entitled to be cast on the plan,” plus a separate majority of any class entitled to vote as a group, unless the articles require more.¹ Shareholders whose approval is required generally get appraisal rights, subject to a market exception for widely traded shares.² Map both before you sign.

The LOI is mostly nonbinding, but the terms in it rarely get better for the seller afterward.

An LOI sets price, structure and the major deal terms. It is usually nonbinding, except for exclusivity, confidentiality and a few process terms. In practice, every term in the LOI becomes the starting point for the purchase agreement, and buyers rarely give back what a seller conceded at this stage.

Negotiate in the LOI, not later

• The price bridge. State how enterprise value converts to equity value: cash, debt, transaction expenses and the working-capital target.
• Exclusivity. Its length, what it covers, and what ends it early.
• Escrow and indemnity. Their size, how long they last, and whether reps-and-warranties insurance replaces most of the escrow.
• Earnout. If there is one, the metric, the measurement period, and the buyer’s operating obligations.
• Your role after closing. Employment, rollover equity, non-compete scope.

Make “nonbinding” mean nonbinding. In Delaware, an express promise to negotiate in good faith from a term sheet is enforceable: “where parties agree to negotiate in good faith in accordance with a term sheet, that obligation to negotiate in good faith is enforceable.” A party that negotiates in bad faith can owe the benefit of the deal it blocked.³ Florida courts look at “the language of the document in question and the surrounding circumstances.” They declined to enforce an LOI that called itself a “proposal” and contemplated a later formal agreement.⁴ So say which paragraphs bind, and if you want the freedom to walk, say that too.

Disclosure is your protection. What you disclose clearly, the buyer generally can’t claim later as a breach.

Diligence usually runs 30 to 90 days alongside drafting of the purchase agreement. The buyer reviews corporate records, contracts, IP, employment, tax, privacy and regulatory compliance. Your job is to answer accurately, quickly and in a form that feeds straight into the disclosure schedules.

Run it well

• Assign an owner to every diligence category and every schedule.
• Disclose broadly and specifically. A vague disclosure protects you less than you think.
• Keep the data room clean. Limit downloads, and control competitor access with clean-team rules.
• Watch for re-trades. Diligence findings are the buyer’s usual reason to reopen price. Fixing problems before the LOI (Stage 1) is the best defense.

What the buyer learns in diligence doesn’t automatically protect you. Delaware’s Court of Chancery has treated the default rule as allowing “sandbagging,” meaning a buyer can close and then sue on a rep it knew was false. As the court put it: “In my view, Delaware is, or should be, a pro-sandbagging jurisdiction.”⁵ If you want the opposite rule, negotiate an anti-sandbagging clause. Otherwise, rely on the disclosure schedules.

The definitive agreement turns the LOI into enforceable promises, and allocates the risk of everything nobody knows yet.

The core pieces:

• Representations and warranties: statements about the company that the seller stands behind.
• Indemnification: who pays for breaches, up to what cap, above what basket (deductible), and for how long.
• Escrow or holdback: purchase price held back to fund indemnity claims and the working-capital true-up.
• Covenants: what each side must do before and after closing.
• Closing conditions and termination rights: when either side can walk away.

The cap protects you from mistakes, not from lies. Delaware enforces anti-reliance clauses that limit the buyer to the reps in the contract. But “when a seller lies, public policy will not permit a contractual provision to limit the remedy of the buyer to a capped damage claim.”⁶ In 2026, the Delaware Supreme Court called that decision “the lodestar for contract-based limitations on extra-contractual fraud liability.”⁷ Disclose problems, don’t spin them, and make sure the anti-reliance clause covers everything said outside the contract.

Reps-and-warranties insurance (RWI) changes the math. When the buyer’s policy covers rep breaches, the seller’s escrow can shrink to a fraction of the purchase price. The tradeoff is the policy’s exclusions: known issues, purchase-price adjustments and some forward-looking reps stay with the parties.

Between signing and closing, the deal can still die. Know every exit the buyer has.

When signing and closing don’t happen at once, the gap can run from days to months. It depends on third-party consents, financing, and regulatory approvals such as an HSR antitrust filing. For 2026, an HSR filing is generally required for transactions valued above $133.9 million that close on or after February 17, 2026.⁸

Buyers can walk away for more than a “material adverse effect.” A missed interim operating covenant, a bring-down condition that fails, or a missing consent can each give the buyer an exit.

• The material adverse effect bar is high, but it can be met. In 2018, Delaware courts let a buyer terminate on a material adverse effect for the first time, after a dramatic, company-specific downturn in the target’s business and badly false regulatory-compliance reps.⁹
• The ordinary-course covenant is the sleeper. In a 2021 hotel sale, the seller’s reasonable COVID-19 response still cost it the deal. The Delaware Supreme Court held that the seller’s “drastic changes to its hotel operations in response to the COVID-19 pandemic without first obtaining the Buyer’s consent breached the ordinary course covenant and excused the Buyer from closing.”¹⁰ So ask the buyer for consent before any major operating change, and negotiate an exception for responses to emergencies.

Protect the gap

• Make operating covenants loose enough to run the business.
• Define material adverse effect narrowly, with industry-wide and market-wide carve-outs.
• Get financing certainty, or a reverse termination fee if financing fails.
• Keep a short outside date.

The deal closes once. The money can keep moving for years.

Three post-closing mechanisms decide whether you receive the rest of your price:

• The working-capital true-up. Usually 60 to 120 days after closing, the buyer recalculates closing working capital against the agreed target, and the price moves dollar for dollar. Keep it a narrow accounting exercise: same principles, consistently applied, before an accountant acting “as an expert and not as an arbitrator.” In a 2017 decision, the Delaware Supreme Court refused to let a buyer use the true-up to relitigate the seller’s accounting after closing, because the contract barred post-closing rep claims.¹¹
• The earnout. Contingent payments tied to future revenue, EBITDA or milestones. Earnouts are among the most litigated terms in private M&A, because after closing the buyer runs the business that produces the number.
• Indemnity claims. These can be made against the escrow, then against the seller up to the cap, until the survival periods expire.

Draft earnouts for the dispute you hope never comes

• Use objective metrics with a worked example.
• Spell out the buyer’s operating obligations (efforts standards, resources, no actions intended to defeat the earnout).
• Add acceleration on a sale or breach.
• Give the seller information rights and a fast dispute process.

Efforts clauses decide earnout cases. In Shareholder Representative Services LLC v. Alexion Pharmaceuticals, Inc., the merger agreement measured the buyer’s “commercially reasonable efforts” against what a similarly situated company would do. The court held that the buyer breached it by terminating the acquired drug program.¹² In Fortis Advisors LLC v. Johnson & Johnson, the Court of Chancery found that a buyer breached its contractual efforts obligations and committed fraud in connection with a medical-device earnout, with damages and interest above $1 billion.¹³ In January 2026, the Delaware Supreme Court reversed the implied-covenant ruling and vacated the related damages, but otherwise affirmed the efforts-breach and fraud findings.⁷ The lesson for sellers is to write the buyer’s obligations into the contract. The Supreme Court said the implied covenant “functions like a scalpel, not a brush,” and it will not fill gaps the parties could have foreseen.⁷