Acquisitions can involve a lot of hard work. Among other considerations like valuations, financing, and so on, you need to understand how to isolate acquisition assets, ensure they’re transferable, and then assign them to the Asset Purchase Agreement (APA). It’s a lot to think about – especially if you’ve never done one before.
That said, buyers love asset purchases as it allows them to acquire assets they’re interested in while excluding others (and their liabilities). This reduces risk and saves money for what they plan to do post-acquisition. You also benefit from an asset purchase as it might free you to invest in other areas, acquire a new business, or simply do more of what you love.
Asset purchases do involve a lot of moving parts, however. The key thing here, as with all elements of an acquisition, is preparation. It bears repeating: the better prepared you are now, the easier it is to close. With that in mind, read on to learn how to transfer your SaaS assets the easy way.
SaaS acquisitions mostly involve intangible assets such as:
Unlike fixed assets such as property, machinery, and so on, intangible assets are harder to qualify and quantify. The more evidence you have, however, the stronger your claims, which brings me to a critical recommendation: Consult a legal professional to assess your legal claims to fixed and intangible assets before you start negotiating.
Without legal help, you risk disputing asset ownership with contractors, suppliers, or other third parties. A buyer worth their salt will sniff out potential disputes during due diligence but don’t rely on them alone or you could face a nasty legal battle post-acquisition. Instead, hire a professional to help you – especially if your business is large ($1 million-plus ARR) or complex.
If you’ve already signed the Asset Purchase Agreement (APA), skip to the next section. Or, read on for a reminder of the common issues that impact asset-purchase acquisitions.
Intellectual Property (IP) is the stuff that makes your startup your startup and includes code, proprietary technology, trademarks, copyrighted assets, patents, and so on. You might have trademarked your brand name or slogan, for example, copyrighted your codebase, or been awarded a patent for an innovative system or process.
In all cases, you should have legal agreements that protect your IP from anyone else using, reproducing, or distributing it without your consent. That way, when the buyer acquires these assets, you simply transfer the agreements to the new name. Otherwise, you might have to draw up new agreements before entering negotiations, which could stall the acquisition.
Many SaaS companies hire contractors to write code. But unlike regular employees, contractors aren’t subject to the same rules. For example, your employment contracts might include a clause that assigns ownership to the company for anything produced using company resources or on company time. But what about contractor agreements?
Without legal contracts that define who owns what, contractors might claim ownership on anything from code to content – especially if they get wind of a lucrative acquisition deal. If your code is part of an acquisition, ensure it belongs to you and not the contractors who wrote it. Otherwise, you have no legal right to sell it in the first place.
You should have watertight contracts and Non-Disclosure Agreements (NDAs) that protect your ownership rights. Legal disputes can stall an acquisition, or worse, sour an acquisition after it’s taken place. Smart buyers will cover this in due diligence but it’s good to get your house in order before you negotiate or it’ll weaken your bargaining power.
You should also consider the impact of hosting – do you host your SaaS business or rely on a third-party vendor such as Amazon Web Services? A buyer acquiring your entire software stack needs reassurance it’ll transfer without outages or other customer disruptions. Ensure your hosting provider agrees to the same Service Level Agreements (SLAs) and price, and in the absence of anything concrete, be cynical and assume they might want to renegotiate!
Have your engineers built something cool? Did your marketing team help your startup grow from pre-revenue to $1 million-plus ARR? If so, you might find buyers interested in your people, not your assets. Why? Well, it might make better sense to acquire a team with a proven track record than hire one from scratch. Or, perhaps IP is tied to team members and that’s the buyer’s only way of acquiring it (in which case, I refer you back to the previous section!).
Whatever the buyer’s rationale, consult your team first. Let them know you received an offer and ask how they’d feel about working for someone else. It’s a delicate conversation as you don’t want them to think you’re selling them off. But if you’re moving in a new direction and can’t take everyone with you, this could save some heartache.
It could also boost their careers. Don’t forget: buyers might offer higher salaries, equity, and bonuses which are powerful motivators for people starting families or trying to get on the property ladder (as is the kudos of joining a well-respected firm). If you want the acquisition to succeed, frame it from your employees’ perspective – sell the benefits to them.
Are your employees really employees? If not, they might not be transferable. Contractors, as noted earlier, are common in the SaaS industry and without the right employment contracts, your buyer might not be interested. That said, contractors might be willing to join on a more permanent basis and relish the opportunity to work for the acquiring entity. You can always ask.
Conventional wisdom suggests it costs up to 25 times more to acquire customers than it does to retain them. With that in mind, it might be cheaper for buyers to acquire customers en masse in an asset purchase than to spend a fortune on pursuing their own. Other reasons include landing an important client, kickstarting a new enterprise, or moving into new territory.
Couple of things to note, however. What do your customer contracts permit? Are they transferable? Before entertaining offers for your customers, audit your customer contracts first to ensure you’re free to transfer them in an asset purchase. Then communicate the potential acquisition in advance, focusing on how it benefits customers so as many of them stay as possible when the company changes hands.
The APA is the legal document confirming the transfer of assets to the buyer. It includes a description of the assets, payment terms, representations and warranties, timings, and lots more.
Due diligence on an asset-purchase acquisition is usually quicker than, say, a stock purchase, since the buyer assumes only assets and liabilities as described on the APA. However, negotiating the APA can take a little longer, as there’s more work to define and then isolate assets under offer.
But once you finalize the APA, you’re as good as done – mutual signing is quick, and then you’ll hand over anything you need to hand over, be it physical things like fixed assets or software credentials, contracts, customer lists, patents, and other intangible assets.
As I wrote at the beginning, SaaS acquisitions tend to have many moving parts. Unless you’ve got a handover plan, things can get messy, and you don’t want that so close to the finish line. Once you’re legally bound to transfer the assets, create a handover plan that includes:
For this, you should create a shared drive, file, or sheet that both you and the buyer can access and update until everything is transferred. While your assets under question will differ depending on what’s being acquired, here are a few things to consider:
You might also consider the use of an escrow service such as escrow.com if you’re nervous about the buyer’s credibility or creditworthiness.
One of the advantages of an asset purchase is that your business might be left intact after the assets change hands. This means you’re free to continue building and serving customers or to take your business in a new direction. All you need to do is update the balance sheet with the reduction in assets and increase in cash.
You might then use the proceeds from the acquisition to develop or launch a new product, supercharge growth with a cross-platform marketing campaign, or even acquire a new business of your own. The choice is yours, and better yet, we’ll be here to help you get acquired again if that’s what your future holds. Until then, thanks for reading, and get in touch if you have any questions about SaaS asset purchases: email@example.com.
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