Hidden liabilities, poorly defined terms, and shifting regulatory landscapes have made the purchase agreement one of the riskiest blind spots in M&A transactions. For businesses preparing to sell or acquire, failure to properly negotiate and structure these agreements can lead to losses reaching into the millions.
Tom Wippman has seen firsthand how vague indemnity clauses, compliance missteps, or even misaligned earnout terms can cause post-closing fallout. As Hourglass Legal Consulting’s founder and president, his extensive experience in corporate law and dealmaking has made him a firm believer in a proactive approach that prioritizes transparency, accountability, and due diligence before signing.
Regulatory Shifts Increase Exposure
Recent regulatory changes have reshaped what buyers and sellers must disclose and verify, especially in the financial services, education, and manufacturing sectors. Expanding compliance obligations, data privacy regulations, are among many areas of the law that are shifting legal exposure in ways many traditional agreements don’t anticipate.
Purchase agreements that fail to reflect these updates leave parties vulnerable to regulatory action or costly renegotiation. For example, representations regarding compliance must now account for environmental practices, cybersecurity protocols, and even diversity metrics, depending on the jurisdiction and industry.
When advising its clients, Hourglass Legal Consulting stresses that deal teams must align with legal representatives early to address these evolving obligations. Apart from impacting valuation, failure to do so can result in law-related proceedings, which survive long after the deal closes.
The Price of Poorly Drafted Indemnity Clauses
Indemnification terms are often the most contested‒and expensive‒components of a purchase agreement. Broad, undefined language can obligate sellers to cover post-closing claims they never anticipated, while buyers may find that time-limited or underfunded escrow arrangements offer little recourse.
Hourglass Legal has frequently reviewed agreements that have become unenforceable due to overly vague or over-negotiated indemnity provisions. For this reason, the firm recommends clearly defining covered claims, survival periods, caps, and baskets to avoid disputes.
Buyers should conduct rigorous diligence to support indemnity demands, while sellers must understand the long-term financial impact of indemnity language. Modifying these terms or securing insurance coverage can be the difference between a clean exit and years of law-related actions.
Earnouts: Misaligned Incentives, Expensive Fallout
Earnout structures are common in growth-focused transactions. However, they carry significant risks if targets aren’t clearly defined. When post-closing performance metrics aren’t aligned with operational realities, disputes often follow. Sellers may accuse buyers of suppressing growth to avoid earnout payouts, while buyers may argue that sellers failed to meet realistic goals.
Tom Wippman warns that earnout provisions should never be boilerplate. Instead, they should be customized based on industry benchmarks, business model nuances, and realistic financial projections.
Carefully crafted performance metrics, dispute resolution mechanisms, and audit rights can mitigate the risk of post-close conflict. When ignored, earnouts can become a breeding ground for misaligned incentives and costly battles in and outside the courtroom.
Additional Hidden Triggers: Escrows and Material Adverse Changes
Escrow terms and Material Adverse Change (MAC) clauses are frequently underestimated, yet they carry real financial and legal risks. Overly broad MAC language can allow buyers to walk away from a deal without consequence, citing vague or subjective reasons. At the same time, escrow arrangements that fail to reflect the true nature of deal-specific risk can leave sellers unnecessarily exposed, even after the transaction closes.
Hourglass Legal Consulting recommends structuring escrow provisions based on actual risk allocation, not just a percentage of the purchase price. MAC clauses, too, should be precisely worded‒broad enough to capture real threats to deal value but specific enough to avoid manipulation or abuse.
Conclusion
Missteps in a purchase agreement can unravel even the most promising transaction. Based on its years of complex M&A experience, Hourglass Legal Consulting urges dealmakers to treat these terms as strategic levers, not afterthoughts. The financial stakes demand nothing less.
