Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / The Representation Gap That Cost a SaaS Founder Seven Figures
Transcript
- Lucas: Let me tell you about a SaaS founder who signed a term sheet at eight times revenue and walked away with roughly a million dollars less than he expected — not because of an earnout failing or a working capital trap, but because of a three-paragraph gap in the reps and warranties section of his definitive agreement. Luna: Wait — the reps and warranties section? That's usually the most boilerplate part of the deal. Everyone assumes it's just confirming what you already told the buyer. Lucas: Exactly. And that assumption is exactly how the gap forms. This founder — let's call him Dan — had built a B2B SaaS platform over seven years. He'd done a couple of small financing rounds, had about 200 customers, and was generating two and a half million in ARR. The buyer was a mid-market strategic that had acquired three other companies in the space. Dan thought the hardest part was over once they agreed on valuation. Luna: So where does the gap come in? The buyer's lawyers started drafting the definitive agreement, right? Lucas: Right. Standard procedure on many middle-market deals — buyer's counsel takes the first pass at the purchase agreement. And Dan's lawyers, who were a solid regional firm but not M&A specialists, didn't push back hard on that. They handed over the pen. And that's where the representation gap opened. Luna: What specifically was missing? I'm guessing it's not something obvious like 'we own our IP' — that's in every agreement. Lucas: It was more nuanced. The buyer's draft had a representation that said the company owns all intellectual property used in its products. Standard enough. But it was qualified by a 'knowledge' qualifier — meaning Dan only represented what he knew. And it had a materiality scrape — meaning even if something was wrong, unless it was material in the aggregate, it didn't count as a breach. That combination is actually pretty common. Luna: But that seems harmless. Founders typically know what IP they own. Lucas: Dan thought so too. But here's the thing — about two years earlier, he'd hired a freelance developer to build a critical module for his platform's analytics engine. The developer had signed a standard contractor agreement that included a work for hire clause. But the clause was poorly drafted — it assigned copyright only for 'deliverables expressly described in Statement of Work.' And the Statement of Work for that project didn't list the analytics module by name. It was more vague. Luna: Ouch. So the buyer's diligence found that, and argued the representation was technically inaccurate? Lucas: Exactly. During diligence — after the term sheet was signed but before closing — the buyer's technical team interviewed the founder's engineers. One of them mentioned that a contractor built the analytics engine. The buyer's counsel asked to see the contractor agreement. They spotted the gap in the work for hire language, and then they pointed back to the representation: 'You represented that you own all IP. This module might not be covered.' They didn't say the deal was off. They said the risk justified a price reduction. Luna: And how much did they take off? Lucas: Seven hundred fifty thousand dollars. They argued that the analytics module represented about thirty percent of the platform's value, and that the legal uncertainty around ownership meant they should discount that portion by half. Dan had no leverage — the deal was already in exclusive negotiations, the no-shop clause was in effect, and his team had already told employees and some customers that an acquisition was imminent. Walking away would have been incredibly costly. Luna: So he took the haircut. Seven figures gone because of a three-paragraph gap in the reps and warranties section. That's brutal. Lucas: And entirely preventable. The representation gap has three common causes. First: letting the buyer draft the reps section without a robust seller-side redline. Second: accepting a 'knowledge' qualifier that limits your representation to what you personally know — versus what the company knows collectively. Third: not auditing your own IP chain before you start negotiating. Luna: On that second point — the knowledge qualifier — I've heard lawyers say it's actually seller-friendly because it limits your liability to what you actually knew. When does it become a trap? Luna: The trap is that the buyer's diligence will inevitably find things you didn't know. If your representation is limited to your personal knowledge, a breach requires proof that you actually knew about the problem. But the buyer can still claim the representation was misleading if the problem was knowable — and then you're in a dispute over what you 'should have known.' The safer approach is to represent what the company knows — meaning you've done reasonable inquiry across key employees. Lucas: So you're saying a 'knowledge of the company' qualifier is actually stronger for the seller than a 'knowledge of the seller' qualifier? Lucas: In many cases, yes. Because it forces you to do a systematic review before signing. And if you've done that review, you can represent with confidence that you've disclosed everything material. The buyer can't come back later and say 'you should have known about the contractor issue' — because you can show that you asked all relevant employees and reviewed all contracts. The gap only forms when you don't do that work. Luna: That's a practical takeaway. What's the single most important rep that sellers should insist on drafting themselves? Lucas: The intellectual property representation — specifically the one that lists all registered IP, all pending applications, and all material unregistered IP. And it should include a schedule of all third-party code, open-source licenses, and contractor-developed work. That's the rep where most gaps hide. If you draft that schedule yourself, you control the narrative. If the buyer's counsel drafts it, they'll use broad language that you'll struggle to comply with. Luna: And then they'll use the gap to reprice. I've seen that happen in reverse too — where a buyer overrepresented its own ability to integrate, and the seller later had a claim. But on the sell side, this is such a common blind spot because founders are focused on valuation, not on the fine print of representations. Lucas: Right. And the gap isn't just about IP. It can be about customer contracts, regulatory compliance, data privacy — any area where the seller's actual operations might not perfectly match the legal language. The key is to identify those gaps before the buyer does, and either fix them or disclose them upfront. Dan's mistake was not doing that audit before he went to market. Luna: You know, conversations like this are exactly why listener support matters. We keep this show ad-free and independent so we can dig into specific, practical cases like Dan's — not just general advice. If these episodes have helped you think more clearly about your own deal terms, you can support the show at buy me a coffee dot com slash fexingo. It's a small gesture that helps us keep doing these deep dives. Lucas: Absolutely. And speaking of deep dives — let's talk about how to actually prevent the representation gap in your next deal. There are three concrete steps you can take before you ever sign a term sheet. Luna: Let's hear them. Lucas: First: run an internal legal audit focused on the five reps that matter most in your industry. For a SaaS company, that's IP ownership, customer contract compliance, data privacy, employee and contractor agreements, and financial statement accuracy. Don't just rely on your lawyers — walk through each area with your operations team. Second: insist on drafting the reps section yourself, or at least co-drafting it with your counsel. The buyer will push back, but it's a reasonable position. You know your business better than they do. Luna: And the third step? Lucas: Third: negotiate the knowledge qualifier carefully. Don't accept a 'personal knowledge' qualifier for reps that cover areas where you've done a company-wide review. Push for a 'knowledge of the company' standard, and document your diligence process. If you can show you made reasonable inquiry, you've closed the gap the buyer might try to exploit. Luna: That's a solid framework. It's not about being adversarial — it's about making sure the agreement actually reflects the business you built. Lucas: Exactly. The representation gap isn't a sign of bad faith on either side. It's a structural risk created when the person who knows the business best isn't the person writing the words. Dan learned that the hard way. But you don't have to.