Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / How the Information Rights Trap Handcuffs M&A Sellers
Transcript
- Lucas: You sign a deal, you retain a meaningful stake, you stay on as a minority owner — and then the buyer just stops sending you financials. No quarterly P&L, no balance sheet, no updates on the earnout metrics. You ask for a copy of the monthly flash report, and the buyer's CFO says, 'Our internal financials are proprietary.' That's the Information Rights trap, and it's one of the most quietly destructive clauses in M&A. Luna: I've seen this happen to a founder who sold a SaaS company in 2023. He kept thirty percent of the equity, stayed as CEO, and still couldn't get basic numbers out of the buyer for almost a year and a half. Lucas: Right. And the information rights clause is usually buried in the ancillary agreements — the shareholders' agreement, the registration rights agreement, or sometimes just a single sentence in the purchase agreement itself. It dictates what financial and operational information the seller gets to see after close, how often, and in what format. Luna: And the default language that buyers — especially private equity firms — put in there is incredibly broad in their favor. It typically says something like 'the company shall provide the seller with such information as the buyer deems appropriate in its sole discretion.' That's a give-nothing clause. Lucas: Exactly. 'Sole discretion' means the buyer can unilaterally decide you get a one-page summary once a year — or nothing at all. And if your earnout or your contingent consideration depends on hitting certain revenue or EBITDA targets, you're flying blind. You can't verify whether the buyer is allocating revenue correctly, or whether they're loading corporate overhead onto your unit. Luna: So what should the seller ask for instead? What's the standard that minority investors typically get in a venture deal or a growth equity round? Lucas: In a typical minority investment — say, a Series B where the investor buys twenty percent — the information covenant is much stronger. The investor gets quarterly unaudited financials within 45 days, annual audited financials within 90 days, a detailed budget before the fiscal year, and sometimes monthly flash reports. And there's no 'sole discretion' qualifier. It's a contractual obligation. Luna: But in M&A, the buyer sees the seller as a former owner who's now a minority holder, and they often argue that providing detailed financials is administratively burdensome or could leak sensitive information to competitors. Lucas: Which is a fair concern — if the seller goes and starts a competing business. But the solution isn't to deny all information. It's to add a confidentiality covenant and a non-disclosure agreement that covers the seller. That's standard in venture deals too. The real issue is leverage asymmetry. The buyer controls the data, and the seller has no way to enforce their rights without suing, which is expensive and awkward when you still work there. Luna: So the negotiation happens before signing. What are the three or four specific things a seller should push for in the information rights clause? Lucas: First, get rid of 'sole discretion' or any language that makes the buyer's obligation conditional. Replace it with 'the company shall provide to the seller' followed by a specific list — quarterly financials within 45 days, annual audited financials within 90 days, a monthly operating report if the seller is still involved in operations. Luna: And that list should include a profit and loss statement, balance sheet, cash flow statement, and a comparison to budget — not just a revenue number. Lucas: Second, add a materiality qualifier. The buyer may say, 'We can't guarantee every single number is exactly right because we're integrating systems.' That's fine. You can agree that the financials will be prepared in accordance with GAAP and present fairly, in all material respects, the financial condition of the business. That's standard audit language. Luna: Third, put a deadline on requests. If the seller asks for additional information — say, a breakdown of a specific expense line — the buyer should respond within a reasonable time, like ten business days, rather than 'promptly' or 'as soon as reasonably practicable.' Lucas: And fourth — this is the one most sellers miss — tie the information rights to the earnout or the contingent consideration. Write it directly into the earnout provision: 'Buyer shall provide seller with a detailed calculation of the earnout metric within thirty days after each earnout period, along with supporting documentation.' That way, if the buyer doesn't provide it, they're in breach of the earnout clause, not just the information rights clause. Different remedies. Luna: Because breaching the information rights clause usually only gives you the right to sue for specific performance — you can get a court order forcing them to give you the data, but that takes months. Breaching the earnout clause can trigger a liquidated damages payment or accelerate the earnout. Lucas: Exactly. And there's a whole genre of disputes where the buyer simply withholds information to run out the clock on the earnout period. The seller can't prove the target was met because they never got the numbers, and after the earnout period expires, the buyer says 'sorry, you didn't hit the target.' The information rights clause is the first domino. Luna: I want to go back to that software founder I mentioned. He eventually got the financials — after his lawyer sent a formal demand letter. But by then, eighteen months had passed, and the earnout period was almost over. He never got paid the earnout because he couldn't demonstrate that the targets were met within the contractual window. Lucas: And that's tragic, because it's avoidable. If his original purchase agreement had included a specific information covenant with deadlines and a tie to the earnout calculation, he would have had the data every quarter. He could have flagged issues in real time. Luna: What about the buyer's legitimate concern about confidentiality? Is there a standard way to handle that? Lucas: Standard is to include a confidentiality provision that says the seller will keep all information confidential and not use it for any purpose other than monitoring their investment. And if the seller is still an employee or officer, they already have a fiduciary duty of confidentiality. So it's largely redundant. But buyers like to see it spelled out. Luna: And if the seller is a passive investor — they're not working at the company anymore — the buyer may be more resistant to giving granular data. They'll say, 'You don't need to see the monthly flash report; you're not running the business.' Lucas: That's a fair point, but the seller still has a material economic interest. If they own twenty percent of the equity, they have a right to know whether their stake is worth anything. The standard for passive minority investors in a private company is usually quarterly financials and annual audited statements. That's the norm in the LLC agreement or shareholders' agreement for any private company with outside investors. Luna: So really, the seller should just ask for what a typical minority investor gets. Not more, not less. Lucas: Right. And if the buyer pushes back, the seller can say, 'Look, I'm not asking for trade secrets or customer-pricing data. I'm asking for the same financial statements that any outside investor in a private company would receive. If you won't give me that, it signals that you don't intend to treat me as a credible minority holder.' That's a red flag that should make the seller reconsider the deal. Luna: Absolutely. And we should note that this trap is especially dangerous in deals where the seller stays on as a manager or employee. Because you're in an awkward position — you're technically subordinate to the buyer's management, and you don't want to seem adversarial. Lucas: That's the psychological trap. You're still in the building, you're still running the team, but legally you're now a minority owner with limited rights. And the buyer can use the information rights clause to keep you in the dark about the overall financial health of the business, which affects your day-to-day decisions. I've seen managers approve budgets that were completely disconnected from reality because they didn't have the consolidated numbers. Luna: Look, speaking of things that are worth paying attention to — and I don't want this to sound like a plug, but these conversations take real work to research and produce. If you've gotten anything useful out of this episode or any of the previous seventy-plus episodes, we keep this show ad-free because of listener support. If it was worth a coffee to you, there's a link — buy me a coffee dot com slash fexingo. That's it. No perks, no bonus content, just knowing the show stays independent. Lucas: Yeah, and really, if one clause we talked about saves you a headache in a deal, that's worth more than a coffee. But we appreciate it. So — back to the information rights clause. Another variation I see is the buyer trying to limit the seller's right to information after the earnout period ends. They'll say, 'Once the earnout is paid, you don't need any more financial data.' But if the seller still holds equity, that's wrong. Luna: Right. The information rights should survive as long as the seller owns any shares. Even if it's a tiny percentage. Because the value of that stake depends on the company's performance. Lucas: Exactly. And that's another negotiation point: make the information rights coterminous with the seller's equity ownership, not with the earnout period. And if the buyer says, 'We'll give you information only for so long as you own five percent or more of the company,' that's actually common in minority investment agreements. But the seller should push for a lower threshold — one percent or two percent — because a five percent floor could be breached if the company issues more shares or does a stock split. Luna: So the seller's checklist: remove 'sole discretion,' specify the financials and timing, add a materiality qualifier, tie information to earnout, and extend rights for as long as the seller holds equity. Lucas: And one final tactical point: if the buyer refuses to budge on the information rights, the seller can ask for a 'trusted advisor' exception. That means the seller can designate an outside CPA or lawyer who will receive the financials under a strict NDA and can share a summary with the seller. That way the buyer's confidentiality concern is addressed, but the seller still gets the substance. Luna: That's creative. I've seen that work in a couple of deals where the buyer was a private equity firm with a strict policy against sharing financials with former owners. They allowed the seller's accountant to review the numbers quarterly. Lucas: It's a compromise that preserves the seller's economic oversight without the buyer feeling like they're exposing the whole company. And it's better than nothing — which is what most sellers end up with. Luna: Alright, so to wrap up: the information rights trap is about control of data after close. Without strong language, the seller is flying blind. With the right provisions, they can monitor their investment and enforce their earnout. Lucas: And that's the takeaway. Read your information rights clause before you sign — not after you stop receiving financials. Because by then, it's too late.