For most founders, an acquisition is the destination they have been working towards from the day they incorporated. It is also the single most legally intensive event in the company’s life — the moment when every governance shortcut, every undocumented decision, and every loose end in the cap table suddenly matters. The deal you negotiate over weeks of late nights will define not just the price you receive, but how much of it you actually keep, when it lands in your account, and what you can do with the years of your life that come after.
This article walks through the legal lifecycle of a startup acquisition under Australian law, from the first conversation with a buyer through to completion. It is not a substitute for advice on your specific deal, but it should give you a clearer picture of what is coming, where the leverage is, and where the risks live.
Two Ways to Sell a Company
There are two fundamentally different ways to structure the acquisition of a private company in Australia: a share sale and an asset sale. The choice has significant consequences for tax, transfer mechanics, and risk allocation.
In a share sale, the buyer purchases all (or substantially all) of the shares in the target company from the existing shareholders. The company itself remains intact — same legal entity, same contracts, same employees, same liabilities — but with new owners. From the founders’ and investors’ perspective, this is usually the preferred structure: it is conceptually clean, generally tax-efficient, and avoids the need to renegotiate or novate every contract the company holds.
In an asset sale, the buyer purchases specific assets and assumes specific liabilities of the business, leaving the corporate shell behind. The buyer chooses what to acquire (the IP, the customer contracts, the equipment, the goodwill) and what to leave behind (legacy liabilities, unwanted contracts, problem employees). The selling company receives the proceeds and is then typically wound up and the cash distributed to shareholders.
Buyers often prefer asset sales because they can cherry-pick what they want and leave behind unknown liabilities. Sellers usually prefer share sales because they cleanly transfer the entire business, are often subject to a lower effective tax rate (particularly where the small business CGT concessions or the venture capital concessions apply), and avoid the operational headache of obtaining third-party consents to assign contracts. In practice, most Australian startup exits are structured as share sales — but not all, and the structure is one of the first issues to negotiate.
The Letter of Intent or Term Sheet
The first written document in most acquisitions is a letter of intent, term sheet, or memorandum of understanding. This is typically a short, mostly non-binding document that records the headline commercial terms — purchase price, structure, key conditions, exclusivity period, and a target timetable.
Two parts of the LOI are usually binding even when the rest is not: exclusivity and confidentiality. Exclusivity (sometimes called a “no-shop” provision) prevents you from talking to other buyers for a defined period, typically 30 to 90 days. Once you sign, your negotiating leverage drops sharply, because the buyer knows you cannot walk to a competitor. Push for the shortest exclusivity period you can, and make sure it terminates if the buyer materially changes the headline terms.
The price in the LOI is usually expressed as an enterprise value — the value of the business assuming it has no debt and a normal level of working capital. The actual cash you receive at completion will be that number adjusted for net debt, working capital, and any deductions for transaction expenses, deferred consideration, escrow holdbacks, and earn-out structures. Make sure you understand the conversion from headline price to founder cash before you sign.
Due Diligence
Once the LOI is signed, the buyer’s lawyers, accountants, and (often) technical advisors will descend on your data room. Diligence in a startup acquisition typically covers corporate, commercial, financial, tax, employment, IP, data protection, and regulatory matters.
The bad news: due diligence will surface every problem you have ever ignored. The cap table that was never quite cleaned up after that early angel investor; the consultancy agreement that had no IP assignment clause; the privacy policy that has not been updated since 2019; the customer contract that requires consent for any change of control. Each of these has the potential to delay the deal, reduce the price, or expand the warranties and indemnities you will be asked to give.
The good news: most of these issues are fixable, and most can be addressed before diligence begins. If you are 12 months out from a likely sale, this is the time to do a pre-sale legal audit and clean up the most obvious problems. The cost of fixing them before diligence is a fraction of the cost of having them discovered by the buyer’s lawyers in week three of the process.
The Sale and Purchase Agreement
The sale and purchase agreement (SPA) is the central legal document of the transaction. It is typically long — 80 to 200 pages — and dense. The provisions that founders need to focus on are:
Purchase price mechanics. How is the price calculated, how is it adjusted between signing and completion, and how is it paid? Watch for working capital adjustments, locked-box mechanisms, and completion accounts processes — these can move the final number by millions.
Warranties. A warranty is a contractual statement about the company that, if untrue, gives the buyer a damages claim. Expect dozens of warranties covering corporate matters, ownership of shares, financial accounts, contracts, employees, IP, data protection, tax, litigation, compliance, and more. Warranties are usually given by the founders personally (and sometimes by other major shareholders), and they are the primary risk transfer mechanism in the deal.
Indemnities. Indemnities are different from warranties: they are pound-for-pound recovery rights for specific identified risks, often without the limitations that apply to warranty claims. Expect targeted indemnities for known issues uncovered in diligence — historical tax matters, employment claims, IP disputes — and resist broad indemnities that effectively re-allocate general business risk to the sellers.
Limitations and caps. The SPA will contain limits on warranty liability: a cap on total damages (often the purchase price for fundamental warranties, and a much lower percentage for general business warranties), a time limit (typically 12 to 24 months for general warranties, longer for tax), de minimis thresholds, and basket arrangements. Negotiating these limits is one of the most important things your lawyers will do for you.
Disclosure schedules. The warranties are qualified by the disclosure schedules — a detailed list of exceptions and known issues that the buyer accepts as already disclosed. Anything in the disclosure schedule is, by definition, not a breach of warranty. Drafting good disclosure schedules is a major workstream and is your primary mechanism for protecting against post-completion claims.
Earn-Outs, Escrows and Holdbacks
Very few startup acquisitions involve 100% of the price being paid in cash at completion. Most contain some combination of:
- Cash at completion — the bulk of the consideration, but rarely all of it.
- Escrow or holdback — typically 10% to 20% of the price, held in escrow for 12 to 24 months as security for warranty claims. You will get this back unless the buyer makes a valid claim.
- Earn-out — additional consideration payable if the business hits agreed performance targets in the years after completion. Earn-outs sound attractive but are notoriously difficult to manage in practice, because they depend on how the business is operated by the buyer post-completion.
- Buyer equity — particularly in tech-on-tech deals, part of the consideration may be paid in shares of the acquirer. Look closely at the lock-up, vesting, and registration rights attached to those shares.
If you have a price that is split heavily into deferred or contingent consideration, the headline number on the press release may bear very little relation to what you actually take home.
Regulatory Approvals: FIRB and the New Merger Control Regime
Two regulatory regimes can apply to an Australian startup acquisition.
Foreign Investment Review Board (FIRB) approval under the Foreign Acquisitions and Takeovers Act 1975 (Cth) may be required where the buyer is a foreign person. The thresholds depend on the nationality of the buyer, the sector of the target, and the value of the transaction. Acquisitions of “national security businesses” — including many businesses involved in critical technology, data, infrastructure, or defence — may require FIRB approval regardless of value. If your buyer is offshore, FIRB analysis should happen early.
Australia’s new mandatory merger control regime commenced on 1 January 2026 under amendments to the Competition and Consumer Act 2010 (Cth). For the first time, certain acquisitions must be notified to and approved by the ACCC before completion. Notifiable transactions cannot lawfully close until they have been cleared, and closing without clearance can render the acquisition void. The thresholds are substantial — most genuinely small startup acquisitions will fall below them — but founders should not assume this. Where the buyer is large, where the transaction crosses a market share threshold, or where the deal forms part of a series of acquisitions in the same sector, ACCC notification needs to be assessed early.
Founders, Employees and Restraints
A startup acquisition is also a major employment event. Expect the buyer to require:
- Founder employment agreements — most acquisitions require key founders to stay on for a defined period, typically two to three years, on terms negotiated as part of the deal.
- Restraint of trade — non-compete and non-solicit obligations binding the founders personally, usually running for two to five years. Australian courts will enforce reasonable restraints, but they will strike down restraints that go further than necessary to protect a legitimate business interest. Negotiate these carefully.
- ESOP treatment — the treatment of unvested employee options under the company’s plan rules. Some plans accelerate on a change of control; others do not. The plan terms should be reviewed and, where necessary, the buyer’s intended treatment of employee equity should be addressed in the SPA.
- Retention arrangements — buyers will often want to put part of the consideration into a retention pool for key employees, with vesting tied to continued employment after completion. This is usually carved out of the headline price and reduces the sellers’ net proceeds.
Tax — Briefly, but Critically
Tax planning should start months before the deal, not days before. The available concessions — including the small business CGT concessions, the 50% individual CGT discount, the early stage innovation company (ESIC) concession for qualifying investors, and the venture capital concessions — can dramatically change the after-tax outcome. So can the structure of the consideration: cash versus scrip rollover relief, deferred consideration, and earn-outs each have different tax treatments. Get specialist tax advice early, and make sure your tax adviser and your transaction lawyer are talking to each other before the LOI is signed.
What a Good Exit Process Looks Like
The founders who get the best outcomes from acquisitions tend to share a few habits. They run a clean, well-organised data room before the buyer ever arrives. They have an experienced transaction lawyer engaged from the LOI stage, not the SPA stage. They negotiate exclusivity tightly and avoid letting deals drift past their original timetable. They model the cash they will actually receive at every stage and refuse to be distracted by headline numbers. And they think hard about the human side of the deal — what they want their post-completion role to look like, how their team will be treated, and what they will do with the next chapter of their working life.
A good exit is the reward for years of building something valuable. It is also a process that rewards preparation more than improvisation. The earlier you start thinking like a seller, the better your eventual deal will be.
If you are preparing for a possible exit, working through a live transaction, or want to do a pre-sale legal audit before you go to market, get in touch.
