Essential legal issues when buying or selling a business in the SaaS/AI sector

AI capability and the AI assets of the target entity are now a key driver in deals in the SaaS sector. They determine price and, because of the speed of innovation, inject an added element of risk for buyers and sellers alike. Assessing customer churn rates, for example, a key metric when valuing any AI/SaaS business, has become a more nuanced exercise.

In our experience, customers are more willing to abandon products quickly in the face of constant innovation and fresh iterations of newer, more tailored products coming to market. For buyers, this makes predicting future value, growth, and sustainability of the business more challenging. Sellers should be ready to defend churn rates robustly, providing the buyer with cogent reasons for customer departures. They should also deal promptly with any bugs or weaknesses in their systems (that may be causing churn) well in advance of completion.

SaaS businesses with integrated AI tools are subject to a variety of onerous regulations, including UK GDPR and UK Competition law. Differing approaches to AI governance across different international jurisdictions must also be considered.

UK GDPR

From a GDPR perspective, these businesses use, or will have used, significant personal datasets to develop products and bring them to market. Where data has been unlawfully processed, there is a real possibility of ICO intervention that could be hugely damaging financially and reputationally for the target business.

Buyers will inherit liability for historic breaches, so extensive GDPR compliance checks should be made at due diligence stage. Sellers who can demonstrate lawful processing and a good compliance record will strengthen their position among potential buyers.

Competition Law

Regulation by the UK’s Competition and Markets Authority (CMA) will also be a factor in any M&A in the AI/SaaS sector. We have witnessed more active scrutiny of deals with the CMA anxious to prevent anti-competitive data bundling and the possibility of monopolies arising.

Even where the prescribed benchmarks for intervention are not met (for example, the potential new entity does not meet a certain market share), the CMA still has a discretion to investigate and halt deals where they suspect larger players in the sector are targeting smaller rivals to stifle competition.

International AI governance issues

Buyers and sellers should seek advice on the governance of AI itself. Different approaches to regulating the technology have been taken in the UK, US, and the EU, for example. Consideration must be given as to how these differing international legal frameworks could affect the target entity in future.

Issues around IP ownership play a fundamental part in the due diligence process of any SaaS/AI merger. Most of the value in these businesses is bound up in IP and associated rights rather than physical assets. Buyers must be satisfied that they are purchasing ownership of specific IP assets and that, post-completion, key business features cannot be taken over or shut down by a third party because of weak or non-existent IP rights.

Particular attention should be paid to assets like custom-trained large language models (LLMs), training datasets, and AI agents, as well as bespoke products relating to code generation and workflow automation systems.

TUPE and other employment law regulations affect mergers and acquisitions in this sector as in any other. Additionally, those entering or exiting the AI/SaaS industry will be keenly aware of the value of key developer, engineering, and data scientist talent to the business.

Sellers may wish to consider proactively enhancing employment contracts as part of any pre-sale strategy, ensuring that, as far as possible, essential staff will transition with new owners post completion.

Where it appears that key staff will depart, it is essential to implement robust restrictive covenants and ensure that there is legally enforceable assignment of IP rights from developers to the business, where possible.

Many technology related businesses have issued employee share incentives as a way of engaging and retaining key staff during early development stages.  These incentive schemes require close analysis and attention at a time of exit as buyers and sellers alike assess the consequences, which can include transactional timescales, confidentiality, and tax.

The rapid pace of development and the divergence in regulation internationally present unique risks for anyone entering or exiting the AI/SaaS sector. Added to these challenges is the fact that many existing customer contracts the target entity has in place will have been drafted before generative AI existed.

There will be areas of uncertainty, therefore, around data usage, liability, transparency, and control. This increases the need for the parties to negotiate comprehensive and enhanced warranties and indemnities, in particular, to cover limitations in IP ownership, infringement of data protection law, and misuse of training data.

We have highlighted key areas of concern but there are a range of other factors that must be taken into account. These include questions over future liability for AI-generated outputs, deal structuring, and financing considerations and the issue of management and processing of cross border data flows.

AI/SaaS businesses operate in a fast-changing commercial environment, and M&As in the sector present undoubted opportunities for buyers and sellers. But, with the industry as a whole undergoing fundamental realignment, there are serious risks that must be confronted in the course of any transaction.

DMH Stallard has the resources and expertise to advise on all aspects of M&A deals in the AI/SaaS sector, including advice on routes to market where appropriate.  We will ensure your transaction proceeds as smoothly as possible. Remember, our team of expert Sales, Acquisitions and Mergers lawyers is backed up by others working in areas such as Employment, IT and Cyber Law. DMH Stallard has been an early adopter of AI legal tech.

For an initial conversation get in touch.

At DMH Stallard our Sales, Acquisitions and Mergers lawyers are highly active in the Saas/AI sector, advising a wide range of software and SaaS providers and AI businesses, including  those operating in the FinTech, RegTech and MedTech industries. Many of our lawyers have spent lengthy periods working in-house with clients. As a result, our approach to the governance aspects of any deal is always commercially aware, pragmatic, and legally sound.

Whether you are selling or acquiring a technology business, we will help you navigate the key issues with certainty. We add value by reducing deal risk and minimising future legal exposure through extensive due diligence and negotiation of appropriate indemnities and warranties.

Our deal experience includes selling SaaS targets to a large listed European software, data, and AI solutions entity as well as establishing, advising, and assisting with the listing of an AI usable data model on AIM.