A Diligence Finding Nearly Killed a $38M Niagara Deal

The situation

Sanjay led business development for a mid-market acquirer that had spent most of a year scouting acquisition targets to expand into logistics software. The company he worked for was privately held, well capitalized, and had made two smaller acquisitions before, but nothing at this scale. The target was a Niagara Falls software business built around a route-optimization platform used by trucking and warehousing clients across Ontario. The founder, Andriy, had built the company from a two-person shop into roughly forty employees over twelve years and was ready to sell and move on to something else.

The parties signed a letter of intent for an acquisition priced at roughly $38 million, split between cash at closing and a smaller portion tied to the company hitting revenue targets over the following two years. Sanjay's employer retained our firm to run the legal side of due diligence and negotiate the definitive purchase agreement. Natalia, a software developer on the acquirer's technical team, was brought in alongside our lawyers to review the target's codebase, technical documentation and engineering practices as part of the diligence process.

On paper, the deal looked clean. The target had audited financials for the past three years, a diversified customer base, and no litigation history. The letter of intent set a sixty-day period for due diligence and financing before the parties intended to sign the definitive agreement and close.

What the review found

Legal due diligence in an acquisition like this runs on parallel tracks: corporate records, contracts, employment matters, tax filings and, for a software company, intellectual property. The platform being acquired was the entire reason for the deal — the acquirer was not buying trucks or inventory, it was buying code, the customer relationships built around that code, and the team that maintained it. If the company did not actually own that code outright, the value of the acquisition was in question no matter how clean everything else looked.

Natalia's technical review turned up something the corporate records had not flagged. A significant portion of the platform's routing engine — arguably its most valuable component — had originally been built by an outside contractor hired early in the company's history, before Andriy had any formal legal documentation in place. Our review of the target's contractor files found no signed intellectual property assignment agreement from that period. Under Canadian copyright law, the person who creates a work generally owns the copyright in it unless there is a written agreement transferring that ownership, or the work was created by an employee in the course of their employment. A contractor is not an employee for this purpose. Without an assignment on file, the company's ownership of a core piece of its own product was, at minimum, unclear.

Andriy was candid when we raised it: the contractor had done the work more than a decade earlier, had been paid in full, and Andriy had assumed that payment settled the question of ownership. It does not, as a matter of law, unless the contract itself said so. The contractor in question had since left the software industry entirely and had not been in contact with the company in years. There was no indication of any dispute or claim — but there was also no signed document establishing that the company owned the code its buyer was paying tens of millions of dollars for.

This is a common gap in growing companies. Founders focus on building and selling, and it is easy for a handshake understanding with an early contractor to never get formalized on paper. It rarely causes a problem until the company is sold, at which point a buyer's lawyers are specifically looking for exactly this kind of hole.

What we did

1. Quantified the exposure rather than treating it as a dealbreaker on principle. We worked with Natalia's technical assessment to estimate how much of the current platform still relied on the contractor's original code versus code that had been substantially rewritten since. That mattered, because a buyer's real risk shrinks the more the disputed component has been replaced or rebuilt by employees whose work the company clearly did own.
2. Advised against walking away immediately. Sanjay's initial instinct, shared by others on the deal team, was to treat the finding as grounds to terminate under the diligence-out clause in the letter of intent and look elsewhere. We advised that the underlying business was still sound, the risk was real but manageable, and that a properly structured purchase agreement could address it without abandoning a deal that had taken a year to source.
3. Required the seller to attempt to secure a retroactive assignment. We had Andriy's lawyer make contact with the original contractor to request a signed assignment confirming the company owned all rights to the work delivered years earlier. This is often achievable when the original relationship ended amicably, since there is little incentive for a departed contractor to refuse a request tied to a sale they have no stake in — but it takes time, and it is never guaranteed.
4. Built indemnity and holdback protection into the purchase agreement regardless. Even if the retroactive assignment came through, we did not treat that as sufficient on its own. The purchase agreement included specific representations from the seller confirming ownership of all material intellectual property, backed by an indemnity specific to this issue, and a holdback of part of the purchase price placed in escrow for a defined period after closing to cover any claim that might still surface.
5. Renegotiated price to reflect the residual risk. Because the contractor could not be reached before the closing timeline expired, no retroactive assignment was obtained in time. We negotiated a reduction to the closing price and an increase in the escrow holdback, shifting more of the deal's value into the portion contingent on no claim arising, rather than cash paid unconditionally at closing.
6. Documented a right to pursue the seller directly if a claim materialized. Beyond the escrow, the agreement preserved the acquirer's right to seek further recovery from Andriy personally, up to a capped amount, if the original contractor ever surfaced with an ownership claim after the escrow period ended.

The outcome

The deal did not close on the original sixty-day timeline or the original terms. It took roughly ten additional weeks of renegotiation before an amended definitive agreement was signed. The final purchase price came in about $3 million below the original letter of intent figure, with a larger share of that reduced amount held in escrow for eighteen months rather than paid at closing. Andriy accepted the adjustment; he had built genuine value in the company and did not want to lose the sale over an issue rooted in a decade-old oversight, but he was frustrated at the price reduction and said so during negotiations.

Sanjay's employer completed the acquisition on the amended terms. The retroactive assignment from the original contractor never materialized — the contractor could not be located within the negotiation window — so the ownership question technically remains unresolved to this day. What changed is that the acquirer is no longer carrying that risk without a financial buffer against it. If a claim is ever made on the disputed code, the escrow and the personal indemnity from Andriy give the company a defined path to recovery instead of an open-ended dispute.

No claim has arisen in the time since closing, and the platform has continued to be developed and substantially rewritten by the acquirer's own engineering team, which further reduces the practical exposure with each passing year. This was not a clean win for either side. The acquirer paid less than it originally agreed to, which is a real outcome worth naming honestly, and Andriy received less than the number he had celebrated when the letter of intent was signed. Both sides also avoided the alternative, which was a collapsed deal, a year of sourcing work wasted, and a founder left holding a company he had already mentally sold.

What you can learn from this