Software Licensing in M&A

21 sep '13 - Mark van Wolferen
software-licensing-m-and-a

Software license inventory is low priority during an M&A but critical to a smooth transition. Learn how an inventory helps you avoid additional costs and hassle, and where it fits in an M&A.

Software License Inventory is Critical in Successful M&A

During a business merger or acquisition (M&A), software license inventory and compliance are often low on the priority list. But the legal and financial repercussions of noncompliance can be steep, and they seem even harsher on the company funds and reputation immediately after the hassle and cost of an M&A. To avoid the legal and financial consequences of software license noncompliance, it’s vitally important to conduct a thorough and accurate software inventory before the M&A is completed.

Legal and Financial Impact of Noncompliance

Businesses using unlicensed or under-licensed software violate intellectual property and copyright laws. This leads to several major problems, including:

  • Increased number of license audits from software vendors;
  • Large purchases of licenses to cover software usage and damages;
  • Fines for copyright violation;
  • Lawsuits from software vendors.

Lawsuits and fines are bad enough, but noncompliance can have less obvious repercussions. For example, poor license management and legal problems reflect poorly on the company’s reputation, which can scare away customers and employees - not to mention shareholders. You may not only have to pay for legal fees and damages after the large expense of a merger or acquisition, you also easily could lose money from declining sales and lower productivity.

How a Software License Inventory Can Help

Taking an accurate inventory of all the company’s software licenses and usage before M&A completion is key to avoiding all those legal and financial problems. A thorough software inventory determines the value of a large and fundamental company asset, shows exactly what products you have in place and how these are used, and helps you make sure everything is licensed and operated properly.

For many companies, their software is one of the biggest assets. While hard assets like buildings and machines are typically easy to value during an M&A, software is often valued incorrectly. In many cases, the software assessed is the relatively cheap desktop software, instead of the licenses and true usage requirements of complex enterprise software. An incorrect estimate can dramatically affect the outcome of the M&A for both the buying and selling company. A thorough and accurate software inventory correctly values this business asset, so the M&A can be completed smoother and with fewer problems.

Such an inventory also helps companies see exactly what software they have in place and how it’s being used. This gives the selling company time to correct an unlicensed or under-licensed situation, and prevents the buying company from acquiring that situation and all the legal and financial problems that come with it. Tracking licenses and  usage allows the company to drop or re-assign licenses to other employees or business units, helping you save money and increase efficiency.

Where Software License Inventory Fits in an M&A

First, ensure the M&A agreement allows enough time to take an accurate software license inventory and claim any gaps or shortcomings. Also include in the M&A that any shortcomings can be collected from the previous owners, including the cost of software noncompliance. We’ve seen compliance cases that went over $400 million USD. A proper inventory can help you avoid that cost, and a good M&A agreement makes sure both parties pay their fair share.

Next, the acquiring company should assess the quality of their software license management. A strong management system makes the merger or acquisition much easier, helps prevent a future unlicensed or under-licensed situation, and reassures software publishers if they choose to audit after the M&A is completed.

Third is the actual software license inventory itself. This should be started approximately 3 months before the acquisition date and completed no more than 6 months after the acquisition date. Most software companies allow a grace period of 6 months for mergers and acquisitions of companies.

After completing the inventory, you can acknowledge any gaps, collect any claims, and take action to correct the situation if necessary.

Finally, inform the software publishers of your M&A and your inventory at the appropriate times. Many software companies will perform an audit when the merger or acquisition is complete to verify compliance. Keeping them up-to-date makes things easier for everyone involved.

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