Top Three Tips to Avoid Additional License Costs and Risk During M&A

PWC reported in their mid-year update that ‘Global M&A volumes and values declined during the first half of 2023 (H1’2023) by 4% and 12% respectively …” However, they were expecting that, “ … the second half of the year will see more exciting — and transformational — M&A opportunities.”

This upbeat forecast for M&A is great news for businesses looking to onboard new skilled staff, access additional funds or company assets, expand into new geographies and a wider customer base, diversify and reduce competition, and achieve their inorganic growth ambitions.

It’s also an expensive business where costs associated with employees, office space and technology can be substantial financial commitments. There is a myriad of costs associated with M&A — one such misunderstood, overlooked or little-known cost can be the impact on either business’ software license estate.

This post will highlight the important software license considerations you should be aware of if you embark on an M&A and offers 3 top tips on what you should do to prevent unbudgeted financial cost and risk.

What Does Your License Grant Say?

From your software vendor’s perspective, a merger or an acquisition (in fact any kind of infrastructural or business change that impacts your software) is an opportunity to approach your organisation for a ‘conversation.’ The vendor is exercising their right to ensure that you are correctly licensed regardless of the scenario and if they suspect non-compliance, can request a formal audit. More on this later.

Your software license grant will generally state that it’s granted to a specific company or entity, or minority-owned subsidiary organisation. The problems can start if the software licenses are granted to a company that is then acquired — it’s possible that those licenses won’t automatically apply to the new parent organisation.

In this scenario, you need to carefully examine your license grant to understand what will happen in the event of a merger or acquisition.

• Will the grant roll over or does it apply upwards to the new parent company?
• Do you have a specific clause that says that ‘entity change’ doesn’t apply to joint ventures, or only applies to minority holdings?
• Does the license grant terminate after a merger or acquisition? If it does, this could leave you with no licenses, which would be a big problem if you were assuming that everything would be ok. This massive non-compliance breach, which more often than not, may not be uncovered until a vendor audit, creates a highly unfavourable financial risk.

It’s not all bad news however — it’s entirely possible that once you review your contracts, you may uncover conditions that you could utilise to your advantage. License grant validation before or at least, as part of the M&A due diligence is a critical element of your processes and identifies the best way forward. Don’t make assumptions — this could be a costly mistake. We all know the saying about ‘assuming’.

Software Vendor Approach During M&A

Revisiting my earlier point about software vendor behaviours during your M&A activity — they will come knocking and they will want to understand your new business structure.

Your software vendor will be keen to ensure that any suspected breach of license compliance is fully understood in the form of a formal audit. In isolation, a software audit can be inconvenient to BAU, however, in the middle of M&A activity, this additional workload could be extremely disruptive to your business with the potential for a financially punitive outcome. In a time of high expense, further non-budgeted costs resulting from software noncompliance would be extremely unwelcome.

Three Top Tips to Avoid Cost and Risk During M&A

1. Carefully examine your license grants as part of your M&A due diligence. Engaging with a third-party independent license expert will help to decipher your paperwork and plan the best way forward for the new business.
2. Plan for engagement with your software vendors. If you’ve got all the information to hand and you understand what the likely end point looks like, then you will be better prepared for your vendor discussion.
3. If you have reviewed your license grants and know that you’re going to have to buy additional licenses because of the new organisational structure, you can prepare for this scenario and allocate budget accordingly, during your M&A due diligence stage. If you overlook this task, you could end up with a large unbudgeted software bill.

Summary

Forewarned is forearmed. Study your license contracts carefully before approaching your software vendors. In this way, you are establishing a positive vendor conversation on your terms, as opposed to unwittingly creating a potentially confrontational vendor engagement further down the line.

Engaging with Version 1’s SAM Team facilitates access to license and software asset management experts. We are deeply familiar with enterprise vendor license contracts and terms and can support your business through the entire entitlement discovery process, vendor engagement and negotiation stages.

If you have any questions or require more information, visit our website or contact us for a confidential discussion.

This content is also available as a short video chat which you can watch below.

About the Author:
Jason Pepper is a SAM Practice Head here at Version 1.