IT Must Have a Seat at the Due Diligence Table
Software License Compliance Is a Critical Issue in M&A
By Michael French, CPA, ABV, CFE, Managing Director
In the due diligence phase leading to a business combination, IT represents a key area that stands alongside finance, operations, and human resources in its importance to the success of a transaction. The CIO or IT director of a merging company should have a seat at the table from the earliest stage of negotiations.
As IT has become a major factor in a company's operational and strategic success, so has its importance to its value. Consequently, IT can represent one of the biggest risks in an M&A deal.
Unfortunately, IT is not dealt with in many transactions until later in the process, when problems that could have been addressed earlier can stop a deal in its tracks. In those transactions, discussion about IT during negotiations frequently focuses on how data will be transferred to the new entity without examining other critical IT issues.
Licensing: A Critical Issue
Many large software companies have formal software audit programs to identify non-compliance with licensing agreements. In some cases, these audits have revealed non-compliance issues that resulted in demands for additional fees reaching the nine-figure range; numbers that are large enough to stop a business combination or impact valuation.
Besides the basic questions about the quality of data and the method of data transfer upon completion of the transaction, buyers should ask more probing questions during due diligence, and sellers must be prepared to answer them with documentation. Questions should include the following:
- Do you have an active software license management compliance program? Lack of consistent software license compliance management can result in a higher number of users than allowed under a license, as well as other costly violations.
- Are you using a software license management tool to track your use of third-party software? Many companies still are not using license management tools, and if the company you are considering is one of them, they may not comply with license agreements.
- Have you moved third-party software from your on-premises environment to a cloud platform? In some cases, moving software to the cloud can result in increased computing capacity that exceeds what is possible in the on-premises environment. If this is the case, software license agreements must be reviewed to determine if there is any non-compliance.
- Will this transaction result in an assignment of software licenses that violates any anti-assignment provisions of license agreements? Many software licenses prohibit assignment without payment of an assignment fee when the licenses are transferred from one entity to another.
Involve IT at All Phases of Due Diligence
To evaluate and resolve IT issues during due diligence, high-level IT personnel must be involved from the beginning, from the pre-signing phase through execution and post-closing.
For more information about IT due diligence, contact your PKF Advisory team member or:
Michael French, CPA, ABV, CFE