As we’ve often said, when it comes to acquisitions, IT due diligence often gets glossed over or even forgotten amidst all the financial assessments. But, as we’ve also shown, a lack of thorough IT due diligence can be quite costly, even for “low-tech” acquisitions.
Today we’ll dig into just one aspect of due diligence where not knowing can leave you with costly blind spots: software licensing.
Every company uses software
Practically any company today uses software in one form or another. Even your lawn maintenance guy uses Quicken to print your bill, or Excel to keep track of payments. If you were to purchase that business, and Microsoft or Intuit found out the previous owner hadn’t paid for it, they could press charges. In that case you’d probably just plunk down a few hundred dollars for licenses, and that’d be it.
However, when you acquire a business full of professionals, each using a full suite of office productivity tools, you’re facing a different situation. You’d better hope that company’s IT team has budgeted—and paid—for an enterprise license software agreement. Those software companies won’t be nearly so understanding about a sizable company using pirated copies of their software.
But in the enterprise, there’s far more than word processing, presentations and spreadsheets to worry about. Even companies you don’t think of as “hi-tech” have billing, accounting and customer support software. The larger the company, the more likely they are to have relational databases and more complex applications like CRM and ERP. And when you get into industries like healthcare, engineering and technology services, you’re talking about highly-specialized—and expensive— software.
Properly licensed means properly paid for
Is every seat, for every piece of software, used in every department and division of your target company paid for in full?
You might be tempted to assume the answer is yes, but that may not be the case. Even if a company representative answered “yes” to this question on a due diligence survey, you can’t assume that person answered truthfully. The respondents themselves may not know the true answer, or in some cases they simply be trying to make the company look more attractive for acquisition.
This is an area where it’s beneficial to interview persons not normally in-the-know about the proposed acquisition. Before attempting this, you should get clearance from both companies’ due diligence teams, since stray speculation and doubt can cause undue stress on personnel.
To get the real picture, you should talk to various persons in the company’s IT and DevOps teams. Being developers themselves, these team members know the effort required to create a software product. If the company uses unlicensed software, these persons will almost certainly be less than enthusiastic about the situation—and more likely to tell the truth about it.
Someone will pay—will it be you?
Whether it’s an office productivity suite or a cloud-based CRM, the company that developed the software has a legal right to the license fees for using it. If your acquisition target hasn’t paid for it, then you have to factor in the real costs to make its licenses compliant.
You want to discover this before the deal is signed. It’s better for the interviewed IT employees to tell you than to tell the authorities. Stressed or upset employees are known to do such things. And it’s much better for you to know about potential future costs ahead of time.
Also, many private equity professionals have discovered that IT teams can be defensive and/or territorial when it comes to the M&A discovery process. So bringing in a third party IT services firm to do IT due diligence can go a long way in getting honest, helpful answers from IT personnel that feel besieged.
Does your pending acquisition or carve out put you at risk for software licensing and other hidden technology costs? Take our free online assessment to find out how much technology risk exists in your acquisition.