Acquiring a software company is much like acquiring any company in that thorough due diligence needs to be conducted. That being said, there are five factors that are critical when examining a software company for acquisition.
M&A Software Transaction: 5 Questions to Ask
(1) Can the seller prove ownership of the source code? It’s important for the buyer to know that the source code is owned or was created by the seller.
(2) Will the software programmers that created the code stay with the company post acquisition? This is important, particularly with complex software programs as it’s difficult for outsiders to understand the architecture and features.
(3) Many times, sellers will offer their key employees, especially software programmers stay bonuses that match whatever time period the buyer is requesting. While that’s fine, many buyers have been quite surprised that after the magical time period that a majority of the employees leave. Therefore, it’s important for the buyer to know that any employee that has been offered a stay bonus may quit as soon as the time period is fulfilled. Such key employees may need additional incentives to stay beyond that bonus period. The best way to cover this is via a rep and warranty in the Definitive Agreement that reveals if stay bonuses are being paid and to whom.
(4) In any business, customers are critical as they provide the cash flow. The important question is how committed are they to the business being sold. If the customers are running important software programs and are worried that the new buyer won’t support them adequately, there might be a huge risk of them switching to another vendor.
(5) Another important point is to make sure that software license sales prior to closing don’t contain future obligations of updates or to maintain such software. That could be a very expensive obligation for a buyer.
