What to watch out for when buying a Tech business

Legal issues when buying a technology business

The starting point is the heads of terms stage. Well thought out and well negotiated heads of terms leads to a smoother process with reduced professional fees.

There are basic terms which are included in most sale and purchase agreements involving technology and/or intellectual property. Our job is to ensure you get a bespoke agreement, invetigating the key legal risk areas and negotiating for key protections so as to reduce risk and enhance your position.

How to fully investigate what IP is included with the business

A buyer will want to ensure that the seller has full title to the technology and any intellectual property rights being acquired. Full title implies the:

• seller has the right to dispose of the technology intellectual property rights.
• seller will, at his own cost, do all that it reasonably can to give the buyer title to the technology or IP acquired.
• technology IP rights are assigned free from charges and third-party rights.
• IP and software operate as expected.  Bugs and enhancements need to be established and costed.
• trade secrets are adequately secured.

Who owns the IP?

Ownership of the technology in terms of its creation or previous acquisition should be considered and you should never assume it's definitely the seller without in-depth checks and due diligence.

Use of escrow accounts

With software, you need to consider the timing of the sale. Often in a software sale, an escrow company is designated in order to safeguard the buyer’s interests. The idea is that the buyer has a chance to test the software before buying.  The seller is then able to disclose against the testing window offered via the escrow company and limit liability for matters such as bugs and software defects.  The process of testing can extend the period between exchange and completion of contracts.

Escrow accounts can be used to extend security for the sale consideration pending satisfactory testing.

Due diligence when buying a tech business or IP

Any transaction involving intellectual property requires due diligence. The due diligence exercise breaks down into:

• The technology IP rights as they exist.
• Liabilities the buyer could be taking on.
• The benefits and risks of any existing IP licence agreements.
• Assignment of rights.
• What consents are needed to sell the business or assets.

Key contracts

A buyer will want to inspect and carefully consider any employment contracts, framework agreements, collaboration agreements, licence agreements and business contracts to make sure that the business sellers have run business properly.

Disclosure letter when buying a technology business

The buyer will want indemnities to protect against risk. The seller will need to give sufficient details to enable the buyer to understand the issues and assess the impact. The seller will then seek to limit liability through the use of disclosure. The disclosure letter is an important document. Without a disclosure letter the seller is potentially exposed to claims which will be offset against the purchase price.