What to watch out for when buying a Tech business

Legal issues when buying a technology business

The process starts with the heads of terms. Clearly drafted and carefully negotiated heads of terms can streamline the transaction, reduce uncertainty and help control professional fees.

Technology acquisitions require careful consideration of intellectual property, software, contracts and potential liabilities. Our role is to tailor the transaction documents to the business, investigate key legal risks and negotiate appropriate protections to safeguard your position.

How to fully investigate what IP is included with the business

A buyer needs to establish that the seller owns, or has the necessary rights to transfer, the technology and intellectual property being acquired. Key considerations include whether:

• The seller has the legal right to transfer the relevant technology and intellectual property rights.
• The seller is required to take reasonable steps to transfer ownership and provide the necessary supporting documentation.
• The intellectual property is transferred free from charges and third-party rights, subject to any agreed exceptions.
• The software and technology operate as expected, with bugs, defects, required enhancements and associated costs identified.
• Trade secrets and confidential information are adequately protected.

Who owns the IP?

A buyer should not assume that the seller owns all the intellectual property used in the business. Due diligence should establish how the technology was created or acquired, who owns it and whether any third-party rights restrict its use or transfer.

This is particularly important where software has been developed by employees, consultants or external developers, or incorporates open-source software and third-party components. Relevant assignments, licences and consents should be identified before completion.

Use of escrow accounts

For software acquisitions, escrow arrangements may help protect the buyer where access to source code or satisfactory testing is important. Depending on the transaction, an independent escrow agent may hold source code or other materials and release them when agreed conditions are met.

A testing period may allow the buyer to assess whether the software meets specified requirements before completion or release of funds. The parties should agree the testing criteria, timetable, consequences of defects and any rights to terminate or require remedial work.

Escrow arrangements should be tailored to the transaction: holding source code and releasing purchase consideration are distinct mechanisms, each requiring appropriate contractual terms.

Due diligence when buying a tech business or IP

Due diligence is essential in a technology acquisition. The review should cover:

• The nature, ownership and scope of the intellectual property rights being acquired.
• Existing and potential liabilities that may affect the buyer.
• The benefits, restrictions and risks associated with existing intellectual property licences.
• The documentation needed to transfer intellectual property and related assets.
• Any third-party consents required for the sale, transfer or continued use of technology and contracts.

Key contracts

A buyer should review employment contracts, consultancy agreements, framework agreements, collaboration arrangements, software licences and material customer and supplier contracts. The review should identify restrictions on assignment, change-of-control provisions, termination rights, service commitments and obligations that could affect the value or continued operation of the business.

Disclosure letter when buying a technology business

The buyer will usually seek contractual protection through warranties and, where appropriate, specific indemnities. The seller will generally disclose relevant matters against the warranties so that the buyer can assess known risks and their potential impact.

The disclosure letter is therefore an important transaction document. The disclosure process helps define the scope of the seller’s warranty liability, subject to the terms of the acquisition agreement. Without appropriate disclosure provisions, the parties may face uncertainty over which matters qualify or how claims should be assessed.