How To Plan for Success When Selling A Technology Business

Intellectual property (IP) is one of the most valuable assets for many technology businesses.

A potential buyer will want to make sure they are acquiring the IP as part of the acquisition. A seller should review to ascertain what IP they own.

If the seller comprises various group companies, part of this review would be determining which entity within the seller's group owns the IP and which entity should own the IP.

If the IP does not sit within the correct entity, a seller should ensure the IP is assigned appropriately to the target business or other group company before any sale takes place, together with an appropriate licence to or from the target business.

There is also the issue of establishing whether the business owns the IP it thinks it owns, which is particularly essential if there is proprietary software or other technology which provides most of the value to the business.

Where a third-party developer for the business has created IP, it is advisable to ensure that there is a written agreement in place with the third-party developer and that the IP has been correctly assigned to the business, as the default position under the law is that the IP is the property of the creator (i.e. the third party developer, even where the business has paid for such development work).

If no terms are in place or these rights have not been assigned, the technology business may seek confirmatory deeds of assignment of such IP before completion.

A seller should also ensure any registrable IP is registered so that the public records reflect the actual position.

Technology businesses often provide outsourced services for their customers.

The seller should ensure that all its outsourcing terms are up-to-date, including any service levels and data processing terms provided to its customers.

A key issue to identify is whether transferring the technology business to the buyer will trigger a transfer of employees under the TUPE Regulations 2006.

To prepare for this, a seller should identify those employees who are or may be in the pool of transferring employees at the time of the transfer, as this will not only assist with the due diligence process but also with the seller's obligation to provide specified 'employee liability information' at least 28 days before the transfer.

Many technology businesses are re-sellers (i.e. they re-sell products or services provided by a third party (e.g. Microsoft).

If the target re-sells software under a licence agreement, a buyer will want to review the terms of any such agreement to ensure they are comfortable with the terms they will be assuming or inheriting.

The seller should ensure written licence terms are in place and any existing licence terms are reviewed so that any business sale won't place the buyer in breach of the licence after completion or give the licensor rights to terminate the agreement.

In circumstances where the licence agreement contains a change of control provision, the seller should consider whether they should approach the licensor for consent to the sale to avoid delays to the transaction timetable.

Technology businesses should also consider the standard terms of their licence and how their licensing model may have evolved.

In particular, a technology business should be careful when licensing software on a perpetual basis for a lump sum, as this can risk being deemed equivalent to selling the software to a customer.   

Another key concern that a potential buyer would want to assess would be how much of the proprietary software of a technology business is comprised of or integrated with open-source software (OSS).

Therefore, a useful exercise a seller can undertake is to review its software for OSS and identify under which OSS licences such components (if any) are made available.

OSS can be restrictive or permissive, and depending on the exact terms of the particular licence, it can require that some or all of the business's software integrated with OSS also be distributed without restrictions.

This may be a key factor in a buyer assessing the value of the business.

If the business is part of a larger group of companies, it should identify and consider how to deal with any assets, contracts, systems and services shared across the group.

In particular, if proprietary software or other technology is essential to the group's business and will have to remain with other group members post-sale, then assignments and licenses will need to be put in place before completion.

Also, a buyer may require the seller or its group to continue to provide certain services or resources for a period of time following completion (until the buyer integrates the business into its group or procures the services from a third party).

This will most commonly be provided in a transitional services agreement. The scope and extent of the services required must be ascertained as soon as possible.