The Due Diligence Question You're Not Expecting
No one would sell their company without consulting their CFO and general counsel. Historically, very few companies have included the chief information officer (CIO) in this process. The obvious information technology issues are usually covered, such as intellectual property, proprietary software and applications, contracts with carriers, and so forth.
However, what about software licensing? Are you licensed to sell? If not, the costs could be significant, and it could jeopardize the sale of your company.
We have all heard stories about software companies that start in someone’s garage and after two years sells for millions. Even such stellar success does not exempt the company from software licensing laws. The manufacturing or construction company with hundreds of employees that has purchased and licensed third-party software must follow the exact same licensing regulations. Nobody is exempt.
When a company sells or merges, there are some employees who do not make the transition and exit the company. Are they all happy? It only takes one disgruntled former employee to call to the Business Software Alliance and trigger a software audit. A company with 1,000 employees could easily face fines ranging from a few thousand dollars to millions.
There are five software licensing issues that could impact the sale of your company. When performing your due diligence, make sure you review the licensing for each type of software you use.
1. Microsoft Office Microsoft Office is the most common software used in business today. You need to have a license for each machine that is running the MS Office Suite, and the license needs to reflect the version of the software that's actually in use.
2. Creative Suite Big software fines are common from Adobe or Oracle. Even virus protection companies like MacAfee or Norton may levy fines if software licensing is not up to date.
3. Servers Servers need licenses for both the Operating System (OS) such as Windows 2008 or 2012 Server, and for the application, such as Exchange or SharePoint.
4. CALs The CAL or Client Access License is the most expensive server-related license. A variety of these are required to operate your Microsoft network. A separate CAL is required for each user and each function.
For example, if your company runs Exchange for email and has 100 mailboxes for 90 users, you need the following licenses:
- Microsoft Windows 2012 Server for the server that runs email.
- Microsoft Exchange 2010 or 2013--licensing for the mail application.
- One Exchange CAL for each user--90 in all.
- Since Exchange uses Windows authentication, you need 90 Windows CALs.
- CALs are generally sold in a bundle, so you should have some version of Windows Professional or other CAL that includes Windows, Exchange, SharePoint, and Linc.
Some companies may have CALs for devices rather than users. You should also verify the version on your CALs. They generally need to be upgraded along with your software.
Finally, during due diligence, ask if the company has Microsoft Software Assurance. Among its many benefits, it acts as an insurance policy from Microsoft. You pay more for your software when you purchase it originally, but automatically receive upgrades to the new versions when available.
As we all know, there are hundreds of issues to review during the M&A process. If you are thinking about selling your company, you should create an IT licensing check list that is reviewed on a regular basis to ensure you are licensed to sell.
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