Open Source Due Diligence: An Essential Step in the Acquisition of a Software Company

Open-source software has gained significant importance in recent years and can now be found in nearly every company. It provides a cost-effective solution for businesses to access innovative technologies and enhance their digital offerings. However, the use of open-source software also carries risks, particularly concerning compliance with license terms.

Every open-source software is associated with a specific license that governs its use and distribution. These licenses can range from very permissive (such as the MIT License) to highly restrictive (like the GNU General Public License). Non-compliance with licensing terms can result in legal consequences, including copyright lawsuits and claims for damages.

Therefore, reviewing open-source software is crucial during due diligence. Companies must ensure they have a comprehensive understanding of all open-source components used in their software and comply with each license's conditions. This is vital not only for legal security but can also significantly affect the company's value and the final purchase price.

Conducting open-source due diligence is a multi-step process that requires careful planning and execution. The first step involves a technical examination of the open-source components used. This includes identifying all open-source software embedded in the company's products or services. It is essential to consider not only primary applications but also smaller tools and libraries used in software development.

Once all open-source components are identified, the next step is reviewing the associated license terms. Each component has a specific license governing its use and distribution. It is critical to understand and adhere to each license's terms to ensure compliance.

Finally, the company must fulfill all formal requirements associated with open-source software usage. This may include providing copyright notices, disclaimers, and other information required by the license.

Thorough open-source due diligence can require significant time and resources, but it is a worthwhile investment. It helps minimize legal risks, protects the company's value, and ensures a smooth transition during company acquisitions.

Despite meticulous planning and execution, issues may still arise during open-source due diligence. These can range from minor license infringements to significant legal risks. When such issues are identified, there are several ways companies can address them.

One approach is to resolve the identified issues by adjusting open-source component usage, changing licensing conditions, or fulfilling formal requirements. In some cases, however, remedying these issues might not be practical or economical.

In such situations, it may be necessary to adjust the purchase price to reflect potential costs and risks associated with the identified issues. Alternatively, indemnification clauses can be included in the Sales and Purchase Agreement, where the seller assumes liability for certain risks and compensates the buyer for potential losses.

It's essential to emphasize that identifying and addressing issues is integral to open-source due diligence. Only this way can companies ensure complete control over their software assets and minimize legal risks.

Conducting open-source due diligence is a critical step when acquiring a software company. It enables buyers to gain clarity on open-source components used by the target company and ensure compliance with licensing conditions. This minimizes legal risks and protects the company's value.

Moreover, comprehensive open-source due diligence can significantly impact the purchase price and contract terms. Identifying issues can lead to price adjustments or indemnification clauses in the purchase agreement, protecting the buyer from unexpected costs and risks.

In summary, thorough open-source due diligence is not just a best practice—it is an essential assessment when acquiring a software company. It helps leverage the benefits of open-source software while simultaneously minimizing legal risks and safeguarding the company's value.