Software companies
Will a prior code license show up in M&A due diligence?
By SourceX Editorial · Reviewed by Noah Loul ·
Short answer
A prior code or data license will almost always surface in M&A due diligence, because acquirers ask for every outbound IP license and the purchase agreement usually requires you to list them. A well-documented license that is non-exclusive, time-limited, limited to training and evaluation, and clear on deletion is usually a routine disclosure, not a deal problem.
Key takeaways
- Acquirers find outbound licenses through data room requests, IP representations, revenue review and code scans.
- Exclusivity, perpetual rights and consent requirements on a change of control are the terms that slow deals.
- A delivery manifest showing exactly what was licensed answers most diligence questions in one document.
- The license's confidentiality clause should allow disclosure to prospective acquirers under NDA.
- Board approval and any investor consents should be in the minute book before a buyer asks.
How do acquirers find a prior code license?#
Acquirers find prior code licenses through several overlapping channels, so assuming a license will go unnoticed is a mistake. The diligence request list asks for all material contracts and every license of intellectual property granted to third parties. The purchase agreement then typically asks the seller to represent that the disclosure schedules list every such license, which turns any omission into a potential breach claim.
Financial diligence finds the revenue line. A quality of earnings review is likely to ask what a non-recurring licensing receipt was and whether it will repeat. Technical diligence may find a delivery script, an export bucket or an access log. If the buyer is using representations and warranties insurance, the underwriter is likely to ask about IP licenses too.
Timing changes how the same license reads. Disclosed in the first data room upload, it looks like ordinary business. Found late by the buyer's own team, it looks like something the seller hoped to avoid, and it invites wider questions about what else is missing.
What acquirers want to know about the license#
Acquirers want to know whether the license limits what they can do with the code after closing, whether it creates continuing obligations, and whether it was properly authorized. Having the answers ready keeps the license a short conversation.
| Diligence question | Why it matters | Document to have ready |
|---|---|---|
| Is the license exclusive in any way? | Exclusivity can block the acquirer's own plans for the code | Executed agreement with the grant clause |
| What use is permitted? | Broad use rights look like a transfer of the asset | Permitted use and restrictions clauses |
| What exactly was delivered? | Scope defines what a third party now holds | Delivery manifest with repositories, date ranges and exclusions |
| When does it end, and what happens then? | Perpetual rights stay with the asset forever | Term, termination and deletion clauses, plus any deletion certificate |
| Does a change of control need consent? | Consent rights can delay or complicate closing | Assignment and change of control clauses |
| Are there ongoing obligations? | Refresh deliveries or support duties pass to the buyer | Schedules for future deliveries |
| Was it properly approved? | Authority gaps raise questions about every other contract | Board resolution and investor consents |
| Were third-party rights cleared? | Contractor, customer and open-source issues can become claims | Rights review notes and license inventory |
Which license terms worry buyers?#
The license terms that worry buyers are the ones that make the code less exclusively theirs after closing or that create liabilities they cannot size. Most of them can be avoided at signing at little cost to the deal itself.
Exclusivity is the biggest single concern, even when limited to a field of use, because it constrains the acquirer's freedom. Perpetual and irrevocable rights come next, especially when paired with permission to use the code for any purpose. Assignment clauses that require the licensee's consent on a change of control give a third party leverage at the worst moment.
Less visible terms matter too: a most-favored-licensee clause promising the same terms as any later license, an uncapped indemnity, or an obligation to deliver future code. Each one passes to the buyer with the company. If any of these are already in a signed license, raise them with advisers before a sale process starts, while an amendment is still easy to request.
Disclosure checklist for a prior code license#
A disclosure package for a prior code license should let an acquirer's counsel understand the arrangement without a call. Assemble it once and keep it current, so it is ready for any financing, acquisition or audit.
- Disclosure schedule entry: counterparty, date, subject matter, exclusivity, term and permitted use.
- Executed agreement, all amendments and any side letters.
- Delivery manifest: repositories, branches, date ranges, excluded paths and file counts.
- License inventory showing how open-source and third-party code was handled.
- Contributor map and ownership documents relied on for the warranties.
- Board resolution and any investor, lender or customer consents obtained.
- Deletion or return certificate if the term has ended.
- Accounting memo on how license revenue was recognized.
- Any correspondence about claims, audits or disputes under the license.
Illustrative: a vertical SaaS founder sells the company#
Illustrative: a fictional vertical software company serving commercial cleaning contractors licenses a curated git history and its linked Jira issues to an AI developer for model training and evaluation. The license is non-exclusive, has a fixed term and requires deletion at the end.
Some time later the founder agrees to sell the company to a larger software group. The acquirer's counsel spots the license in the material contracts list and asks whether the licensee could use the code to build a competing product. The founder produces the agreement, the delivery manifest and the board resolution. The permitted use clause limits the licensee to training and evaluating models and gives it no right to deploy or redistribute the code.
The license is listed in the disclosure schedule, the acquirer adds a specific representation about its terms, and the deal proceeds on its original timetable. The question is settled through correspondence rather than a renegotiation.
How to structure a license so it is easy to disclose later#
A license that is easy to disclose later is one an acquirer can read in minutes and conclude changes nothing about its plans. The contrast below shows the terms that make the difference.
| Term | Easier in diligence | Harder in diligence |
|---|---|---|
| Exclusivity | Non-exclusive | Exclusive, even within a field |
| Duration | Fixed term with deletion at the end | Perpetual and irrevocable |
| Permitted use | Training and evaluation of models | Any purpose, including reproduction in products |
| Assignment | Supplier may assign on a change of control | Licensee consent required |
| Future code | None, or optional at supplier's choice | Obligation to deliver updates |
| Confidentiality | Disclosure allowed to acquirers and advisers under NDA | No carve-out for transactions |
| Future licensing | Supplier free to license others | Most-favored or non-compete terms |
How SourceX documents a license for future diligence#
SourceX records every package in a SourceX Evidence Packet covering provenance, licensing rights, permitted use, the privacy record and release authorization. The same record that supports the buyer's own diligence at signing becomes the core of the seller's disclosure package if the company is later acquired or raises capital.
The SourceX five-step transaction, Supply, Rights, Preparation, Approval and Delivery, also leaves a trail of supplier approvals at each step, which answers the authority question acquirers ask. Data is licensed, not sold, so the company keeps ownership of its code and records.
Frequently asked questions
Can the license's confidentiality clause stop us from showing it to an acquirer?
It can if it has no transaction carve-out. Many confidentiality clauses allow disclosure to prospective acquirers, investors and their advisers under a similar NDA. If yours does not, ask the licensee for consent early, before a buyer's request turns a routine permission into a deadline.
Does a code license reduce the value of our IP?
A non-exclusive license for training and evaluation leaves the company owning its code and free to use and license it further, which is why acquirers often treat it as minor. Exclusive or perpetual broad rights are different and may be priced in. The acquirer's view depends on its own plans for the code.
Will representations and warranties insurers ask about AI training licenses?
Underwriters review the IP representations and the diligence behind them, so a known license usually comes up. A documented license with a manifest tends to be straightforward. Undisclosed licenses, or licenses with unresolved ownership questions, are more likely to draw exclusions from coverage.
Should we tell investors before signing a code license?
Check your investor rights and protective provisions first. Some financing documents require consent for licenses of material IP or for transactions outside the ordinary course. Even where consent is not required, an early board discussion avoids surprises later. Record the approval in a written resolution that names the counterparty and the scope.
What if a company we acquired had already licensed its code?
That license came with the company and belongs on your own disclosure schedules in any later transaction. Ask the acquired company's former owners for the full file now, including the delivery manifest, while people who know the details are still reachable.
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