promotional feature - corporate finance 41 Buying and selling technology businesses


The value of a technology business lies in intangible assets such as intellectual property rights (IPR). Therefore due diligence undertaken by the buyer will need to reflect:


1 The Nature of Technology Assets Due diligence will focus on analysing IPR rights to establish ownership, usage rights, litigation risks and required consents, and generally ensuring that such rights can continue to be used unencumbered post- acquisition. It is therefore extremely important to identify and investigate what the target:


• receives from third parties; • owns; • provides to third parties.


The IPR of a tech business normally falls within one or more of the following:


• IPR owned by the business outright (either because they have been developed internally or developed by third parties and the ownership transferred).


• IPR owned by the third parties and their use is licensed to the target.


• IPR which the target has shared ownership of (by joint development with the third party through a joint venture or development agreement or otherwise).


It is common for the development of a product and the identities of those responsible for its development to become blurred with time. It is crucial for the due diligence process to ensure that the “development trail” of the IPR can be traced.


In the UK, the rights to inventions made within the course of employment are generally owned by the employer (unless the contract of employment states otherwise). Conversely where a consultant develops technology for a company the consultant will own the IPR unless it is transferred to the company or the contract for services states otherwise.


Doubts as to ownership can be resolved by retrospective assignments, although the value and tax implications of such assignments must be considered.


The terms on which third parties license technology to the target have to be checked carefully. Key concerns include:


• The ability of the buyer and/or target to modify or adapt IPR.


• Change of control provisions will allow a third party to terminate an agreement/licence with the target.


Such issues may seriously affect the future use and exploitation of the target’s IPR and/or the buyer’s general ability to operate the business post-acquisition.


Increasingly important, particularly for patent applications, is whether the target’s technology could be open to


THE BUSINESS MAGAZINE – THAMES VALLEY – DECEMBER 11/JANUARY 12 future challenge.


Any technology yet to be converted into marketable/saleable products should be commercially evaluated as part of due diligence.


2 Skilled Staff


“Know-how” is another crucial intangible asset of any tech business which resides in highly skilled staff. The valuation of companies increasingly directly relates to the number of skilled employees they employ.


The due diligence process must not alienate key staff. Employees are able to move easily to other employment, often to competitors, if they are unsettled.


Given personnel are likely to be key assets for a tech business, retention and incentivisation schemes are popular. A common method is to grant employees options over shares in the target. Such option scheme rules usually allow the early exercise of options on the sale or flotation of the company. Both buyer and seller may wish to reward employees for past efforts, but the buyer will not want such a reward to reduce employees’ incentive to continue working for the company and its future development post-sale.


3 Relationship Between Target and Seller Increasingly, buyers target IT divisions in a group, particularly where the target has outgrown its purely in-house function. The buyer hopes it can better integrate this type of business into its existing structure.


In such scenarios, there may be a continuing relationship between the buyer and the seller through the ongoing provision of services to the selling group.


Typically buyers place far greater resource and emphasis on due diligence than post- completion warranties and indemnities, for fear of the latter affecting continuing service relationships.


Practical Issues to Consider When Carrying Out Due Diligence:


1 Confidentiality


Potential buyers must enter into suitable confidentiality undertakings.


2 Non-Solicitation


Sellers should consider including non- solicitation covenants within the confidentiality undertaking or in the heads of terms. This is significant for businesses dependent on key people or customers.


Although such covenants are inherently difficult to enforce, since it is not easy to prove that an employee or customer was in fact solicited, they should nevertheless be included.


www.businessmag.co.uk


Details: Oliver Kelly 023-8083-1902


oliver.kelly@lamportbassitt.co.uk www.lamportbassitt.co.uk


3 Managing the Information Flow Material disclosing the valuable elements of the business should be held back until a relatively late stage in the sale process when a buyer’s commitment is clear. Even then, a well-drafted non-disclosure agreement, signed by all parties before any documentation is disclosed, is crucial.


4 Access to Suppliers/Customers Sellers occasionally permit buyers access to customers and suppliers, but only under supervision. The shortcoming of this is that once identities of important customers are disclosed, policing contact is difficult. An alternative is to allow access to suppliers/customers at the final stage of the sale process or as a condition to completion.


5 Product Functionality/Technical Review A buyer will often wish to carry out technical analysis of the target’s products or systems. This is difficult for many businesses where a large part of the value of the technology assets lies in their confidentiality. Allowing them to be analysed can be disastrous if the transaction does not proceed.


Sellers frequently propose that such analysis be carried out by an independent expert who may disclose conclusions (but not content) and who is bound by


confidentiality restrictions heavily favouring the seller.


Alternatively, this issue can be dealt with at the final stage of the sale process or as a condition to completion.


Lamport Bassitt advises a number of technology businesses on the South Coast and Thames Valley on acquisitions / disposals as well as commercial agreements and other matters.


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