The Licensing Debt That Never Made the Debt Schedule
Most licensing agreements transfer just fine in a transaction. That’s not the problem. The problem is what transfers along with them.
I’m Paul Lindberg, president of Altaris Cloud — 17 years in Microsoft licensing and compliance, more than 600 audits personally. This is part of a six-part series on licensing risk in mergers and acquisitions.
An Unreported Licensing Obligation Is Debt
Every deal has a process for finding liabilities. There’s a debt schedule. There’s a working capital calculation. There are disclosure schedules. There are representations about undisclosed obligations. The purchase price gets built on the sum of everything the parties identified.
An unreported licensing obligation is a real, accrued liability. It existed before anyone signed a letter of intent. It has a dollar value. Somebody is eventually going to pay it. It just never got measured. So it never made it onto any schedule.
Think about how that obligation actually behaves. It’s a fixed amount owed to a third party for conduct that already happened. It accrues penalties over time. It survives the transaction. Functionally, that’s debt. But it doesn’t look like debt, because nobody has quantified it. So the purchase price gets set as though it doesn’t exist. The buyer pays full value for a company carrying an obligation nobody put a number on.
The Look-Back Problem
Now add the look-back problem. Compliance look-back periods routinely extend several years. That means the exposure period covers the seller’s era. The under-reporting happened on the seller’s watch, under the seller’s management, benefiting the seller’s margins. But the entity holding that agreement after close is your client’s entity.
The conduct was the seller’s. The invoice is the buyer’s.
This gets especially sharp in service provider agreements, and I’ll devote the next video entirely to those. Under an SPLA agreement, the provider self-reports usage every month. Every month of under-reporting accrues. The agreement itself transfers cleanly enough. So does everything that piled up underneath it.
The Piece I Most Want Attorneys to Sit With
Representations and warranties on software compliance are common, and survival periods are frequently 12 to 18 months. In my experience, licensing findings often surface later than that.
So your client ends up holding a representation that has already expired against a liability that just arrived. They have an indemnity that no longer applies, for an obligation that was never priced, created by conduct they had nothing to do with.
That’s the actual risk. Not that the paperwork fails to transfer. It’s that your client acquires debt that never entered the negotiation — and you can’t negotiate a liability you don’t know exists.
Before close, there’s a counterparty across the table, a purchase price to adjust, and an escrow to fund. After close, there’s nobody left to negotiate with. The seller has the money, and your client has the obligation.
If your deal involves a hosting company or a managed service provider, watch the next video. That’s where the largest numbers live. If there’s Microsoft licensing anywhere in your deal, call before you close.
