Businees mentor: IT issues can be tricky area for purchaser

Q. I'm looking at buying a small business and it has been brought to my attention that I need to pay care to issues around IT systems and intellectual property. What should I be looking out for?

A. Small business sector specialist Sarah Trotman replies:

The first thing to do in a transaction of this type is to seek legal advice. I've consulted Karen Ngan, a partner at Simpson Grierson, and she pointed out some key matters to be aware of.

INFORMATION TECHNOLOGY

If shares in a stand-alone company are being bought and that company operates its IT operations independently, then the transition might be relatively painless.

All software and systems owned by the company will transfer to the new owner with the shares and any third-party software or equipment licensed to the company is also likely to remain useable provided the licence agreements do not contain change-of-control provisions.

You should look out for change-of-control provisions in software licence agreements during due diligence as they offer IT vendors a good opportunity to negotiate transfer fees that would otherwise not apply.

If the target business forms part of a wider group company structure and relies on the corporate group for IT services, then you might need to ensure that arrangements are put in place so the target business can continue to make use of the vendor group's IT systems and services, at least for a transitional period.

It is common in these circumstances to enter into a transitional services agreement which details the services to be provided to the business being sold and the terms on which those services will be provided.

Another point to be aware of in these circumstances is that because the business being sold is no longer owned by the vendor, it may be that a number of the third-party licence agreements which the business relies on will not allow that business to continue using the software or systems being supplied under them.

INTELLECTUAL PROPERTY

The most common IP transition issues that arise on the purchase and sale of a business relate to trade marks and the rights of the respective parties to use them.

If you are apportioning value to a particular trademark as part of an acquisition, you need to be certain that the rights to use that trademark and all associated trademark applications and registrations are being acquired.

You should conduct searches of trademark records to see in whose name the various trademark applications and registrations are held. There have been a number of cases where buyers have paid large premiums for brand value only to find the key trademark rights were not included in the sale and purchase agreement.

Volkswagen paid about US$790 million for the Rolls-Royce business, which had a net tangible value of US$250 million at the time.

The premium paid was put down to goodwill or brand value. The only trouble was Volkswagen failed to acquire the Rolls-Royce mark with the business and was forced to pay more later to acquire these rights.

The lesson in this is that acquisitions often require input from IT and IP specialists who can identify key intangible assets that may be needed by the vendor, the purchaser or both after the transaction and take steps to transfer, license or protect them.

IT and IP assets are unique in that they can be licensed and exploited in ways that tangible assets cannot be. Careful planning and expert advice can assist greatly in making the transition as painless as possible.