October 9, 2025

Preparing for Acquisition: Why License Due Diligence Is a Critical Valuation Lever

(Insight Article – Part 2 of 3)

Introduction

M&A valuation models are disciplined—discounted cash flows, synergy projections, risk adjustments. Yet one area is often under-weighted—not from neglect, but from the sheer time pressure of due diligence: the inbound and outbound contract terms that define how software licenses, SaaS entitlements, and service rights actually operate.

License due diligence may represent a small part of the total valuation exercise, but it’s a high-impact lever. Done well, it can preserve or even enhance Annual Recurring Revenue (ARR) and reduce post-close disruption. Done poorly, it invites compliance disputes, integration delays, and unplanned costs that erode deal value.

In acquisitions, there are often “one-sentence clauses” buried in contracts—or operational interpretations—that determine whether:

  • Revenue streams continue or lapse,

  • Software rights survive or require renegotiation, and

  • Systems critical to business operations remain usable after closing.

This Insight examines both software vendors (being acquired or acquiring others) and enterprise customers (being acquired or merged), outlining key risks, overlooked opportunities, and post-close actions to stabilize value.

License Due Diligence Pre-Close — Evaluating the Target

This is the homework phase—confirming that what’s being purchased can legally operate and that projected value aligns with contractual reality.

Vendor-Specific Risks and Opportunities

  • OEM License Survivability – If a vendor’s products include embedded or Original Equipment Manufacturer (OEM) components, assignment restrictions can trigger costly renegotiations—or worse, the collapse of distribution rights.

  • Customer Contract Survivability – Transfer restrictions in customer agreements may not kill revenue but can trigger dozens of required renegotiations and create short-term administrative chaos.

  • Legacy Template Inconsistencies – Years of acquisitions often create a patchwork of contract forms and metric definitions. Similar terms (“users,” “transactions,” “instances”) may have diverged across products, creating confusion for both enforcement and revenue recognition.

  • Compliance Revenue Streams – Audit or true-up revenue may look healthy, but that strength can be temporary when recent enforcement surges were meant to strengthen the near-term picture or when heavy-handed tactics left customers wary and future renewals at risk. Conversely, underserved compliance programs may represent significant unrealized upside.

Enterprise Customer-Specific Risks and Opportunities

  • License Continuity – Are mission-critical software systems—such as Enterprise Resource Planning (ERP), Customer Relationship Management (CRM), or Human Resources Information Systems (HRIS)—licensed to the correct entity? Do rights survive the acquisition, require consent, or lapse entirely?

  • Operational Disruption Risk – “Void if attempted” or “consent required” clauses can immediately revoke system access at close, giving software suppliers tremendous leverage for premium relicensing.

  • Metric Ambiguity – Undefined or evolving usage metrics can expose the acquirer to compliance violations post-close if the acquired entity’s usage tracking doesn’t match the contract definitions.

  • Untracked or Decentralized Licensing – Many targets lack a single repository for contracts or entitlement data, leaving acquirers blind to what they’re inheriting.

📌 Case Example – The Lost Leverage

During due diligence, an acquirer discovered hundreds of software products from a single global supplier deployed across the target’s worldwide operations—but no central repository of license grants, usage records, or responsible entities.
The acquirer assumed its size would give it leverage and refused the supplier’s request for a commercial resolution. The deal closed before the issue was resolved. With the target unable to prove entitlement and the software still in active use, the global supplier had complete leverage. The result: a multi-million-dollar relicensing settlement and months of lost integration bandwidth rebuilding entitlement records and negotiating new terms.

License Due Diligence Post-Close — Protecting and Realizing Value

After closing, diligence becomes discipline: executing what was discovered, stabilizing operations, and converting insights into measurable outcomes.

Shared Post-Close Priorities (Vendor and Enterprise)

  • Consent Execution – Finalize outstanding vendor approvals identified pre-close. When these linger, leverage evaporates, and vendors may renegotiate from strength.

  • Continuity Stabilization – Validate that every essential system, entitlement, and SaaS environment remains operational and correctly licensed.

  • Cost Recovery – Use consolidated purchasing power to negotiate enterprise agreements that offset relicensing expenses uncovered after close.

  • Compliance Revenue Optimization – Assess remaining audit or true-up potential and execute planned adjustments to enhance and stabilize predictable revenue.

Software Vendor Post-Close Focus

  • OEM Continuity & Replacement Planning – Engage OEM suppliers early to secure transfer rights or negotiate structured transitions.

  • Contract Harmonization – Begin integrating inconsistent templates and metric definitions across product lines to prevent future disputes.

  • Compliance Revenue Streams – Review pipeline health; a fading enforcement program can mean overstated recurring revenue.

Enterprise Customer Post-Close Focus

  • License & Metric Validation – Confirm that contract metrics align with how software is used post-merger.

  • Operational Readiness – Build central visibility into software assets and entitlement data to avoid future compliance or renewal risk.

  • Vendor Engagement Strategy – Proactively approach strategic suppliers to confirm continuity and establish stable long-term terms.

📌 Case Example – OEM Collapse

Shortly after acquiring a enterprise software vendor, the acquirer faced an unexpected challenge: a core feature of the acquired product relied on an OEM component supplied by a major competitor. The OEM license prohibited transfer without consent, and the supplier used the acquisition as leverage to demand a massive fee for consent.


Rather than negotiate, the acquirer opted to replace the component. A one-year grace or wind-down period allowed continued distribution, but the engineering effort consumed all available development resources, delaying product enhancements and eroding customer trust. The product ultimately lost market position and was discontinued. A single clause—had it provided for transferable rights or structured renegotiation—could have avoided the collapse.

The Acquirer’s Checklist

📄 Inventory Licensed Entities
Confirm every legal entity tied to license contracts and usage. Prevent entitlement lapses and identify where software is used under the wrong entity name.

🔍 Assess License Continuity
Evaluate whether mission-critical systems (ERP, CRM, HRIS, billing) will legally survive closing—or require vendor consent. Quantify time and cost exposure if relicensing is required.

💰 Validate Metric Definitions
Compare how key metrics (users, transactions, APIs) are defined across contracts vs. how usage is actually tracked. Unclear metrics drive audit risk and revenue uncertainty.

⚙️ Evaluate Compliance Revenue Streams
Identify whether compliance or audit-derived revenue is fading (overstated ARR) or under-enforced (potential upside). Adjust valuation and forecasts accordingly.

📑 Review OEM and Partner Agreements
Check assignment clauses in OEM, reseller, and channel contracts. Plan early engagement or renegotiation if consent or transfer limits apply.

📈 Analyze Legacy Template Variability
Map all customer and supplier contracts. Identify inconsistencies in license grants, usage definitions, and audit clauses that could affect integration or customer billing.

🕓 Finalize Post-Close Execution Plan
Close all open consents before leverage fades. Stabilize vendor relationships, standardize templates, and convert diligence findings into executed actions.

RevenueEdge Perspective

During Due Diligence: We help acquirers and sellers surface hidden risks and opportunities—translating license complexity into measurable valuation impacts.
During Valuation: We quantify exposure and opportunity ranges that can directly modify financial assumptions and purchase price modeling.
After Close: We help execute stabilization plans, finalize consents, and ensure the additional value identified during diligence is fully realized.

In M&A, small oversights can become major write-downs—or meaningful upside when handled early.
At RevenueEdge Advisors, our role is to help acquirers protect what they’ve bought, sellers defend what they’ve built, and both sides see the full picture before it’s too late.

Next in the Series

Part 3: Preparing to Be Acquired — Strengthening Valuation Through Contract Integrity, Licensing Readiness, and Sustainable Enforcement Practices