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We are looking to purchase a software product, but the current owner is in a foreclosure status. What legal and/or financial issues might we face?

By: Bill Wortman

 

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We are looking for an out-right purchase of a “software product” with all the licenses and complete rights on the product for us to own, sell and maintain along with the current customer accounts and contracts from a software company, to add to our existing products and services offering, with an intent to completely take over the Product from its current owner. While we are quite interested in this Asset Purchase, we now understand that the Sole Owner of this software company is in a foreclosure status against which his company is attached. Given this we need advice on: a) What legal and/or financial issues we may face if we go for this Asset Purchase?  b) Should we even consider buying this Asset? c) Are there any specific clauses that we should include in the contract with any specific wording to minimize the risk involved? d) What specific topics we could cover in the negotiation?

 

Answer: We have provided general business comments and considerations below; however, you will need to consult your lawyer for legal input regarding due diligence, asset liens, purchase contract terms (ownership warranty, liability indemnification, etc), and the other legal issues with your planned software purchase. Also, it would appear that the legal implications may vary depending on the type of foreclosure matter – personal or business, bank or other creditor lien, bankruptcy, etc.

A. Asset purchases issues. The following are some of the legal and financial issues when buying business assets:
1. Lien release: You want to be sure that any lender, creditor, or other liens are properly identified and released unless you plan to assume any outstanding debt of the seller as part of the purchase.
2. Product warranty liabilities: You want to clearly understand any known or contingent product and/or service warranties and liabilities to the current software product customers.
3. Sale trends: The historical sales, recent sales trends, sales projections, ongoing software development and maintenance costs, and target audience demographics are important financial considerations.
4. Due diligence issues: Though an asset purchase may be less complex, business software and customer contract acquisition due diligence can potentially cover many important issues. Due diligence and other checklists for assessing a business can vary depending on the peculiarities of the business and what aspects of the business you are evaluating, so there isn’t a common checklist that applies in all situations.

B. Asset purchase decision: If after you complete the due diligence process, the price, profit projections, and other facts still support the purchase, then we do not know why you would not go ahead with the transaction. However, your lawyer and local business CPA will be the best resources to help with your final purchase decision based on all of the facts and information that you gather.

C. Asset purchase contract terms: Your lawyer is the best resource to help identify the important contract terms and develop a comprehensive asset purchase agreement that protects your interest. Business acquisitions can have seller non-compete, intellectual property transfer, and other legal considerations; however, for drafting with your lawyer, the following legal websites have a wide selection of asset purchase and similar agreements (some free and others for a fee) that you can copy or otherwise use to prepare an agreement for your transaction:

Understand that not all templates are created equal, with many being created for a narrow set of requirements. A particular template will not be warranted to cover every provision that may be required by a particular set of business circumstances. Studying the language included in various samples and templates will improve your level of understanding related to the subject of your particular agreement and may help you articulate your business objectives related to an agreement, but be aware that many, perhaps most, agreements should be prepared by your lawyer to provide greater assurance that your interests have been protected.

D. Business contract negotiations: Price, seller financing, seller non-compete terms, and seller representations and warranties are some of the important points to negotiate when buying business assets.

Published: February 3, 2014
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Bill Wortman

As the Chief Business Consultant at BizCoachingOnDemand.com, Bill has over 40 years of business experience. He's held multiple executive-level positions and fulfilled the role of CFO at large, publicly-held (NYSE, NASDAQA, and AMEX) corporations. In addition, he's also been an owner of several successful private ventures in real estate and in the automotive industry.

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