ALP: When a company is considering a significant investment in software, what are some tips for a successful acquisition?

January 2005
Frost Brown Todd LLC

1.     Research, Research, Research.  Participate in all demonstrations and trial use opportunities available with respect to the software product you want to license.  Find other users and have frank discussions with them about how they feel about the software.  Many software agreements require that licensees keep pricing confidential, but obviously, to the extent you can research the pricing, be sure and do so.  Be prepared with the hard questions at your first meeting with the software representative.    Every software product has its weaknesses, and the provider’s response to the hard questions will tell you much about the provider and your future relationship with the provider. 

2.     Put the Right Team Together.   Your team should consist of your software specialist, the executive in charge of the business line that will use the software and your legal counsel.   It will take all three of these individuals to fully appreciate the business need, what is reasonable to expect from the software package and the legal issues. 

3.      Don’t assume that it is a take or leave it deal!!! – There is only one kind of take it or leave deal in the marketplace and that is with respect to the software you buy shrink-wrapped at the retail computer store.  Even with this software,  you can return the shrink-wrapped software for a full refund if you return it in a reasonable time with the required proof of purchase.  Any company that refuses to reasonably address issues raised by you with respect to its license agreement is likely not a company you can count on when the going gets rough down the road.

4.    Make sure you know what you are getting!!!  One of the most common reasons software providers and their customers end up in court is due to miscommunication about the functionality and capability of the software.  Carefully review all specifications and documentation in advance of  purchase, and if the license fee is significant,  insist on a test and acceptance period following installation and implementation of the software. 

5.    Don’t pay all monies up front!!!   Software companies are like many other businesses.  Once they make a sale, it may not be as easy to get their attention if you have problems down the road.  Hold back as much of the purchase price as you can until you know the system works to your satisfaction.

6.   Review your warranties.   As noted above, not even shrink-wrapped software sold at The Computer Warehouse is sold “AS IS”.  You have the right to return the product to the store and obtain a refund in many cases if the software isn’t what you thought it was.  With more expensive software, you should at a minimum have a representation that the software will work in accordance with agreed upon specifications, have certain agreed upon functionality, be virus free and have no material defects.  You should also receive a warranty that the software does not infringe the rights of third parties. 

7.  Carefully outline the terms of the relationship going forward.   Do you need 24/7 access to assistance and support in cases of emergency?  Do you need the provider to commit to upgrade when your operating system provider upgrades?  Do you need your software provider to enhance a particular aspect  of the software to better meet your needs?

8.  Assignment of the Agreement.   Many software agreements do not give you the right to assign the agreement to a new owner should you sell your business.  If there is a possibility that you might be selling your business during the term of the agreement, you want to negotiate up front the right to assign the license to the buyer of the business without the consent of the software provider. 

9.  Consider an Escrow Arrangement.    If the software is cutting edge, but the provider is still cutting teeth, consider asking for an escrow arrangement whereby a third party escrow agent would release to you a copy of the source code under certain conditions, such as if the software company filed for  bankruptcy.

10.   Right to Modify.  Finally, in some situations, you may need to hire a third party to integrate the software with other software you already have or you may otherwise  need some modifications.  Some providers strictly prohibit any modifications to the software, and some merely terminate all warranties if the software is modified.  To the extent you need the right to modify, the presumption under federal copyright law is that you do not have the right to modify a third party’s software without that party’s written agreement, so get this up front if you will need this flexibility.