The Hidden Risks in Third-Party Agreements: Why Your M&A and Licensing Transactions Need a Strategic Approach

In M&A and licensing deals, companies often focus on negotiations, finances, and synergies, overlooking the risks tied to third-party agreements. These risks—stemming from external vendors, partners, or licensing arrangements—can lead to legal issues, financial exposure, and operational disruptions if not addressed.

Unseen Liabilities in Third-Party Agreements

Third-party contracts often hide liabilities that aren’t immediately obvious, such as:

• Ongoing obligations like payment or compliance requirements.
• IP issues such as unclear ownership or usage rights.
• Vendor dependencies that create operational risks if relationships are unstable.

Businesses often fail to account for these hidden risks, which can jeopardize financial and operational stability.

Proactive Risk Mitigation

Instead of addressing third-party risks after a deal, companies should evaluate these relationships upfront. Here’s how:

1. Deep-Dive Due Diligence: Analyze third-party contracts thoroughly to identify potential liabilities or restrictions.
2. Third-Party Liability Clauses: Ensure clear, enforceable liability clauses, indemnification provisions, and termination rights in all agreements.
3. Assess Third-Party Dependencies: Identify critical vendor relationships that affect operations and factor these dependencies into negotiations.
4. IP and Licensing Audits: Conduct thorough audits to identify any third-party IP rights or exclusivity clauses that could limit future flexibility.

Using Software Escrow for Protection

Software dependencies pose significant risks, especially if a vendor discontinues or fails to support essential systems. Software escrow can mitigate this by securing access to critical source code, ensuring business continuity even if the vendor fails.

Why It Matters Now

As global deals become more complex, third-party risks are increasing. Ignoring these risks can damage a company's reputation, hinder growth, and create long-term operational challenges. Legal professionals must approach third-party agreements strategically, recognizing their impact on broader operations.

Bottom Line

Third-party risks often cause the most damage in M&A and licensing deals when overlooked. A proactive, strategic approach—incorporating tools like software escrow—helps companies avoid hidden liabilities and unlock the full potential of their transactions. Legal teams should treat third-party agreements as a priority from the start.

Strengthen Business Continuity Plans

Strengthen operational resilience and protect software investments by implementing an effective business continuity plan for critical third-party services.

What's inside:

• Discover best practice recommendations for Business Continuity Management (BCM) to ensure the long-term availability of critical software.
• Explore challenges in implementing BCM plans and effective strategies to overcome them.

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