The licence count that did not match the people using the software

The situation

Ildiko's law firm sent over a revised disclosure schedule four days before the scheduled closing, with a single new line item buried on page eleven: software licensing was 'substantially consistent with historical practice.' It was the kind of sentence written to answer a question without quite answering it, and it was the first sign that something in the target company's technology stack needed a harder look than the deal team had planned to give it.

The buyer was an employee ownership trust, a structure where the company's employees collectively become the owners through a trust that holds shares on their behalf, funded in this case by a mix of vendor financing from the retiring owner and a modest bank facility. Daniela, a municipal planner who sat as lead trustee, and Rodrigo, an elementary school teacher who had volunteered to serve as a fellow trustee, were overseeing the acquisition of a mid-sized manufacturing operation in Kapuskasing on behalf of the roughly ninety employees who would become beneficial owners once the deal closed. Neither trustee lived anywhere near northern Ontario. Daniela worked from a mid-sized city several hours south, Rodrigo further away still, and the entire transaction, including diligence, was being run by video call, shared drives, and courier packages, because an in-person site visit was not practical on the trust's budget or timeline.

The transaction was sized around twenty million dollars, and IT systems diligence, ordinarily a modest workstream, had been treated as routine. The manufacturer ran standard scheduling, inventory, and accounting software across its office and shop floor, licensed on a per-user basis from the software vendors directly. Early in diligence, the seller had represented that licensing was current and compliant. Ildiko's late disclosure suggested otherwise, and because the trustees could not simply walk the shop floor themselves to count workstations, they needed us to press the point from a distance and get a real answer before money moved.

An employee ownership trust brings its own pressures to a diligence process like this one. The trust exists to hold the company for the benefit of its employees over the long term, funded by a note the retiring owner effectively carries and a bank facility sized conservatively because the buyer has no outside investors to call on if something goes wrong after closing. Every dollar of unbudgeted liability the trust inherits comes directly out of the cushion the ninety incoming employee-owners are counting on, which made Ildiko's vague new sentence about licensing more than an irritant. It was a flag that the retiring owner's team either did not fully understand its own technology environment or was hoping the point would slide past a buyer working entirely by video call from several hours away.

What was actually at stake

We pushed for the underlying licence inventory rather than the summary characterization Ildiko's team had offered, and what came back told a clearer story. The company was licensed for forty seats of its core production software. Payroll records and network login data, which we requested separately once the licence numbers looked thin, showed sixty-three active users touching that system across two shifts. The gap was not a rounding error or a recent hiring bump; it had been building for at least two years as the company added shift workers without adding corresponding licences, a common way businesses quietly outgrow their software agreements without anyone flagging it internally.

The exposure was real and it was not the buyer's to simply inherit and ignore. Most commercial software agreements give the vendor the right to audit usage and demand a true-up payment, covering both the additional licences needed going forward and, in some cases, back charges for the period of underlicensing already elapsed. If the vendor came looking after closing, its claim would run against the company as the licensee, so in the first instance the newly employee-owned company, not the departing seller, would carry the bill, and its relationship with a software vendor it depended on daily would be strained by a compliance dispute in its first months of new ownership. Whether that cost stayed with the company or moved back to the seller was a separate question for the purchase agreement to answer: a representation about licence compliance backed by an indemnity could push it back to the seller.

There was a harder question underneath the licensing gap. If the seller's own IT function had not tracked something as basic as licence counts against headcount, diligence needed to ask what else in the technology environment had been left unmanaged, from data backup practices to security patching. We could not audit every system remotely in the time remaining before closing, so the immediate task was narrower: quantify the one confirmed problem precisely, and use it to negotiate protection against what might still be undiscovered.

There was also a practical timing problem layered on top of the legal one. The purchase agreement's outside closing date was approaching, the bank facility funding the trust's share of the purchase price had its own commitment window, and every extra week spent chasing the licensing question risked pushing the deal past the point where the financing stayed available on its original terms. Daniela and Rodrigo needed an answer that was accurate enough to negotiate on and fast enough not to jeopardize the financing that made the acquisition possible in the first place, which ruled out the kind of exhaustive audit a buyer with more time and a larger deal team might have run.

What we did

1. Obtained the actual licence and usage data, not a summary. We insisted on the vendor's licence certificates and the company's own network access logs rather than accepting Ildiko's client's characterization, because a written assurance that licensing was 'substantially consistent' meant nothing without the underlying numbers to check it against, and a summary written by the seller's own counsel is never the right place to stop asking questions.
2. Quantified the shortfall and estimated the true-up cost. Working from the confirmed gap of roughly twenty-three seats, we obtained current per-seat pricing from the software vendor's public rate card and calculated a realistic range for what a formal true-up, including a reasonable estimate of back charges, would likely cost the buyer if the vendor initiated an audit after closing. Putting a number on the exposure, rather than leaving it as a vague worry, was what let the trustees negotiate from a position of fact instead of anxiety.
3. Coordinated entirely by video call and document exchange. Because neither trustee could travel to Kapuskasing on short notice, we ran every diligence call and negotiation session remotely, using shared document rooms and recorded walkthroughs of the company's system inventory so Daniela and Rodrigo could review evidence themselves rather than relying solely on our summary, which mattered to trustees who took their duty to the employee-beneficiaries seriously enough to want to see things firsthand where possible.
4. Pushed for a purchase price holdback rather than a simple indemnity promise. An indemnity is only as good as the seller's ability to pay it later, and the retiring owner's post-closing liquidity was uncertain once the sale proceeds were distributed, so we negotiated a portion of the purchase price held back in escrow specifically earmarked to cover the licensing shortfall, giving the trust money already in hand rather than a promise to chase later.
5. Built a post-closing true-up plan the trust could execute without us. We drafted a straightforward playbook for contacting the software vendor proactively after closing to negotiate the additional licences on the buyer's terms, rather than waiting for the vendor to discover the gap through an audit, which typically produces worse terms and can come with penalty language a proactive approach usually avoids.
6. Narrowed the remaining representations to cover unknown gaps. Given that a full remote systems audit was not feasible before closing, we obtained a broader IT compliance representation from the seller covering the technology environment generally, giving the trust a contractual basis to pursue a claim if other undisclosed gaps, in areas like data backup or security patching, surfaced later after the trust had time to review the systems properly.
7. Protected the financing timeline while negotiating the holdback. Before the escrow terms were finalized with the seller, we went to the trust's lender directly, disclosed the licensing gap and the proposed holdback structure in writing, and obtained confirmation that the bank facility's commitment terms would hold on the amended purchase price mechanics. Raising it before the lender heard secondhand kept the financing in place through closing, since a collapse of the facility over a licensing dispute would have hurt the employee-beneficiaries far more than the licensing gap itself.
8. Briefed the incoming employee-owners on the risk in plain terms. Because the trust's beneficiaries were the company's own staff, we prepared a short written explanation of the licensing issue and how it was being handled, so the workforce understood the holdback was protecting their new ownership stake rather than a sign the deal was troubled or the company they were about to own was mismanaged.

The outcome

The deal closed on its original date with roughly one hundred and ten thousand dollars held back from the purchase price in escrow, calculated to cover the estimated true-up cost with a margin for the back-charge period. This was not a win in the sense of the problem disappearing; the licensing gap was real, it predated the trust's involvement, and someone had to pay for it. The negotiated outcome meant the departing owner absorbed that cost through the holdback rather than the trust and its employee-beneficiaries bearing it unexpectedly after taking over.

Within the following months, the company's new management, guided by the playbook we prepared, approached the software vendor directly to true up the licence count. The vendor, seeing a proactive correction rather than an audit finding, agreed to bring the licensing current without pursuing back charges beyond a modest administrative fee, which came in well under the escrowed amount. The remainder of the holdback was released to the departing owner roughly six months after closing, once the true-up was confirmed complete.

The trustees did not get the clean, no-surprises closing they had hoped for, and the transaction took an additional two weeks to finalize while the holdback terms were negotiated. What they avoided was worse: taking on the company, and its employees' collective ownership stake, with an unbudgeted vendor liability sitting undisclosed on the books. Daniela has since said the experience changed how the trust approaches diligence on distant acquisitions, treating a vague disclosure answer as a reason to dig rather than a box already checked.

The financing held through the delay, in part because the holdback structure gave the bank the same comfort it gave the trust: a specific, bounded amount set aside for a known problem, rather than an open question the lender would have had to price for itself. For the ninety employees who became owners of the company at closing, the practical effect was invisible day to day, which was the point. The cost of the seller's licensing shortfall was paid by the seller, out of proceeds the seller was already receiving, rather than by a special assessment or a rockier first year for a company its new worker-owners had every reason to want off to a stable start.

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