The Hidden Risks in Third-Party Agreements:

Overlooked Risk in M&A and Licensing Deals

In M&A and licensing deals, companies often focus on negotiations, financial terms, and anticipated synergies. The risks tied to third‑party agreements are frequently overlooked.

These risks often stem from external vendors, technology partners, or licensing arrangements that support core business operations. If they are not identified and addressed as part of the transaction, they can lead to legal exposure, financial impact, and operational disruption.

Where third‑party software supports business‑critical services, these risks become legal and governance issues rather than purely commercial or operational concerns.

Unseen Liabilities in Third‑Party Agreements

Third‑party contracts often contain liabilities and restrictions that are not immediately visible during a high‑level deal review. Common examples include:

• Ongoing obligations, such as payment, compliance, audit, or reporting requirements that continue after the transaction.
• IP and licensing risks, including unclear ownership, limited usage rights, or restrictions on transfer following a change of control.
• Vendor dependency, where reliance on suppliers creates continuity risk if those relationships become unstable.

These issues are frequently inherited as part of an acquisition or licensing arrangement. If they are missed during due diligence, they can undermine post‑deal operations and limit future flexibility.

Why These Risks Often Surface During Transactions

M&A and licensing transactions force organisations to reassess third‑party arrangements in a new context. Change‑of‑control provisions, termination rights, or support obligations may be triggered, amended, or challenged as a result of the transaction.

What worked under the previous ownership or operating model may no longer be acceptable once risk tolerance, regulatory requirements, or integration plans change. Without early visibility, legal teams may be left managing these risks after completion, when options are fewer and remediation is more costly.

Managing Third‑Party Risk

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

• Deep-Dive Due Diligence: Analyze third-party contracts thoroughly to identify potential liabilities or restrictions.
• Third-Party Liability Clauses: Ensure clear, enforceable liability clauses, indemnification provisions, and termination rights in all agreements.
• Assess Third-Party Dependencies: Identify critical vendor relationships that affect operations and factor these dependencies into negotiations.
• 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 to Manage Continuity Risk

Software dependency presents a particular risk where systems are business‑critical, and replacement options are limited. If a supplier fails, withdraws support, or ceases trading, the impact on continuity can be immediate.

Software escrow can help mitigate this risk by providing a contractual mechanism that defines access to source code and associated materials under agreed release conditions. From a legal perspective, escrow clarifies access and continuity rights where reliance on a third‑party software provider cannot be avoided.

In M&A and licensing transactions, escrow can also support due diligence outcomes by reducing reliance on assumptions about supplier stability or future cooperation.

Why It Matters Now

As transactions become more complex and increasingly technology‑driven, dependence on third‑party software providers is increasing. Ignoring software dependency risk can expose organisations to service disruption, damage reputation, and create long‑term operational challenges. Legal professionals must approach third‑party software agreements strategically, recognising their impact on wider business operations.

Bottom Line

Third‑party and licensing agreements often cause the most damage in M&A and licensing deals when they are overlooked or treated as secondary considerations. A proactive, structured approach that addresses access, dependency, and continuity, including the considered use of software escrow, helps companies avoid hidden liabilities, protect post‑deal operations, and realise the full value of their transactions. Legal teams should treat third‑party agreements as a priority from the outset.