Explore the intricacies of a recent M&A case involving the sale of a cloud-based SaaS business. Dive into the details of the deal, including purchase price, royalties, and the legal battle that ensued.
June 17, 2019
M&A Stories
Introduction:
In this M&A case, a Seattle-based systems integration firm sold its cloud-based software as a service (SaaS) business to another systems integration company. The focus of this blog is to shed light on the intricacies of the deal, particularly regarding the purchase price and royalties.
The Deal:
The seller had developed a user-friendly SaaS application on Microsoft’s SharePoint platform, generating revenue through subscriptions. The buyer acquired this software line, assuming liabilities and contract obligations the seller had already been paid for. Additionally, the buyer agreed to pay the seller a royalty of 30% on the net “product license fees” for three years post-closing, up to a cap of $5 million.
The Twist:
Unfortunately, the buyer’s post-closing subscription service didn’t yield any royalties. However, they did generate professional fees by offering consulting services to customers who needed customization and enhancements to the software. These services included migrating existing on-premises intranets to cloud-based platforms like Microsoft SharePoint and creating bespoke intranet portal components.
The Legal Battle:
The disagreement arose when the buyer excluded these professional fees from the definition of “product license fees.” The seller took the matter to a Missouri federal district court, arguing that royalties should apply to these professional fees.
Court’s Verdict:
The court ruled in favor of the buyer, asserting that “product license fees” unambiguously referred to monthly subscription fees paid by customers for software access. The professional services fees didn’t fall under this definition.
Comment:
In hindsight, the seller would have preferred a clear definition of “product license fees” in the asset purchase agreement, encompassing professional fees. Alternatively, a fixed purchase price could have mitigated this issue.
Case Reference:
This case is referred to Blue Rooster LLC v. Perficient, Inc., Case No. 4:17-CV-02689-AGF, United States District Court, E.D. Missouri, Eastern Division, (May 2, 2019)
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million).
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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