In the world of software, speed often wins. Developers rely on open source to build faster, scale quicker, and solve problems that don’t need reinventing.
But when it’s time to sell the company, all that borrowed code gets a lot more attention.
In a tech acquisition, open source can become a hidden landmine. It looks harmless in the repo, but if not tracked or used properly, it can slow down or even stop a deal.
This article explores how open source risk shows up in M&A, why buyers care so much, and what founders and legal teams need to do to make sure this powerful asset doesn’t become a dangerous liability.
Let’s dive into how to stay ready — and why smart open source practices drive cleaner, faster, and stronger exits.
Why Open Source Raises Flags in M&A
Open Source Is Everywhere, and That’s the Point
Open source isn’t a corner case anymore — it’s core infrastructure.
Most modern software products rely on open source components. They help teams move fast, solve problems, and scale their codebases quickly.
But because it’s so easy to use, companies often pull in open source without thinking much about long-term obligations or compliance.
That’s fine during the build phase. But when a buyer steps in and starts due diligence, every one of those dependencies is put under a microscope.
The Problem Isn’t the Code — It’s the License
Buyers aren’t afraid of open source itself. They’re afraid of what the licenses might require — especially when the licenses haven’t been followed properly.
Some licenses are permissive. They let you use the code with few strings attached. Others come with strict rules about disclosure, modification, and redistribution.
And in many cases, the license terms don’t align well with the company’s business model — especially if it’s a proprietary or closed-source product.
That mismatch creates legal risk. It also creates friction in the acquisition.
M&A Triggers a Deeper Review
During diligence, the buyer’s legal team will ask for a full list of third-party software — including every open source library used in the product.
They’ll want to know what license applies, how the code was used, whether it was modified, and what the company did to stay compliant.
If the company doesn’t have that information — or worse, if the data isn’t accurate — the buyer gets nervous.
That uncertainty slows the deal. It can lead to escrow holds, reduced valuations, or even pulled offers.
Buyers want clarity. And they want proof that the product doesn’t come with hidden obligations that could blow up after closing.
Where Open Source Risk Really Comes From
Missing or Incomplete Inventories
The most common issue in tech M&A isn’t the license itself — it’s the lack of records.
Founders and dev teams often don’t keep a full bill of materials. They may not know what open source packages were used, where they came from, or what version is in production.
Without a complete inventory, buyers can’t assess risk. And that leads to more questions, more reviews, and more delays.
The absence of a clear list becomes its own red flag.
It tells the buyer the company may not have a handle on its own product — and that’s not a good place to start.
License Incompatibility with Business Model
Not all open source licenses are equal. Some, like MIT or Apache, are very flexible. Others, like GPL or AGPL, are more aggressive.
They may require that any code linked to the open source component be made public. Or that the entire application must be distributed under the same terms.
That’s a problem for companies with proprietary platforms, commercial software, or SaaS models that rely on closed-source IP.
If the team pulled in restrictive code without understanding the license, it could force disclosure of sensitive logic, methods, or even full codebases.
Buyers don’t want that. And if it’s not resolved before signing, it might kill the deal.
Modifications Without Documentation
Open source is often customized. A developer might tweak a library, add new functionality, or fix bugs.
That’s normal — but if those changes aren’t documented, and the license requires you to share them, it becomes a compliance issue.
Some licenses require attribution. Others require that modified code be published or redistributed.
When a company modifies open source but keeps it private without the right disclosures, it can trigger violations.
In M&A, that kind of risk is a serious concern. It suggests potential lawsuits or public backlash after acquisition — both of which scare buyers.
Dependencies Inside Dependencies
Open source doesn’t live in isolation. A single library might depend on five others — each with its own license.
These “nested” components are easy to overlook. But they carry the same compliance obligations as the code you pulled in directly.
If your scanning tools don’t detect those dependencies, or if your tracking process doesn’t go deep enough, you may miss something critical.
And in diligence, that gap gets exposed. The buyer’s tools will go further, and if they find hidden licenses, it raises concerns about governance and process.
How Buyers Evaluate Open Source Risk
They Ask for the Software Bill of Materials (SBOM)
An SBOM is a detailed list of everything inside your product — including the open source components, their versions, and their licenses.
Buyers want this early in the diligence process.
A complete SBOM gives them clarity. It shows that you know what’s in your codebase and that you’ve taken steps to monitor usage properly.
If you can’t provide one, it tells them there’s a risk of hidden problems — especially if the product has been through multiple developers or code rewrites.
Having a current, accurate SBOM is no longer a bonus. It’s a requirement in many M&A conversations.
They Run License Scans
Buyers usually don’t just take your word for it. They’ll run automated tools on your codebase to detect license types and flag possible violations.
These scans go deeper than most dev teams expect. They look for nested dependencies, forked libraries, and mismatched declarations.
If the scan shows GPL code in a proprietary product, or uncredited reuse of code, that instantly becomes an issue.
It doesn’t mean the deal is dead — but it does mean extra negotiation, legal review, and possibly remediation.
The cleaner your license scan results, the more confidence you give the buyer.
They Review Your Compliance Process
Having a clean SBOM is one thing. Having a repeatable process for maintaining it is another.
Buyers want to know you’re not just reacting to diligence — but that you’ve been managing open source risk over time.
That means you have policies for code intake. You have tools that alert you to license changes. You document which packages were approved and why.
It’s about showing discipline. If you treat open source with care, it signals that your product — and your company — is mature enough to scale.
Buyers like that. It makes integration easier and reduces the chance of future surprises.
What Happens If Problems Are Found
Remediation Might Be Required Before Close
If license violations are discovered, buyers will often pause the deal until they’re fixed.
That might mean replacing a problematic library, rewriting a module, or re-licensing code.
In some cases, they’ll want to see that the offending code is removed entirely. Other times, they may accept a mitigation strategy with legal support.
Either way, this slows the timeline.
And if the problem is big enough — like a core dependency with a restrictive license — it can reduce the deal price or change the structure.
Buyers don’t want to inherit unresolved risk. So they’ll often require it to be addressed before they sign.
You Might Face Escrow or Indemnity Changes
If the buyer agrees to move forward despite open source issues, they’ll protect themselves with stronger terms.
That can include a bigger escrow — where a portion of the purchase price is held back in case problems arise post-closing.
It can also mean tighter indemnity clauses, where the seller agrees to cover costs tied to any future IP claims.
These terms matter. They affect how much money you get, when you get it, and what happens if things go wrong later.
Sellers who fix open source problems early can avoid these adjustments entirely.
The Deal Could Be Recut or Abandoned
In rare cases, open source misuse is serious enough that the buyer walks away.
That usually happens when the core product includes large portions of code that were reused without compliance — and fixing it would require major refactoring.
Or when the product is already in market under a license that conflicts with how the company claims it operates.
These situations are avoidable. But only if the company pays attention to open source early — not during the final weeks of M&A.
Buyers will understand mistakes. But they won’t forgive negligence.
How Sellers Can Prepare Before Diligence Begins
Start with a Full Open Source Audit
Before any buyer runs their own review, run one yourself.
Use a scanning tool that identifies open source packages, their versions, and associated licenses. This gives you a real snapshot of your product’s exposure.
Make sure the audit includes nested dependencies. Don’t just check the top layer. Go deep — because the buyer will.
This audit isn’t just for optics. It gives you time to clean up, replace risky code, or patch anything that could become a red flag.
Done early, it gives you control. Done late, it gives the buyer leverage.
Build a Clean, Shareable SBOM
Once you’ve audited the code, create a software bill of materials that you can confidently share with a buyer.
It should be well-organized and readable. It should match the actual state of your production code — not just your GitHub repo.
Include license types, current versions, and last-reviewed dates.
Buyers care about how recent your data is. A stale SBOM is almost as bad as none at all.
A current SBOM shows that you’re proactive. That your team knows what’s under the hood. That you’re not guessing.
Flag and Fix Conflicts Early
If you find packages with licenses that could conflict with your business model, make a plan to fix them.
That could mean replacing the code, seeking alternative libraries, or working with a developer to isolate that logic.
In some cases, the conflict isn’t fatal — especially if the open source code is used in a way that avoids linking or distribution triggers.
But you still need to explain that clearly. Buyers will ask how you’re using the package, and why you believe it doesn’t violate the license.
The more specific your answer, the less room there is for concern.
Update Contracts and Contributor Agreements
Open source compliance isn’t just about the code — it’s also about who touches it.
Make sure your developer contracts — especially for freelancers — include IP assignment language and open source contribution rules.
If your team has contributed to open source projects, confirm what was submitted and under what license.
Buyers don’t want to acquire a product that secretly includes contributions to third-party projects.
They want to know what was created in-house, what was shared, and what still belongs to you.
This kind of cleanup shows maturity — and saves time when questions start coming fast.
How to Use Open Source as a Strength in M&A
Show You Have Policies — Not Just Tools
Buyers love companies that run lean. But they trust companies that run smart.
Having a license scanner is a good start. But having written policies around open source is better.
That means documented processes for approving new packages. Clear rules around modification. Templates for evaluating risk and responding to alerts.
These policies don’t need to be long. But they should be consistent.
They show that you take IP seriously — and that you’ve made good choices, not just fast ones.
That’s a signal buyers look for when assessing how reliable your product will be after the deal closes.
Tell a Clean, Confident IP Story
IP due diligence is as much about trust as it is about paperwork.
When you can explain where your code came from, why you used certain packages, how you kept track of licensing, and how you resolved past issues — it makes the buyer’s job easier.
And when their lawyers feel good about the IP, the rest of the deal moves faster.
It’s not about hiding risk. It’s about showing you’ve managed it well.
In M&A, a strong IP story isn’t just defensive. It can support price, speed, and certainty.
Use Compliance as a Signal of Readiness
Many buyers use IP diligence as a test of overall operations.
If you’re buttoned up on open source, chances are you’re buttoned up on other things — like contracts, accounting, and employment matters.
If open source is a mess, they start to wonder what else might be.
So don’t just clean up for the lawyers. Do it to prove your company runs like a business — not a side project.
Buyers reward companies that show discipline. And IP hygiene is one of the easiest ways to show it.
Building Open Source Discipline Into the Business
Make It Part of Your Engineering Culture
Open source risk isn’t a legal issue that shows up once a year. It’s something your dev team handles — every single day.
That’s why the first fix isn’t in your contracts. It’s in your culture.
Teach developers what different licenses mean. Help them understand why GPL might be fine for internal tools but risky for a SaaS platform.
Make it normal to review license terms before adding a dependency. Create review points in the CI/CD flow. Track updates, and make license checks part of your security scans.
When it’s built into the workflow, it stops being a burden. It becomes the way your company protects what it’s building.
Keep Documentation Alive — Not Just Archived
It’s not enough to create an SBOM or policy and then bury it in a folder.
Documentation only works when it’s updated regularly and used in decision-making.
Make it easy for your team to add new libraries, record license types, and track any changes to use or versions.
Create a shared place where this lives — a dashboard, a table, even a clean spreadsheet.
If someone new joins, they should know where to find it. If a buyer asks for it, you shouldn’t have to scramble.
Treat your documentation like source code. Keep it clean. Keep it current. Keep it collaborative.
Review Third-Party Tools and APIs Too
Sometimes the open source risk doesn’t live in your own repo — it lives in the tools and platforms you rely on.
That includes SDKs, APIs, analytics platforms, integrations, and anything else your product depends on.
These tools may include open source code themselves. Or they may pass license obligations onto you through their terms of service.
Know what your dependencies are. Read their terms. Ask what they license — and under what conditions.
The more clarity you have here, the fewer blind spots you’ll face during diligence.
Founder Mindset: Treat Open Source Like a Strategic Asset
You’re Not Just a User — You’re a Steward
Using open source isn’t free in the long run. It’s a trade: you get speed, but you take on responsibility.
That responsibility isn’t just about compliance. It’s about stewardship.
Founders should treat open source like any other third-party relationship — one that needs boundaries, tracking, and respect.
You’re not borrowing code. You’re integrating it into your business. That comes with legal and reputational stakes.
See it clearly. Handle it well. Buyers notice the difference.
Don’t Wait Until Diligence to Start Caring
If you only start reviewing licenses when a buyer sends a diligence checklist, it’s already too late.
Fixing open source issues under pressure is harder, slower, and far more expensive.
It distracts your team. It invites discounts. And it often exposes other areas where compliance was skipped.
The better approach is to prepare long before the deal starts.
Build open source governance into your regular audits. Review usage quarterly. Keep a clean inventory — even if no one’s asking for it yet.
This isn’t about paranoia. It’s about professionalism.
Use Clean IP as a Competitive Advantage
Clean IP — including well-managed open source — isn’t just a box to check.
It’s something buyers use to compare you with other targets. It affects how much they trust your team. It influences how quickly they move and how much they’re willing to pay.
Companies that can prove clean ownership, clear usage, and responsible license tracking stand out — especially in competitive markets.
It’s not just legal hygiene. It’s a signal that your company is operating at a higher level.
And that signal creates leverage.
Final Thoughts: Open Source Doesn’t Kill Deals — Sloppiness Does
Open source isn’t the enemy of M&A. In fact, most buyers expect to see it in your product — and are fine with it.
What they don’t like is uncertainty. Surprise licenses. Missing documentation. Confusing terms. Lack of policy.
That’s what slows them down. That’s what makes them lower your valuation, add escrow, or rethink the deal.
But when you treat open source with intention — with clarity, documentation, and process — it becomes a strength, not a risk.
You show maturity. You show operational discipline. You show your IP is ready to scale, sell, or partner.
Managing open source well doesn’t just protect the deal. It improves it.
Because in the end, smart IP practices reflect smart companies. And those are the companies everyone wants to acquire.
