Why FOSS Audits Matter in Mergers and Acquisitions

Software as a Core Asset

Software is one of the most valuable assets in modern technology companies. As a result, mergers and acquisitions involving software firms require close examination of the software itself. Today, due diligence goes beyond financial records, contracts, and patents. It also includes reviewing the source code that underpins the product. Because modern applications rely heavily on open source components, companies must understand how they use open source software to assess risk and value.

The Prevalence of Open Source Software

Most commercial software includes a substantial amount of open source code. Developers rely on libraries, frameworks, infrastructure platforms, and tools from the open source ecosystem. This approach speeds up innovation and development, but it also introduces legal and operational considerations. Open source licenses impose obligations such as attribution, license notices, and, in some cases, source code disclosure. During an acquisition, the buyer must verify that the target company has met these obligations.

What a FOSS Audit Involves

Open source audits are now a standard part of software due diligence. A FOSS audit systematically analyzes a codebase to identify open source components, determine applicable licenses, and assess compliance. The goal is not to avoid open source software—it is everywhere—but to understand its use and identify potential risks.

Industry Expectations and Governance

Industry guidance emphasizes the importance of tracking software components and their licenses. Organizations must maintain a clear inventory of all components, including open source dependencies. Without this visibility, companies cannot fully evaluate legal obligations tied to their software. Strong governance practices help ensure responsible and compliant use of open source.

How the Audit Process Works

A FOSS audit starts by identifying all open source components in a product. Modern applications often depend on hundreds or thousands of external libraries, many added automatically through package managers. Automated tools scan the codebase to detect these components and their licenses. Auditors then review how the components are used and whether the company complies with license terms.

License Compliance Risks

License compliance is a key focus of open source due diligence. Some licenses, especially copyleft licenses like the GNU General Public License, require companies to share source code under certain conditions. These licenses are widely used, but companies must follow their terms carefully. Non-compliance can terminate license rights and create legal and financial risks.

Security Considerations

Security is another critical aspect of open source audits. Some components may contain known vulnerabilities. If left unresolved, these issues can expose the acquiring company to risk. Auditors typically check components against vulnerability databases to identify known issues. Fixing these vulnerabilities before closing reduces operational risk.

Intellectual Property Concerns

Open source audits can also uncover intellectual property issues. Companies may unknowingly use code with unclear licensing or unknown origin. Buyers need to understand where the software comes from and whether the company has the right to use it. Uncertainty in ownership or licensing can reduce the value of the software.

Evaluating Governance Practices

Modern due diligence also examines how a company manages open source use. Mature organizations enforce internal policies, maintain component inventories, and review new dependencies before adoption. These practices help demonstrate that the company manages open source responsibly and complies with legal requirements.

Impact on Deal Terms

Findings from a FOSS audit can influence deal terms. Identified issues may require fixes before closing, price adjustments, or indemnities to address risks. In some cases, unresolved problems demand significant engineering effort to replace or modify components. As a result, open source due diligence can affect both timelines and valuation.

Tools for Transparency

Open source software spans every layer of modern technology, from operating systems to machine learning libraries. As reliance grows, transparency becomes essential. Tools like Software Composition Analysis (SCA) and Software Bills of Materials (SBOMs) help track components and licenses. These tools give companies visibility into their software supply chains and simplify due diligence during transactions.

The Value of a FOSS Audit

A FOSS audit provides clarity about the software being acquired. It helps buyers understand the codebase, verify license compliance, and assess security and intellectual property risks. With this insight, the acquiring company can confidently integrate and develop the software.

Conclusion

Open source software dominates the modern technology landscape, and its role in corporate transactions continues to grow. Companies preparing for acquisition or investment must maintain clear visibility into their use of open source. This practice is no longer optional—it is essential for sound governance and for preserving the value of software assets.

Need Support?

If you need help analyzing open source components in your software and understanding their risks in a transaction, Bitsea can help.