SAP Affiliate Licensing in M&A: Risks, Definitions, and Negotiation Strategies

SAP Affiliate and Subsidiary Licensing in M&A: What IT Leaders Must Know

Why Affiliate Licensing Becomes Critical in M&A

Mergers and acquisitions (M&A) often bring new subsidiaries or affiliated companies into the fold. The challenge is that SAP licensing rules usually tie software usage rights to specific legal entities. Read our guide for a full overview of all SAP Licensing & Mergers and Acquisitions risks.

When your organization acquires another company or spins off a business unit, the existing SAP contracts may not automatically cover these new or restructured entities. SAP is aware of this and can use it as leverage.

If a new affiliate isn’t explicitly covered under your current contract, SAP may demand that you purchase fresh licenses or sign a separate agreement for that entity.

For example, imagine you acquire a regional subsidiary that uses SAP software. If your master SAP agreement only names your original company (and perhaps certain existing affiliates), a newly acquired business might be outside the agreement’s scope.

Without proactive management, you may face unexpected relicensing demands. SAP might insist that the new entity pay full price for licenses, even if you already have an enterprise deal covering similar usage.

This scenario highlights why affiliate licensing becomes critical in M&A — failing to address it can lead to paying twice for the same software or falling out of compliance.

Whenever your corporate structure changes, you must revisit SAP licensing.

IT leaders and procurement teams must ensure any new affiliate or subsidiary is either covered by existing licenses or handled through a planned licensing approach. Otherwise, an M&A event can turn into a costly surprise, with SAP holding the upper hand in negotiations.

How SAP Defines Affiliates and Subsidiaries

Understanding how SAP defines “affiliate” in its contracts is key to avoiding licensing surprises. Typically, SAP contracts include a clause defining the licensee (your company) to include certain affiliated entities.

In many agreements, an affiliate is defined as any entity directly or indirectly controlled by the licensee, usually meaning your company owns more than 50% of that entity’s shares or voting rights. This definition might also cover parent companies or sister companies under common ownership.

However, the details can be tricky: some SAP contracts define affiliates narrowly or even require each affiliate to be named in the contract. For instance, a contract might list the specific subsidiaries allowed to use the software.

In such cases, any new acquisition or entity formed after the contract was signed would not automatically be included. This ambiguity leaves room for SAP to interpret coverage in a way that benefits them.

For example, a European manufacturer acquired a smaller Asian firm and assumed it was covered as an affiliate under their SAP agreement.

SAP disagreed, claiming the new subsidiary wasn’t within the original contract’s scope, and issued a €4 million demand for additional licenses. The company was caught off guard — they believed “affiliate” included any company they owned, but SAP’s interpretation differed.

The lesson: never assume future subsidiaries are protected by your existing SAP terms. Always double-check your contract language and clarify any points that need clarification.

Clear entity definitions in your SAP agreements will prevent nasty surprises down the road.

Negotiating SAP Contracts During Acquisitions: 5 Proven Tactics

Common Affiliate Licensing Risks in M&A

During M&A activities, several risks commonly arise regarding affiliate and subsidiary licensing.

Being aware of these will help you plan mitigations:

• Newly acquired company not covered: An acquired company isn’t included under your main SAP contract, making its SAP use unlicensed and leading to unplanned license costs.
• Carve-out losing access: A divested subsidiary loses the right to use the parent’s SAP after separation, potentially causing downtime or a costly scramble to secure new licenses.
• Joint venture needs separate licensing: A newly formed joint venture isn’t automatically covered by either parent’s SAP license, so sharing SAP could trigger compliance issues or duplicate licensing fees.
• Overlapping systems post-merger: If you maintain two parallel SAP systems after a merger, you’re effectively paying for two sets of licenses and support until those environments are consolidated.

The following table summarizes these risks, their impact, and possible mitigations:

Each of these risks can result in major costs or compliance problems. The key is to spot which ones could affect your situation and address them upfront.

Negotiation Strategies for Affiliate Coverage

The good news is that with the right negotiation strategies, you can prevent many affiliate-related licensing headaches before they happen.

Key tactics to ensure your SAP contracts cover affiliates and subsidiaries during M&A include:

• Affiliate coverage clauses: Negotiate contract language that explicitly states all current and future affiliates and subsidiaries of your company are covered under your primary SAP license. If you acquire another company, that entity’s SAP usage falls under your existing agreement (you might still need to purchase additional user licenses for growth, but you won’t need a brand-new contract for the affiliate). This clause removes ambiguity and stops SAP from claiming a new affiliate is outside the agreement.
• Continuity provisions: Include “change of control” or continuity clauses to preserve your pricing and terms through mergers or acquisitions. For instance, stipulate that if your company merges with or acquires another, the current discount levels and pricing remain in effect for a set period. This way, SAP can’t use an M&A event as an excuse to revoke your discounts or raise prices for the combined entity.
• Tighten entity definitions: If the default definition of ‘Customer’ or ‘Affiliate’ in your contract is vague, work with your legal team to broaden and clarify it. For example, specify that “Affiliate” means any entity that your company controls, is controlled by, or is under common control with – including any future entity in which your company holds a majority stake. The clearer and more inclusive the definition, the less wiggle room SAP has to exclude a new subsidiary from coverage.
• Transition terms for carve-outs: When selling or spinning off part of the business, negotiate a transition services agreement that covers IT systems, including SAP usage, for the carved-out unit. This allows the divested entity to continue using the parent’s SAP for a limited transition period (e.g., 6–12 months post-separation). Likewise, if you’re acquiring a company, ensure the acquired business can keep using its existing SAP system during the integration phase (with SAP’s consent). These arrangements prevent sudden cut-offs and give everyone time to secure proper licenses or migrate to new systems.
• Leverage renewal periods: The best opportunity to secure the above clauses is during a major contract renewal or purchase. SAP is more flexible when closing a big deal, so make affiliate coverage and M&A protections a condition of signing. For example, one company anticipating growth through acquisitions added a broad affiliate clause during its SAP renewal. Over the next two acquisitions, it saved them around €8 million in licensing costs by avoiding separate deals — a significant win from one negotiated clause.

When negotiating these terms, emphasize that you need flexibility for corporate changes as part of your SAP partnership.

Clauses won’t always be granted easily, but enterprise customers have managed to include M&A-friendly terms in their contracts. Investing effort in these negotiations up front can save enormous costs later.

Example Scenario — Protecting Affiliates in M&A

Consider a scenario that shows how proactive planning can thwart SAP’s attempts to capitalize on affiliate licensing gaps:

Scenario: Alpha Corp, a multinational enterprise, has an SAP agreement that includes a well-defined affiliate coverage clause. Alpha Corp acquires Beta Inc., a regional manufacturing firm that relies on SAP.

• SAP’s stance: Upon hearing of the acquisition, SAP claims Beta Inc. isn’t covered under Alpha Corp’s current license. They propose that Beta must sign its own SAP agreement — at a substantial cost (quoting €10 million for those licenses). This is a classic SAP move, using strict contract terms to push a new sale.
• Alpha’s response: Alpha Corp’s CIO and procurement team review their SAP contract and point to the affiliate clause negotiated in their last renewal. It clearly says any new majority-owned subsidiary is covered under Alpha’s existing license. They inform SAP that Beta Inc. falls under their agreement and that they will purchase additional user licenses as needed for Beta’s employees under the existing pricing terms.
• Outcome: SAP concedes Beta Inc. is covered under Alpha Corp’s existing agreement. Instead of a €10 million new contract, Alpha Corp only needs a minor “true-up” purchase. Beta continues operating without interruption. In the end, Beta’s SAP access remained uninterrupted, and a single contract clause saved Alpha Corp from a massive unforeseen cost.

Affiliate Licensing Checklist for M&A

To ensure you cover all bases, here’s a quick checklist for IT and procurement teams managing SAP licensing during mergers, acquisitions, or divestitures:

• Review the SAP contract language on affiliates. Understand exactly how “Customer” and “Affiliate” are defined in your current agreements. Note any requirements to notify SAP of new affiliates or any entity that is excluded from coverage.
• Negotiate future affiliate coverage. If a contract renewal or negotiation is approaching, advocate for language that automatically covers all future subsidiaries or acquisitions under your master SAP license.
• Add continuity clauses for M&A events. Ensure the contract has provisions to maintain your pricing and discount levels in the event of a merger, acquisition, or divestiture. Remove or modify any clause that lets SAP terminate or renegotiate the deal just because your company’s structure changes.
• Plan transition arrangements for carve-outs. If you are divesting a business unit, arrange temporary rights or a transition agreement so the carved-out entity can use SAP for a while post-separation (until it secures its licenses). If you’re acquiring, ensure the target can continue using its SAP system during the integration process. Document these plans to avoid compliance issues.
• Consolidate duplicate SAP systems quickly. After a merger, audit any parallel SAP environments to ensure consistency. Develop a plan to merge into one primary system and contract. The faster you consolidate systems, the sooner you can eliminate duplicate license costs and reduce compliance complexity.

5 Recommendations for IT & Procurement Leaders

Finally, here are five key recommendations for IT leaders and procurement professionals to stay ahead of affiliate and subsidiary licensing challenges in M&A:

1. Treat affiliate coverage as non-negotiable in SAP deals. Make broad affiliate inclusion a must-have whenever you sign or renew an SAP contract. It’s as critical as negotiating a good price — a huge discount means the agreement doesn’t cover little if half of your new business.
2. Close gaps in entity definitions before any acquisition. Don’t wait until you’re amid an acquisition to discover your contract language is too narrow. Proactively tighten the definitions of “Licensee” and “Affiliate” now, so when a merger or purchase happens, your bases are already covered.
3. Use continuity clauses to preserve terms in the event of change. Ensure that your negotiated discounts, pricing protections, and other key terms are carried over even if your company merges or divests parts. Continuity clauses stop SAP from using corporate changes as an excuse to strip away your favorable terms.
4. Plan carve-out licensing with transitions. When selling or spinning off a unit, remember that SAP licenses cannot be transferred without approval. Plan by arranging temporary licensing or a transfer mechanism for the carve-out’s SAP usage. This avoids panic buys or service gaps when the deal closes.
5. Consolidate SAP estates post-merger to cut costs. Mergers often leave multiple SAP systems and contracts in place. Have a plan (and budget) to unify onto one primary SAP environment as soon as feasible. Consolidation will eliminate redundant license and maintenance costs, giving you stronger negotiating leverage as a single, larger customer.

Adopting these practices positions your organization for strength. Instead of reacting to SAP’s moves, you’ll proactively set the rules and minimize compliance risks. Essentially, you’re closing the licensing loopholes before they can be exploited.

FAQ

Q: How does SAP define affiliates and subsidiaries in contracts?
A: SAP generally defines an affiliate as any entity your company controls, usually over 50% ownership or voting power. However, definitions vary. Some contracts explicitly list which affiliates are covered or only include those that were in existence at the time the contract was signed. Always check your specific SAP agreement to determine which entities it considers “affiliates.”

Q: Can SAP force relicensing for newly acquired affiliates?
A: Yes. If you acquire a company that isn’t covered under your existing SAP contract, SAP can insist you buy new licenses for that affiliate (often at full list price) or sign a separate agreement. This is why having a clause that automatically covers new affiliates is so important — without it, an acquisition can trigger an unexpected licensing bill.

Q: What protections can be negotiated in advance to avoid these issues?
A: Key protections include an affiliate coverage clause (to include future subsidiaries), continuity clauses (to preserve pricing and terms after M&A events), and transitional provisions (to grant divested units temporary SAP access). It’s best to secure these in your contract during a negotiation or renewal, when you have leverage, rather than trying to add them after the fact.

Q: How do carve-outs impact SAP licensing rights?
A: When you carve out (divest) a part of the company, the SAP licenses typically stay with the original company. The separated entity loses the right to use the parent’s SAP software once it’s independent. That means the carve-out needs to quickly arrange its own SAP contract or negotiate a temporary usage agreement to avoid any interruption in SAP access.

Q: How can enterprises consolidate SAP estates to avoid duplication after a merger?
A: Review both companies’ SAP contracts and usage after a merger, then decide on one primary SAP system in the future. Migrate users from the secondary system to the primary and retire the redundant licenses and system. The sooner you consolidate onto a single SAP environment, the faster you eliminate duplicate costs and simplify compliance.

Would you like to learn more about how we can support your organization with SAP during mergers and acquisitions?

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