Not a terrible idea at all, IMHO. Isn't the core idea of OSS to enable those who use the software to modify it and keep maintaining it? It doesn't mean you have to give it to everyone else as well for free.
One reasonable choice would be to give or sell your former paying customers just a raw code dump, with a notification and a disclaimer of all the included license problems and other embarrassement. Giving it for free would of course be an easy way to avoid unnecessary liabilities.
Who knows, maybe next they want to buy your services to make fixes and new features? Perhaps they might even be willing to sponsor you in making it a proper open source project.
Talk to your customers. They are your most valuable asset.
One reasonable choice would be to give or sell your former paying customers just a raw code dump, with a notification and a disclaimer of all the included license problems and other embarrassement. Giving it for free would of course be an easy way to avoid unnecessary liabilities.
Who knows, maybe next they want to buy your services to make fixes and new features? Perhaps they might even be willing to sponsor you in making it a proper open source project.
Talk to your customers. They are your most valuable asset.
EDIT: continued the natural train of thought