Showing Due Diligence with Intellectual Property

With ever increasing frequency, intellectual property has become a bigger part of M&A transactions. Intangible assets such as patents and proprietary industrial designs have grown quite significant. In some cases, they’ve become more important than physical assets when determining a value of a business.

Most likely, if you are in negotiations to sell your business to a potential buyer, the deal that’s being put on the table includes clauses that will give them access to your intellectual property.

Therefore, due diligence is incredibly important on both sides of the coin, and must be done with great care and detail. If you’re a buyer, you want to avoid any possible infringement suits or being placed in a vulnerable position because of weak patent or trademark rights. As a seller, you want to be prepared to demonstrate the high value and safety of your company’s intellectual property.

If you are selling your business, you want to start preparing your intellectual property right away before a buyer performs due diligence. Start by identifying and cataloging physical evidence of intangible assets. You should interview employees and consultants about potential licensable intellectual property.

In reality, most owners don’t realize how much potential proprietary information is being used on a daily basis. In many cases, no records have ever been created – names of authors or inventors, dates of first use and supporting communications documentation.

If you start preparing early, you will be able to accommodate serious buyers when they do request a preliminary report of the company’s assets. This will prevent any unpleasant surprises revealed by a potential buyer late in the process that could delay or derail altogether a deal’s closing.

When entertaining potential buyers, you should expect to answer a variety of questions that’s related to your company’s ability to control its intellectual property assets, the numerous protections that have been implemented and the availability of key supporting documents such as trade name license agreements and patent assignments.

Some of these questions include:

• Have you secured intellectual property protection in the United States as well as appropriate foreign countries by filing the necessary legal documents or registrations;
• Have you established a properly prepared and recorded chain of title from each prior owner;
• Have any patents or trademarks been challenged or disputed, and are they likely to be infringing on any third-party rights;
• Overall, do you have a strong intellectual property portfolio that would stand up to legal challenge against any patent or trademark claims;
• Have patent and trademark protection processes been performed by legal counsel with a positive, value-driving reputation;
• Have you taken measures to protect your business’ portfolio such as draw up non-compete agreements, enforcement actions, product labeling and security of trade secrets;
• What intellectual property licenses are relied on to run the business; What portions of the intellectual property portfolio have been licenses to others;
• What complimentary patents and trademarks can be developed for the portfolio;
• What are the prospective untapped markets for the intellectual property?

While buyers won’t consider all of your intellectual property rights equally valuable, the more important the rights, the more closely buyers will scrutinize the assets.