The most significant transactions are not always mega mergers. Sometimes a deal that isn’t worth billions of dollars is the one that tells us most about where an industry is headed.
Such was the case in mid-2019, when Big 4 consulting firm Deloitte acquired ClearViewIP, a global intellectual property consulting and transaction advisory company. The deal signalled what everyone had suspected for a while: IP was moving to the foreground of corporate strategy.
DealRoom’s experience on hundreds of deals confirms this: Intellectual property is no longer solely a concern for high-end technology firms.
Intellectual property is a way that companies place a drawbridge around the value that they have created.
In this article, we look at how to conduct IP due diligence, as well as providing a checklist of the items that require attention to ensure this part of your company’s due diligence process passes successfully.
Why is Intellectual Property Due Diligence Important?
Intellectual property (IP) due diligence is important because a buyer cannot accurately evaluate a target company’s technology offering without fully understanding the intellectual property that underpins it.
Many companies’ long-term value is often intricately associated with them being able to maintain market power through the uniqueness and safety of their technology IP, so arriving at a good value demands a good valuation of the target’s IP portfolio.
This is as true for non-technology firms as it is for technology firms. Water and sugar alone were not responsible for making Coca-Cola trillions of dollars. There’s the unmistakable branding, the formula, and even the bottle.
All are part of Coca-Cola’s intellectual property portfolio and are worth billions of dollars each. To paraphrase Warren Buffett, Coca-Cola’s major shareholder: the company’s intellectual property portfolio creates a drawbridge around its future cash flows.
There is another reason why intellectual property due diligence is important: The IP that the target company does not possess may be as telling as that which it does.
To put this in another way, it’s extremely important that you understand whether the company you’re acquiring may be infringing on another company’s intellectual property and that in order to conduct business, the company isn’t impinging in any way on another company’s intellectual property.
The IP due diligence checklist
Like any checklist for due diligence, be it financial due diligence (insert link) or operational due diligence (insert link), the IP due diligence checklist below is intended as a roadmap.
DealRoom advises that you have an intellectual property specialist in place if your company is acquiring a target with an extensive IP portfolio.
However, conducting the following checks would be an excellent place to start in almost any technology transaction:
1. Patents, Copyrights, and General IP Portfolio Issues
- Gain an understanding of all patents currently held, applied for, or in preparation at the target company.
- Obtain a copy of any past or present IP infringement proceedings made against the company.
- Ensure that all of the company’s patents are up-to-date, and that all obligations such as annuities are fully paid up.
- Obtain a list of patents previously held by the company and gain an understanding of why the company no longer possesses them.
- Gain an understanding of the subject matter material that the company possesses copyrights on.
2. Trade Secrets
- Gain an understanding of the company’s trade secrets policy and all trade secrets currently held by the company.
- Obtain documents that prove the validity of the company’s trade secrets.
- Obtain copies of any documents surrounding trade secrets enforceable by third parties against the company.
3. Third Party Intellectual Property Issues
- Gain an understanding of charges or notices from third parties received by the company surrounding IP infringements.
- Conduct an analysis of the validity of the claims made in 3a, and gain an understanding of the company’s defense strategy against the claims.
- Understand any past IP procedures involving third parties and how they were resolved by the target company.
- Identify all cases where the target company’s intellectual property was licensed to a third party and under what terms.
- Understand how target company agreements with third parties will affect IP in case a transaction is closed and what your company’s obligations will be.
- Obtain a copy of all joint venture and/or joint development agreements and their implications for intellectual property.
Conducting Intellectual Property due diligence with DealRoom
Intellectual Property due diligence is often a highly complex process that involves a thorough understanding of law combined with a specialist area (for example, science or technology).
Ensure that you have a team in place with a strong track record to ensure that you are extracting as much value from the process as possible. DealRoom regularly provides companies with a platform to conduct their IP due diligence.
Click on banner below to start conducting your IP due diligence with our pre-built ready to use template.