Due Diligence: Intellectual Property

Ok, now on to the big whale of the due diligence process: intellectual property. This is where the buyers needs to weed out what is really valuable and for the seller to stuff as much as possible the value of the business. What are the trademarks that are truly valuable? What copyrights are worth something? That goes without saying about a well developed portfolio of patents.

• Trademarks: list of the Company’s used & proposed trademarks, licences granted to third parties (including assignments). Is there is trademark claims for or against the Company?
• Copyrights: what are the copyrights (registered or not) owned by the Company? What are the copyright licenses granted by the Company? Is there any copyright infringement for or against the Company?
• Patents: what are the patents (registered or not) owned by the Company? Does the Company have any applications for registration? Did the Company license any patents. Even more importantly, has there been any discussion, claims or dispute regarding patent infringement (for or against the Company). This needs to be well documented – I’ve seen deals called off at the last minute just for on a risk of a patent infringement …
• Industrial Designs: this is also a very important point. Your engineering team and product design team might have a lot of very interesting designs up their sleeves.  While these might not yet help the Company, they can still be quite valuable for the buyer.
• Trade Secrets: this also applies to trade secrets. The seller needs to list all work done by the research team and other highly secret software development done.
• Technological Processes: does the seller have any innovative processes? If so, this is key to identify here.
• Confidentiality and Non-Disclosure: this is an area that I find too many companies are easy going when it comes to signing NDAs. A big portion of NDAs are often signed just because that’s how things are done. And I can’t disagree more. There is a lot of situation where non-disclosure are not needed (and will be a topic of an upcoming post). In any case, the seller needs to provide the complete list of all agreements signed. This is where having a paralegal and a good system to archive agreements makes the due diligence process easier to go thru.

The key takeaway point for me when it comes to intellectual property is all about the quality of the content that the seller can provide. If you don’t have any decent system to manage and retrieve all this information, you will spend a huge amount of time to assemble the data room – let alone forgetting to disclose important information. And this gets even more complicated as the Company gets older. And since many elements related to Intellectual Property lasts more than the usual five (5) years, you can actually drown yourself in a sea of content in trying to provide that the buyer is requesting. The worse of it all is that can be planned ahead – every deal requires for the same core of content (but not always formatted the same way).

So start-ups, start gathering and maintain your data in preparation for any due diligence you might encounter. Don’t wait until you get an offer …