Importance of IP Due Diligence

A due diligence review is important for evaluating all aspects of a potential merger or acquisition. If a due diligence review is being conducted on behalf of the buyer, the information gathering process, including that relating to intellectual property, is a means of discovering as much as possible about the status of the target. A comprehensive and thorough IP due diligence requires significantly more than merely compiling a list of the company’s registrations and other IP assets. Not only must the strength of the company’s IP rights in the marketplace be assessed, but also the strength of its competitors’ rights.
While every IP due diligence must be tailored to meet the particular business situation, certain basic steps should always be considered. The first step is to understand the company’s basic products and services. This includes not only understanding the current product and service offerings of the business, but also an understanding of projected products and services. The second step is identifying the intellectual property which corresponds to such products or services. Once such IP has been identified, inventory must be taken of the company’s intellectual property rights, usually set forth in a detailed schedule. Special emphasis should be placed on the form of IP which is crucial to a specific aspect of a company’s business, e.g., trade secrets or confidential information may be the most important issue for some emerging technologies. Naturally, all forms of intellectual property should be carefully listed, including patents, trademarks, copyrights, trade secrets/know-how, and any other agreements affecting IP.
The IP due diligence can ultimately be the basis for establishing a value for the goodwill of the target company. Establishing a value for a company’s goodwill or for its IP portfolio usually requires the input and analysis of an expert having specific industry knowledge. Various brand and IP valuation companies assist in this determination.
The ultimate valuation of a brand based on its goodwill is often one of the most contentious aspects of negotiations. Both sides tend to present their trademark “experts” who often assign wildly different values to the goodwill. Since goodwill often leads to “bad will” at the negotiation table, it’s best to be as prepared as possible to defend your interpretation of the brand value. This can be accomplished by conducting a thorough and effective IP due diligence review.