The importance of intellectual property (IP) in an M&A deal process can often be underestimated, particularly if it is not seen as central to the transaction process.
Regardless of whether the buyer believes the IP to have a material impact on the value of the acquisition target, it is always worth spending time doing appropriate due diligence. This will reveal the full extent of the IP owned by the target and detail any deficiencies that may become apparent.
A structured approach to this research will provide detailed information to investors that could affect pricing, or other key elements of the proposed transaction. Initial due diligence should establish ownership, ensuring a clear chain of title is defined and documented. A series of questions should also be asked about the IP to establish fully transferable ownership rights, free of any encumbrances. Technology IP is often difficult to trace and more likely to be owned by employees of the business or partner firms involved in its development. Due diligence should identify this and ensure that any existing third party claims are resolved prior to purchase.
IP-related legal disputes, either ongoing or pending, will also be revealed by thorough due diligence. This is important since costly legal disputes can prevent an acquirer from implementing their plans fully following purchase.
Once appropriate due diligence has established the nature and status of the IP in the target business, it is time to value it. IP valuations are critical to make sure the correct price is being paid for a business, since patents, trademarks and trade secrets, can often easily be undervalued or overvalued if not assessed by an expert. Accountants are crucial to the valuation process, as are technical experts where the IP is less tangible, such as in the case of computer programs or specific coding.
The common ways to value IP are the cost, market or income approaches; which essentially consider value based on the cost to replace the asset, the income it generates or the value of comparable assets in the market. Whichever is used, it should generate a fair price that reflects the importance of the IP within the wider business.
When an acquirer knows all of the IP in play and its accurate value, they can start to put a purchase agreement in place, confident that they are unlikely to experience any nasty surprises. This is when appropriately tailored representations and warranties are required to ensure the purchase or sale of the IP is indemnified against unforeseen circumstances. Buyers will push for a warranty from the seller, guaranteeing ownership, and indemnifying the buyer if the IP they believe they have purchased didn’t actually belong to the seller. They might also ask for indemnifications against deficiencies in the IP which make it invalid or inoperable. Elsewhere in the contract, clauses limiting duration and geographic scope of the IP are also common, as are clauses protecting source code in the case of technological IP.
In the following discussion, we speak with five IP lawyers with expertise in ensuring IP is transacted successfully during an M&A process. They will go into detail about the points raised here and give their unique jurisdictional view on the IP-related challenges inherent in an M&A transaction.