Due diligence of intellectual property

In any business acquisition, among the most identifiable and significant of the intangible assets are the target’s intellectual property.

Yet the due diligence process typically focuses on tangible assets and historical results. Today, due diligence is often deficient in the review of the underlying benefits and risk associated with the related intellectual property and other intangible or intellectual assets. Other intangible assets, like associated trade secret, typically receive even less attention during the due diligence process.

The goal of due diligence is to provide the parties with sufficient information to make a reasoned decision as to whether or not to complete the transaction as proposed.

Due diligence can provide a basis for determining or validating the appropriate terms and price for the transaction incorporating consideration of the risk inherent in the proposed transaction.

The acquirer should determine not only whether the process is owned, but also whether or not this cost reduction goal will be achieved within the acquirer’s existing manufacturing operations through the transaction and what risks are inherent in completing the transaction.

The acquirer should investigate the ongoing activities at competitors that may lessen the value of the obtained protect process or feature and whether the competitors are developing next-generation products with their intellectual property without infringement.

The acquirer should also consider whether the patented subject matter could be adapted to other products manufactured by the acquiring company and additional value obtained from other intellectual property in the target’s portfolio that might redefine the objective or strategies driving the transaction.

On the other hand, the seller should consider whether other subsidiaries of the seller currently utilize the intellectual property being sold as protection or competitive advantage which requires license back.

Also, whether there are key employees of the target who should be retained rather than becoming employees of the acquire company.

In addition, whether licensing the patented process to others while maintaining ownership of the targeted subsidiary provide a better long-term return to the parent than selling the subsidiary to the acquiring company.