If you are planning to take your business through commercial transaction, whether investment or M&A, get ready to be scrutinised. For a target business, due diligence is one of the most uncomfortable periods of the transaction.
We regularly support clients through commercial transactions, and we have seen the approach to intellectual property (IP) due diligence change significantly over the years. The days of quietly providing a list of registered patents and trademarks in a data room, only for their status to be checked, are gone. Questions around IP come up in almost every investor pitch I attend. The value of intangible assets is starting to be better understood and a rigorous assessment of all IP assets, beyond registered rights, and their contribution to the business is becoming the norm in commercial transactions.
For any company looking to exit or attract investment, it is critical that you own the conversation around your IP during the transaction. It is rare that no queries arise, but solid preparation for the IP discussion will put you on the front foot and drive confidence throughout the engagement for both sides, leading to a better outcome.
Here are our IP Top Tips to position you to own the IP conversation during due diligence.
1. IP Audit – do it early
It is rare that we cannot improve your IP situation when working towards an exit/investment event. Even the best executed IP strategy can often be optimised when a commercial transaction is being considered.
However, improving your position can take time. Engage your patent attorney early to reduce stress and improve focus. These plans tend to be better thought out when you are out of the spotlight.
Early consideration gives you time to update registers, chase signatures, update contracts, file new IP, extend your registered IP across additional jurisdictions and, in many cases, locate your IP!
2. Identify your IP and tell your story
Correct identification of your IP is obviously critical to preparing for investor conversations. It is more than a list of patents, designs and trademark registrations. Understand where the IP value is in your business. Look at your software products, your know how, your contractual relationships, your people, your data and your brand. Identify it and retrieve it so it can be provided during the transaction.
How does this IP support your business model and provide differentiation? You must be able to map your IP against your products and services and understand how that drives value legally and commercially. Can you back it up quantitatively as well as qualitatively? Can you demonstrate that competitors are having to design around your IP? Have you exploited it in licensing deals?
It can be hard to attribute any value to IP which does not map against your business model.
Ownership is explored in even the highest-level due diligence investigation. Do not ignore it. Queries around ownership are one of the most common problems during IP due diligence and regularly cause panic.
If you cannot prove you own the IP there is immediate uncertainty as to whether you have the right to use it, raising a flag on the transaction.
For all IP, identify who created it, when, and in what circumstances. What agreement was that individual working under when it was created, and does it assign any IP created to you?
Resolving ownership queries or disputes can be complicated. Even retrieving signatures from ex-employees can take time and you can face extreme difficulties if the company previously owning the IP is no longer live. The sooner you resolve these issues the better.
Once you have established a clean line of ownership ensure public records are updated.
4. Is your IP valid?
You would be surprised at how many times registered IP rights listed on schedules have been allowed to lapse or are vulnerable. Ensure all maintenance fees are up to date if you want to retain any credibility in the IP conversation.
In the months leading up to the transaction review the status of your IP. Is the scope of protection consistent across different countries? If not, why not? Does it question the validity of the rights in certain jurisdictions? If you have rights which are deep in examination is there value in trying to accelerate grant before due diligence? Are your IP assets in a vulnerable time period, for example is the opposition period open?
There is a perception among some that a pending application can have more value since the new owner will have the freedom to control the scope. But it also leaves uncertainty. Perhaps a granted patent and a pending right would provide certainty and opportunity, hence greater value?
Finally, if you plan to attribute significant value to a registered right, the question will always arise of how defensible that right is. Relying on patent office approval is a first step but a more robust validity analysis can provide more confidence and give you a chance to amend any patents before scrutiny if necessary.
5. IP contamination of products and freedom to operate
Commercial dynamics around products change as the parent company grows. Are you certain that you have an unencumbered right to use your products? Any IP infringement or licence agreement might have different implications in the hands of a new owner.
Consider running a freedom to operate investigation around your product. If you are operating under licence, check the licences are transferable?
6. Preparation for engagement
Once you have completed the processes mentioned above you are ready to uncover your IP position for due diligence. You should now be ready to handle the IP conversation confidently during investor pitches and commercial discussions, at least on a high level. Be sure to keep your IP team engaged throughout the process and bring them in to cover any detailed questions.
Our expert patent attorneys at BOSH IP have considerable experience in leading our clients through investment rounds and M&A transactions. Contact us for more information on how we can help you prepare your business for IP due diligence and position you to own the IP conversation.