Intellectual Property Due Diligence for Tech Companies: M&A Considerations

Intellectual Property Due Diligence for Tech Companies: M&A Considerations

The tech sector is perennially a darling of mergers and acquisitions because of the massive room for growth, especially in the wake of the pandemic, which made a strong case for digital properties and remote work. For many tech companies, their primary source of value is not real estate or other physical property. It’s a brand identity. And often, that brand is heavily reliant on intellectual property such as software, trademarked images, or patented processes. If you’re planning a tech M&A deal, intellectual property due diligence will be a key aspect of the deal. Set yourself up for success by preparing for the process ahead of time.

Who owns your IP? How do you know?

Auditing your intellectual property landscape begins with determining who owns your IP. Did you hire freelancers to build your website? Did consultants help develop valuable processes? What do your employment contracts say about IP ownership when employees develop valuable IP while at the company? You’ll need to chase down each piece of IP, which may then require dissecting its component parts. Make a list of each item and its owners or potential owners. Then the real challenge begins: building strong agreements to ensure each piece of IP is clearly owned by your company. You may have to pay the creators to regain full rights, so be prepared to negotiate.

Is anything you use copyrighted?

In addition to ensuring your own IP is truly your own, you need to make sure you haven’t taken anyone else’s property. Are you using stock images you’ve paid for on your website? Is all of your software licensed and paid for? Have you taken component parts from anyone else’s IP or from the public domain to use in your own work? If so, you’ll need to pay to ensure you have the right licenses before moving forward, and disclose to the buyer if you are using public domain IP.

What do your transfer agreements say?

Your intellectual property is only as valuable as your ability to sell it to someone else. What do your transfer agreements say? Hire a lawyer to go through each IP contract to ensure you can transfer intellectual property to another person. If the agreements are unclear or unfavorable, you may need to renegotiate them—and that can require negotiating additional payment with the other party to the contract.

Cleaning up IP before due diligence

Auditing your IP is half the battle. Making sure you own it all, however, is a necessary prerequisite to putting your company on the market. A skilled M&A firm can help you identify the most important IP. They can also connect you to an IP lawyer. Unfortunately, these situations often require layers of complex IP agreements to sure you have full ownership of everything that’s yours, and a license to use everything that belongs to someone else. IP disputes can be extremely costly, exposing your company to massive liability that will scare off most buyers. So it’s worth the time and effort required to clean up any IP issues before you begin working with a buyer. Rest assured, if you don’t identify IP issues, they will. Get ahead of these challenges by doing an IP audit now.