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An intellectual property practitioner is often requested to perform a due diligence (“DD”) review in connection with a potential merger or acquisition. The information, report or summary produced based on such a review varies greatly depending on the nature of the task.
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 (if conducting the DD on behalf of the seller) or analyzed (on behalf of the buyer) including patents, trademarks, copyrights, trade secrets/know-how, and any agreements affecting IP.
The IP due diligence can ultimately be the basis for establishing a value for the goodwill of the target company. In many countries, an expert with specific industry knowledge may be called in to establish the value of a company’s goodwill or its IP portfolio. Various brand and IP valuation companies may assist in this determination.
In the context of negotiations, IP lawyers are often the least popular persons in the room. Just when the parameters of a deal are usually close to being finalized, along come the IP lawyers assigning vastly different values to the company’s goodwill. In such instances, it’s important to stick to your guns. A comprehensive due diligence is the key.