Due Diligence and Intellectual Property

By Tom Taulli

If you are buying a tech company, it is very important to conduct a thorough due diligence of the intellectual property (IP) assets. Then again, even seemingly ìbrick and mortarî companies may have IP, such as a patent on a manufacturing process or a critical trademark.

Due diligence is a tough process. Although, it can be even more difficult when dealing with IP.

A big issue is determining if the seller has ownership rights in the IP. This means looking at the:

? Chain of development: Where was the technology built? Was some of the technology built while the employee was working for another firm? If so, this firm may have a legitimate claim of ownership.
? Contracts: Did the seller have strong contracts with its employees and contractors to maintain complete ownership?
? Database Search: An attorney can do searches on copyrights, patents and trademarks to see if there are any problems with possible infringements.

The Value of the Technology

Another big factor in IP due diligence is analyzing the value of the technology.
Here are some strategies:

? Documentation: Make sure the code is fully documented. This makes it easier to integrate into other technologies.
? Customer feedback: Are there many complaint letters from customers? Are there any product reviews from trade magazines? How about customer returns of the product? Is this increasing?
? Competitive Analysis: Make sure you look at the other related products on the market and make comparisons.

Conclusion...

IP due diligence is a highly specialized area. Even if you have in-house talent to deal with the complex issues, it is still a good idea to hire qualified consultants. True, it will add to the overall cost of the acquisition ñ but may, in the end, mean avoiding a costly mistake, such as buying a company that does not even own its technology.

MergerPlace is pleased to have the esteemed Mr. Tom Taulli as the managing editor of our MergerPlace M & A Advisor™ E-zine.

Tom Taulli is an expert in the M&A process. He is the author of the critically acclaimed The Complete M&A Handbook (Random House) as well as six other books written for publishers such as Bloomberg and McGraw-Hill. Tom also teaches M&A at the USC School of Business.

Tom has been quoted extensively in the press, including the Wall Street Journal, USA Today, Barron's, and The Los Angeles Times, and has provided commentary on CNBC, CNN, and Bloomberg TV, as well as appeared on a variety of top radio stations across the country.

Tom's books are available for purchase in our bookstore.

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