Intellectual property is at the core of most tech companies. In private acquisitions, buyers often overlook key intellectual property (IP) concerns in their haste to complete a transaction. Before committing to a purchase, however, a buyer should undertake a rigorous investigation of the target company’s IP. Skilled advisors and intellectual property lawyers can mean the difference between a successful due diligence process and an incomplete one. Some key factors that buyers should examine include:
Documentation of IP
The seller should offer a comprehensive list of its IP, as well as relevant documentation, including patents and patent applications, registered trademarks and service marks, assignments and agreements, details about any infringement claims, registered domain names, a list of software and databases, technology licenses, and any and all documentation that supports the IP or sheds light on actual or potential disputes. Many, if not all, of these items should be listed in the purchase agreement disclosure schedule.
Acquisition and Development of IP
Acquirers often value tech companies based on IP. It is critical that acquirers know what IP the company owns, and that the seller can substantiate ownership. Buyers should provide documentation of any jointly owned IP, IP developed by freelancers or contractors, IP disputes, and all people involved in the creation of intangible assets. An intellectual property attorney can prove invaluable in determining the adequacy of a company’s agreements and in predicting the likelihood of IP-related disputes.
Issues With Open Source Software
Open source software is convenient, and is often used in the development of new products and technology. The use of open source can raise important ownership and licensing issues. The right agreements can reduce this risk, but sellers must carefully evaluate their use of open source in order to assess liability and to plan for potential disputes. Several software programs can help sellers assess and identify potential open source issues.
IP Representations and Warranties
IP representations and warranties serve two roles. These provisions can shield the acquirer from having to perform under a contract if the seller has made false representations. They also may indemnify an acquirer for money damages arising from the seller’s misrepresentations. The seller’s representations and warranties relating to IP ownership are significant. IP infringement representations and warranties can also prove key. If unreliable or poorly executed, this type of oversight can extinguish the deal.
Issues with IP Agreements
Clearly written IP agreements are key for the protection of both buyer and seller. An attorney should review these agreements and identify issues early in the process. Doing so can protect against IP-related disputes, and protect both parties should such a dispute arise.
Web Presence and Social Media Content
A company’s web presence is often key to its marketing strategy. An acquirer will want to know whether the company owns its domain, has adequate terms of use, complies with its stated privacy policy, owns all logos and images used across various platforms, and owns the rights to the company’s social media page. Issues with contractors are common here. For instance, do you have a contractor post to your social media page on your behalf? What are the terms of that agreement, and who owns the post? The answer is not always obvious.
Privacy and Data Protection
What strategies has the seller implemented to protect its IP from cyber attacks, to govern the collection of personal data, and to address potential security breaches? A lackadaisical approach can put the company at great legal and regulatory risk, thereby adversely affecting valuation.
Change of Control and Assignment Issues
IP agreements often contain provisions requiring consent of both parties to change control of the IP or to assign ownership to a new party. The degree of consent required often hinges on the structure of the transaction. An asset sale almost always requires third-party consent, but other scenarios may require careful review of the contract language. This is not a process to undertake lightly. Skilled advisors and an IP attorney are key.
About Solganick & Co.
Solganick & Co. is an independent investment bank and mergers and acquisitions (M&A) advisory firm that provides specialized expertise in the Software, IT Services, Healthcare IT, and Digital Media sectors. Solganick & Co. offers strategic and financial advisory and relationships within the industry, a deep knowledge within these sectors, and a premium team of experienced investment banking professionals. Our team assists companies and owners in completing mergers, sales, divestitures, spin-offs and acquisitions that are strategically and/or financially beneficial to the firm’s business model and transaction goals.
For more information or to discuss an M&A transaction, please contact us at [email protected]
