Due diligence plays a central role in any M&A or investment transaction and its importance in guiding the transaction cannot be over stated. Fiona Stevens, a partner in GJE’s Life Sciences team who frequently advises on the intellectual property aspects of commercial transactions, discusses the importance of IP due diligence.
The purpose of due diligence is to identify any assumptions made by others regarding valuation and where possible to determine and quantify any associated risks. In itself due diligence is a risk because when it is done badly it can cause an assortment of problems, not least overvaluation of the business, exposure to unknown risks and liabilities, and problems of integration when synergy may have been the prime objective for undertaking the transaction. Any one of them is a valid reason for a buyer or investor to end their involvement.
For technology-based businesses the majority of the company value will comprise of the intellectual property assets. For owners of these types of businesses looking for additional investment or an exit, making sure the IP portfolio is “due diligence ready” is therefore essential if the transaction is to progress smoothly and the Definitive Purchase Agreement or Investment Agreement is to be signed by everyone.
Here are our top tips for ensuring the IP due diligence provides a clean bill of health for your business and does not jeopardise the deal:
1. Ensure there is clear ownership of the IP
One of the most common IP-related reasons a deal fails is because of messy ownership issues. We always recommend that all the inventors are correctly identified and that the chain of title is clearly documented.
All the necessary assignments should be correctly executed (and where appropriate also registered). You can save time on the due diligence process by storing all the documents in your data room.
2. Create an IP register
We recommend any business should keep an up-to-date IP register, which is ideally updated every month. This is a clear demonstration to any investor of a well-managed business that recognises the value and importance of its IP.
The register should include all forms of IP. Often it’s just patents, trademarks and designs, but we like to see copyright and know-how also included. The register should include basic information such as the application number and status, as this is always the first piece of information that is asked for when conducting IP due diligence.
A more sophisticated approach involves storing published applications and granted patents in your data room.
3. Map the commercial products
As with the IP register, mapping the interrelationship between the different pieces of IP is also a clear demonstration that the business understands the commercial value of its IP. We like to see the IP shown pictorially in the form of a “mind map” with each product at the centre and the various branches showing the relationship of the different pieces of IP involved. For buyers and investors who lack the necessary technical understanding this can be a great visual representation of what they are investing in.
4. Prosecute the IP intelligently
When it comes to IP there is no universal approach that fits the needs of all businesses. A “one size fits all” approach to IP is simply impossible as every business is different.
We recommend regularly reviewing a particular innovation (at least quarterly) to ensure that the IP strategy is matched to the commercial strategy of the business. For example, if a trade sale is envisaged where an issued US patent is central to the deal being completed, then ensure you accelerate prosecution in the USA by filing early at the United States Patent and Trademark Office, requesting an interview with the examiner or filing a Track One application.
5. Write down an explicit IP strategy
An IP strategy should be an integral part of the much larger business plan and should be as detailed and as clear as possible. A good IP strategy should therefore detail how future innovations are identified within the R&D process and ideally provide details of incentives and rewards given to employees who innovate.
For businesses involved in a joint venture the IP strategy should also state how the innovation process is managed and who owns the IP.
GJE regularly advises companies on formulating an IP strategy as part of our portfolio of consultancy services. More information about our consultancy services can be found here.
6. Freedom to operate searches can be beneficial
Freedom to operate (FTO) searches are undertaken by patent attorneys to determine if an innovation can be commercialised without infringing the valid intellectual property rights of others.
Detailed FTO searches can be very expensive and in most cases we would not recommend that a full FTO search is conducted for the whole IP portfolio. Usually FTO searches are used to test the viability of commercialising an innovation rather than providing a safety net for the entire IP portfolio.
However, it is important to prove that freedom to operate for the entire IP portfolio has been considered and to demonstrate the distinction between growing your own IP portfolio and the risk that third party patents may restrict your commercial plans.
Like the IP strategy, we advocate that this should be written down as a detailed plan within the commercial strategy.
7. Keep Returning to the Business Plan
A well-constructed business plan with an outline of the strategic direction and commercial objectives should be central to any well-managed business.
From experience we have found the potential value of the intellectual property always diminishes when there is deviation from the business plan. For this reason we recommend beginning all IP meetings by reviewing the business plan to ensure the IP strategy is following the same approach.
For any owner of a technology-driven business looking for additional investment or an exit, IP due diligence can be the deciding factor in whether the deal succeeds or fails. For this reason it is important to ensure the IP portfolio of the business is always “due diligence ready”.
IP due diligence also helps to establish trust and confidence in the existing management, which is so necessary for a deal to succeed. It’s a great opportunity to showcase to any potential buyer or investor that the innovation supporting a commercial product has value and can be properly protected; that the IP portfolio is being managed correctly and that the commercial risks associated with the IP have been thoroughly identified and considered.
Maintaining a focus on IP due diligence in a technology-driven business provides an enormous opportunity for business owners to achieve the deal they want rather than allowing potential buyers or investors to focus on poor administration to argue for a lower value or to walk away from the table.
Who knows – should there be more than one interested party then you may be lucky enough to obtain a premium!