IP DUE DILIGENCE

 

Introduction to IP Due Diligence

“A holistic view of those IP assets which are, or will be, the value drivers in a business”

In a nutshell, IP due diligence is an exercise for identifying and assessing the quality and value of intangible assets owned or relied upon by a business. This exercise is often useful to both prospective buyers/ investors in a business as well as to banks which lend against IP assets.  In some circumstances, IP due diligence can also be used to rationalise early-stage, high-risk investments or to inform a company’s technology development and deployment strategy.

A typical IP due diligence exercise consists of the following steps:

  • critical IP assets are identified and confirmed;
  • factors which could detrimentally impact the downstream value of these IP assets are evaluated;
  • associated risks which could commercially encumber the business are highlighted; and
  • an action plan is created for mitigating these risks based on probability and priority.

The output provides an in-depth, holistic view of existing and future IP assets which underpin a business’s competitive advantage and revenue streams.

The Purpose of IP Due Diligence Exercises

“A foresight into the risks which could jeopardise the downstream value of a business’s critical IP assets”

IP due diligence is often context-driven, but its ultimate purpose is to help inform the decisions and actions key parties should take in order to arrive at a successful outcome, e.g. successful merger, secured lending transaction, robust IP rights portfolio creation, etc.

This is particularly important since most businesses today operate within the “knowledge economy,” wherein intangibles underpin nearly 80% of business value (see the Ocean Tomo’s Intangible Asset Market Value Study). Thus IP assets – whether they take the form of patents, trademarks, know-how or trade secrets, for example – are a unique and tradable asset class which can significantly contribute to the success of a business.

It is critical to have insight into the IP vesting in a business, and understand how these intangibles drive value and secure competitive advantage or, conversely, the associated risks which could jeopardise downstream value and compromise the successful outcome being sought.

IP Due Diligence For

 

“Support better decision-making around R&D plans, resource commitments and IP strategy”

Prior to committing significant resources to an R&D plan, the technological and market feasibility of a new technology needs to be verified based on existing IP rights in the same technological domain. Also known as an “IP Rights Landscape,” this form of IP due diligence highlights the extent of patenting activities in a particular technological domain, and assesses whether strategic opportunities for turning innovations into patent-backed technologies remain. Competitive intelligence is also collected and used to inform a business of steps it may need to take in order to steer clear of competing IP and remain “a step ahead” of third party IP portfolios which could otherwise impede deployment or further innovation.

This exercise provides stakeholders (both employees and non-execs) with information that can be used to balance business ambitions and financial risk. It can also help align R&D resource commitment and strategy priorities in order to help secure market share whilst proactively circumventing risks and preventing competitors from entering the same space.

You can read more about the Metis Partners IP due diligence services for IP owners and download relevant literature by visiting our IP Rights Landscape and preliminary Freedom-to-Operate Risk Assessment webpage.

“Minimising the risk in typically high-risk, early-stage investments through validation of technology and market feasibility”

IP due diligence for financiers of early stage ventures can help highlight whether a business can actually bring a technology to market given existing third-party IP rights, and whether the value proposition will be sustainable and be unencumbered by pending filings of current and future competitors. The exercise helps prevent unnecessary and misguided investments into ideas which read well on paper but which are built on uninformed assumptions and information gaps.

You can read more about the Metis Partners IP due diligence services for financiers of early-stage ventures and download relevant literature by visiting our IP Rights Landscape and preliminary Freedom-to-Operate Risk Assessment webpage.

Whereas IP assets may have only been considered ancillary to a transaction in the past, intangibles represent and drive the majority of business value for most companies today. Similarly, most large corporate and investment firms now recognise the value of IP, particularly as it relates to business success rate post-transaction.

As a potential creditor of a business, it is critical to understand the extent and quality of the IP assets which underpin revenue streams, as well as how secure these assets will remain for the duration of a loan term. Various risks such as patent expiration, disputes and IP leakage can significantly harm a business’s ability to use its IP and maintain its competitive advantage, increasing its overall potential for defaulting on loans.  Moreover, in circumstances where creditors wish to register/perfect a security interest in a business’s IP, it is necessary to understand which IP assets are most critical to revenue streams and thus provide the best option for mitigating risk should a company be unable to fulfil its debt obligations].

Actions related to risk mitigation can vary based on the level of risk involved. In some instances, risks warrant action prior to the transaction completing, whereas others can be addressed in the months following closing. It is critical to identify both the conditions precedent and subsequent in order to ensure that the IP assets – whether in the context of commercialisation or securitisation – are both accounted for and protected. Risks to be considered include:

  • lack of asset recognition/registration leading to IP leakage or loss following transaction;
  • overlooking potentially valuable IP which can be used as security;
  • hidden weaknesses (e.g. short patent term of a platform patent) in a company’s IP portfolio which can diminish a significant proportion of value and competitive advantage in the medium term; and
  • IP disputes including invalidation or re-examination proceedings, infringements and other disputes which may jeopardise the IP which underpins a business’s revenues.

Commercial IP due diligence for debt finance providers thus focuses on key IP assets that vest in, or are relied on, by the target business, and assessing the extent and quality of these assets. The exercise serves to identify any commercial risks which would impact the business’s competitive advantage and sustainability, and provides the supporting data creditors need for calculating risk and making sound decisions around lending.

You can read more about the Metis Partners IP due diligence services for debt finance providers and download relevant literature by visiting our Commercial IP Due Diligence webpage.

Whereas IP assets may have only been considered ancillary to a transaction historically, intangibles represent and drive the majority of business value for most companies today. Similarly, most large corporate and investment firms now recognise the value of IP, particularly as it relates to business success rate post-transaction. In a 2014 survey carried out by KPMG, 85% of those pursuing M&A transactions around technology viewed IP to have a significant-to-moderate impact on the economic terms of the transaction. Recent high-profile M&A failures have also made most M&A professionals familiar with the consequences of failing to carry out an IP due diligence prior to closing a deal.

As an investor coming into a business, it is critical to understand not only the extent, quality and value of the IP assets which underpin revenue streams but how these are to be integrated and used post-transaction. It is easy to misunderstand a process or invention and overlook potentially valuable IP which may have a beneficial impact on the outcome of a transaction. Failure to recognise a business’s value-driving IP can exacerbate a stakeholder’s ability to secure and integrate these assets in the first instance, as well as properly manage, leverage and value these assets post-transaction.

Risks can vary and in some instances warrant action prior to the transaction completing, while others can be addressed in the months following closing. Risks to be considered include:

  • lack of asset recognition/registration leading to leakage or loss following transaction;
  • exclusion of potentially valuable IP from transfer or licensing agreements between the seller and buyer; and
  • hidden weaknesses (e.g. short patent term of a platform patent) in a company’s IP portfolio which can diminish a significant proportion of value and competitive advantage in the medium term.

Commercial IP due diligence for PE, VC & M&A professionals thus focuses on key IP assets that vest in, or are relied on, by the target business and assesses the extent, quality and value of the IP assets in order to identify any commercial risks which would impact the business’s competitive advantage and sustainability.

You can read more about the Metis Partners IP due diligence services for PE, VC & M&A professionals and download relevant literature by visiting our Commercial IP Due Diligence webpage.

Metis Partners IP Due Diligence

Metis Partners has conducted IP due diligence and advised on transactions valued from $4 million to in excess of $2 billion in Europe, the US and Asia. Our approach is not patent-centric and delves beyond the superficial realm of IP to identify all critical intangible assets which underpin revenues and which are required for business continuity, thereby considering other valuable IP assets which are often overlooked.

We provide our clients with a thorough understanding of critical intangible assets vesting in a target business, as well as any associated risks, helping elucidate the value proposition a target’s IP assets will have post-transaction. Our due diligence team works closely with both the target’s management team to flesh out critical IP assets and their benefits, as well as with our clients’ legal advisors to ensure that identified risks are properly addressed and, where possible, mitigated by way of undertakings, warranties and other contractual obligations.

Metis Partners’ expertise in helping companies and third party professionals identify and leverage critical IP assets has frequently been commended. We have won numerous awards which recognise both the skills and experience of our team, as well as a number of noteworthy deals and transactions we have been involved in.

Who We’ve Worked With To-Date

To-date we have advised on lending, buy-out and investment transactions ranging between $3 million to $3 billion. Our clients range in size from banks to multinational investment firms – including the Clydesdale Bank, Energy Ventures, Boost&Co, the Malaysian Multimedia Development Corporation and Bain Capital.

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