When buying or selling a business, intellectual property (IP) often holds more value than physical assets. However, these assets also carry hidden risks that surface only during careful review. Understanding what IP due diligence involves can help both parties avoid costly surprises.
Check patent ownership and status
Patents protect inventions. However, their value depends on documentation. A valid written agreement transfers patent ownership. Recording the assignment with the US Patent and Trademark Office provides notice and helps prevent others from claiming rights to the patent. When employees or contractors developed the technology, signed agreements must exist proving the company owns what it claims to sell.
Look for ownership issues
IP assets can be used as collateral for loans. This creates claims that transfer with the assets. Searching UCC Article 9 filings reveals whether creditors have rights to these assets. Finding these claims early allows parties to resolve them before closing. Otherwise, buyers may inherit unexpected debts tied to the IP.
Review trademark registrations
A company’s brand carries significant value. However, trademarks that sit unused may lose their legal protection. Reviewing federal and state registrations reveals whether the company has properly maintained its marks.
Conflicts with similar marks owned by other businesses also create legal risks. Some companies have agreements with competitors that limit how future owners can use certain marks.
Examine licensing agreements
Many businesses use technology they have licensed from others or earn income by licensing their own IP. These agreements often include clauses that end the license if the company is sold. License terms such as exclusivity, territory and duration can affect the business’s value.
Under New York law, assignment provisions may determine whether rights can be transferred. Finding these restrictions early gives parties time to get necessary permissions or adjust the deal terms.
Evaluate trade secret protections
Trade secrets include formulas, processes and confidential information that give a business competitive advantages. Courts look at whether a business took reasonable steps to protect confidential information. Businesses must show they took reasonable steps to keep trade secrets confidential to receive legal protection.
Reviewing confidentiality agreements can show whether proper protections exist. Weak safeguards mean valuable information could be at risk or exposed to competitors.
Completing due diligence before closing the deal
Skipping due diligence can create risks that surface months or years after closing. A thorough IP review can help buyers and sellers identify potential issues before they become costly disputes. It also supports a smoother transfer of intellectual property assets.
