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Aleck Ncube
NOWADAYS companies are increasingly becoming aware of the importance of Intellectual Property (IP) assets as a means to expand their business, raising capital and to providing financial gain. Small and Medium-sized Enterprises (SMEs) are considering IP assets as a part of their balance sheets. Consequently, to understand the full value of their intangibles and make the most of their potential benefits, companies regularly conduct IP audits.
Any entrepreneur should make steps to identify and monitor the IP assets owned and used, to assess risks, to overcome problems and to assess their commercial value.
To this end, IP assets should also be included in business plans, with a view to presenting them to potential investors. These actions are commonly grouped under the name of IP due diligence, intended as the exercise to gather as much information as possible on the value and the risks of a company’s intangible assets, with a view to acquiring IP, raising capital and seeking financial assistance (e.g. bank loans).
Although IP due diligence is a precondition for capital investments, it can be helpful for enforcing IP rights and reducing IP-related costs. In a few words, IP due diligence can be considered as an essential process when developing an IP strategy.
IP due diligence is commonly defined as an exercise intended to value a company’s key assets and liabilities. Above all, such an evaluation is fundamental for business transactions since it focuses on the management of the IP assets of selling company (also called the “target”) involved in trade sale of IP.
More specifically, IP due diligence includes an appraisal of the real and appropriate value of the IP concerned and the IP-related risks that buyers might incur further to a business transaction. Accordingly, from the buyers’ point of view IP due diligence is about risk management.
It is worth noting that IP due diligence is very likely to be requested in situations of IP assignment and licence or when companies are seeking financings. This means that IP experts will check the company intangibles: ownership, contracts, (e.g. licences, assignments), IP filings and registrations. The aim of this enquiry is to discover some gaps or defects in the company IP management that could lead to liabilities and therefore could present a risk for the investors.
Why perform an IP due diligence and risks of overlooking it
Ignoring IP due diligence could cause some negative consequences for SMEs selling their IP assets.
In particular, the due diligence could discover some flaws in the seller’s IP management and result in a loss of credibility to the entrepreneur’s image. Firstly, the due diligence defects may result in the value of the deal being reduced. As an example, the terms of royalty payments that have already been agreed upon during negotiations may be revised to the IP owner’s detriment.
As a second point, due to those defects the deal might be delayed. That is, if the due diligence discovers that the supposedly owned IP is jointly owned by a third party, the transaction will be stuck until the joint owner’s consent has been reached. The main risk here is that investors may lose interest in the overall deal.
Moreover, in the second negotiation the seller’s financial expectations may fall in price because of a likely diminished value assigned by the joint owner to the intangible. To conclude with the worst scenario, the defects discovered could cause the investors to give up on the overall deal.
Advantages of carrying it out
Generally speaking, IP due diligence helps an entrepreneur reorganise its business with the aim of enhancing the marketability of its company and better exploit its products or services. In this sense, IP due diligence is a part of a broader IP audit process.
The latter in fact is normally conducted to identify a company’s IP assets and to develop an efficient IP management.
An IP audit assists SMEs to:
λ Set the IP development and commercialisation strategy;
λ Detect risks connected to the company’s IP assets;
λ Take appropriate actions regarding IP protection and enforcement;
λ Avoid a waste of financial resources in the acquisition or development of IP;
λ Reduce the risk of third parties’ rights infringement.
Undertaking an IP audit assists an SME to draw an IP map to present to investors at the time of negotiations. The IP map has the purpose of facilitating the due diligence carried out by the investor so as to accelerate the course of the negotiations.
Briefly, an IP map serves to identify the intangibles and to retrace the relationship with co-owners, employees and business partners supported by appropriate documents (such as joint ownership agreements, licence agreements, employment contracts, distribution agreements, joint ventures and the like). The aim of this document is essentially to:
-Identify each IP asset and its inventor;
– Ascertain its ownership and the rights to use it.
More specifically, IP due diligence is deemed to be fundamental when small businesses wish to sell their IP assets, raise capitals and seek financial assistance. To this end, as the IP owner it is very important to undertake IP due diligence upon itself since:
– It can help reveal defects that may be discovered by the investors;
– The gaps revealed can be filled first, before the business transaction;
– The risks of having the deal devalued or even abandoned because of those flaws may be reduced or eliminated altogether.
In the next write up, I will outline the process of conducting an IP due diligence for SMEs.
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