Due Diligence in Intellectual Property Transactions

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 What is the Value of Intellectual Property?

The process used to estimate the value of a certain piece of intellectual property is referred to as an intellectual property valuation. This process is an important part of numerous different company initiatives and operations.

There are many different aspects of a transaction that can be influenced by the value of the intellectual property (IP), including:

  • Sales prices;
  • Share ownership;
  • Non-disclosure agreements; and
  • Others.

Numerous different methods may be used to estimate the value of intellectual property. Two popular methods of valuing IP include:

  • Cost analysis, meaning what an investor would be willing to spend for a property of a similar type; and
  • Comparing the number of similar types of property purchased and sold by rivals in the market.

Other factors that may be used in IP valuation include:

  • Whether the property is subject to any legal protections;
  • Anticipated expansion and profitability of the trade secret or intellectual property; and
  • Whether or if some works or materials are similar.

Industry standards that establish official rules for merchants to follow when valuing intellectual property may exist for specific types of intellectual property.

Should I Know the Basics of Intellectual Property Rights?

Because intellectual property is a significant aspect of any business, an individual needs to understand their intellectual property clearly to assign it an appropriate value, an individual will need to know the following details to determine their intellectual property value:

  • What purposes will the intellectual property serve in the company?;
  • What kind of value can be put on an IP?;
  • Who is the IP’s rightful owner?;
  • What are the best ways to make use of the intellectual property, for example, through a licensing agreement or technological application?; and
  • How much will the business need to cover in IP insurance?

The value of intellectual capital and how an individual can use it to advance their firm should be their top priorities regarding IP. Business managers should be aware of both the dangers that IP entails and the IP asset worth.

There are several ways an individual can make use of their intellectual property rights, including:

  • The complete selling of property;
  • An agreement for a cooperative venture; and
  • In the form of a license.

The risk assessment of the IP will ultimately rise with its exploitation. When individuals appraise their intellectual property, they combine the concepts of worth with legal property.

The valuation of IP becomes particularly crucial in the circumstances such as:

  • A joint venture, sale, or merger;
  • When an individual files for bankruptcy;
  • When an individual is considering a divorce;
  • For estate planning;
  • When purchasing an IP; and
  • If there is a lawsuit.

What are My Rights to Intellectual Property?

Because intellectual property is viewed as an intangible asset, determining its value is often challenging. IP assets are becoming more crucial for a business to establish market dominance and retain profitability.

Intellectual capital is also crucial when businesses merge or attempt to purchase other businesses. IP rights are not well understood despite the value of being widely acknowledged.

Intellectual property rights themselves do not necessarily have intrinsic value. The value of IP lies in being able to strategically bar other businesses from using the IP and from being able to profit from the goods, methods, and services that may result from being the sole owner of that IP.

An individual must ensure that their exclusionary rights align with the business’s goals to maximize the benefits of this strategic advantage. The IP rights that provide the most competitive advantage over a company’s rivals will be the ones of the most value.

An individual’s product will be more marketable, and their brand will be at the front of the minds of consumers if the things they offer:

  • Have special functions;
  • Increase efficiency; or
  • A more appealing look.

If an idea is developed in a way that distinguishes it from its competitors, that aspect makes an intellectual property valuable.

What Should I Know When Buying a Company with IP Assets?

In the context of purchasing or selling part of all of a company or the company’s IP assets, there are many issues an individual should be aware of so that they do not end up empty-handed and without any IP rights. Similar to a real estate purchase, a number of issues should be investigated using due diligence, which is a higher standard of care.

In the context of IP, due diligence requires more than simply compiling a list of IP assets. Due diligence in this context should include an investigation directed toward identifying and assessing the risks associated with a transaction and considering what action should be taken to address the risk.

What Steps Should I Take to be Diligent in My Investigation?

It is important to use due diligence to establish the proper value of assets before the completion of a purchase or sale. This will provide information regarding the management of the IP and provide information that will allow a meaningful investigation to be completed on the assets.

There are several steps an individual should take, including:

  • Confirming the target company’s rights in the IP, including:
    • ownership;
    • License; and
    • status;
  • Confirming the validity and enforceability of the intellectual property against a third party;
  • Identifying technology that is either existing or under development but is not currently protected by IP and assess the ability to obtain IP protection for the technology; and
  • Identifying IP owned by third parties that may potentially block the target company’s exploitation of its technology that is under development or existing technology.

What are a Few Legal Concerns Relating to IP Valuation?

Intellectual property valuation may lead to various legal problems and conflicts. Similar to real estate transactions, an IP valuation may be impacted by legal considerations, including:

  • Intellectual property fraud includes misrepresenting the costs and values of the IP, for example, when an innovation promotion company claims a lower price to make a bigger profit; and
  • Breach of contract, for example, providing a quote for one amount of money and then trying to amend that quote after a deal has been signed.

One of the main challenges is that there are frequently no comparable ideas or products for valuation comparison in IP transactions. This is especially true in cases where it is a new idea for a product or invention.

To better understand the value of an IP asset, an individual should consult with an expert or an attorney throughout the valuation process.

What Legal Options Exist for Property Valuation Disputes?

In some cases, it may be necessary to take legal action to resolve a dispute regarding the value of an intellectual property. IP litigation may result in several different legal remedies, including:

  • Financial compensation for the losses resulting from a violation;
  • The right to property transfer, for example, if there was infringement or intellectual property theft; and
  • A cease and desist order is a directive from the court requiring one party to cease engaging in certain behavior.

Properly registering IP interests can help individuals or companies avoid valuation conflicts over their intellectual property.

Should I Contact a Lawyer?

If you have any issues, questions, or concerns related to the value of your intellectual property or the intellectual property you wish to purchase, it is important to consult with an intellectual property lawyer.

Your lawyer can assist you in performing the necessary due diligence and ensure you get the most out of your intellectual property sale or purchase.


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