This blog series explores the steps involved in buying and selling a business, which tend to be much more complex than many business owners realize. In prior blog posts, I explained how due diligence comes into play, the nature of due diligence requests related to the structure of the business entity that is selling its assets and to financial information, due diligence as it relates to the seller’s customers and contracts, the importance of making inquiries in regard to insurance, and due diligence requests involving real and personal property. In this post, I will discuss due diligence requests related to intellectual property.
Intellectual property may be the primary asset of the business to be sold. If intellectual property is at play in a purchase and sale transaction, the potential purchaser will likely make numerous requests for information and documentation in the due diligence process related to this issue. To start with, the purchaser will want to verify the seller’s ownership of its intellectual property by requesting documents evidencing the selling business’s patents, trademarks, copyrights, service marks, trade names, and any other types of intellectual property – related rights. Have any of these intellectual property rights been licensed to third parties? The savvy purchaser will want to know and will undoubtedly request copies of any license agreements. And, what about any licenses that the selling business may hold related to a third party’s intellectual property? A purchaser that is represented by counsel will likely request copies of these licenses as well, and will also make inquiries about how this intellectual property is being used in the business.
Generally, a business that possesses intellectual property has a variety of written policies and procedures about how these assets should be handled. The seller should anticipate a due diligence request to provide copies of these policies and procedures. Were the employees required to sign nondisclosure or confidentiality agreements related to the intellectual property? If so, the purchaser will likely request copies of these agreements.
Another consideration is infringement. The purchaser will want to find out if there are any pending or potential infringement claims against the seller related to violations of a third party’s intellectual property ownership, and will make inquiries in this regard. And, on a related note, perhaps the selling business may be pursuing an infringement claim against a third party. The purchaser will want to know the details of this action as well. The purchaser may be stepping into the shoes of the seller in terms of enforcing those rights.
If intellectual property is an asset that is being transferred pursuant to a business purchase and sale transaction, both the seller and the purchaser should be ready for many requests for information and documentation, and likely much dialogue and negotiation to follow.
My next blog post will continue to discuss due diligence.