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Intellectual property audit for mergers and acquisition

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Intellectual property audit for mergers and acquisition

Oloniyo Ololade

Intellectual Property Law/Technology

What is intellectual property(IP)

Intellectual property refers to the creation of the mind such as inventions, literary and artistic works, designs and symbols, names, images, logos, business marks used by organizations and individuals in commerce.

It is generally referred to as intangible assets, which is different from tangible financial assets. Intangible assets include goodwill, brand recognition, patents, trademarks, and copyright.

Countries like the United States of America, Republic of China have been regarded as the powerhouse of intellectual property law across the world.

READ ALSO: Elegushi urges police to suspend property probe

IP is the major economic driver in Canada and USA. 51% of Canada’s economy is represented by knowledge-based industries, and over time Canada is increasingly becoming dependent on industries of intangible goods and industries propelled by research and development.

There are 81 IP Intensive industries in the US which accounted for 27.9 million in previous years; the knowledge-based industries promote an increase in unemployment and these jobs also indirectly support an additional 17.6 million supply chain jobs through the economy in total, IP Intensive industries, directly and indirectly, supports 45.5 million jobs, approximately 30% of all employment in the US.

It is obvious that the economic boom and development of these states came from the outbreak of intangible assets and intellectual property.

Apart from the fact that it encourages economic growth and viability, it also helps to generate breakthrough solutions to global challenges.

Innovative agricultural companies are creating new products to help farmers produce great products that feed the hungry and IP-driven discoveries in alternative energy and green technologies will help improve energy security and address climate change.

In addition to all of these, intellectual property rights foster innovation as entrepreneurs and innovators are rewarded for the lengthy use of their intellect to create new and viable products for emerging markets.

Mergers and Acquisitions; why an intellectual property audit is relevant?

Mergers and acquisitions are often described as the synergy resulting from the combination of two different corporate bodies.

Without mergers and acquisitions, it will be really difficult for medium-sized businesses to gain a competitive advantage in today’s marketplace.

With the high wave of technology advancement disrupting traditional models of commerce and increased business competition amongst various industries, the corporate merger has become one viable means for sustainability and economic growth.

Mergers and acquisition is an integral part of innovation development. Where a buyer decides to acquire another business, it is of best interest to carry out proper due diligence so as to circumvent risk or potential loss.

The intellectual property audit is a major part of transactional due diligence and it has a meaningful role in identifying, clarifying and managing intangible assets, as well as averting prolonged litigation cases on potential infringement of IP rights.

It is a powerful tool that allows business owners, buyers, tech entrepreneurs to evaluate the worth of intellectual property and protect it with available enforcement mechanisms.

Step to Conducting an IP Audit

Information gathering

Many times the IP audit is used to uncover the existing and potential intellectual property that the buyer stands a chance to gain upon the conclusion of the mergers and acquisition transaction.

At other times, it could be used to unravel potential or imminent acquisition risk. Whichever way it turns out to be, the auditor’s main concern is to provide an assessment report highlighting the value of intellectual property law assets or the basis of potential risk.

When starting out, a background analysis of the business and relevant IP assets should be conducted. The internal or external IP audit team must:

  1. consider a non-disclosure agreement to protect the confidentiality of information exchanged between the target company and the buying company.
  2. Identify all potential intangible/ IP assets such as trademarks, copyright, domain names, technology know-how, patent/utility models, confidential information, designs and evidence of registered rights, filing dates etc.
  3. Identify all potential IP assets that have not been protected by law.
  4. Targets Company’s IP strategy including IP policies and procedures.
  5. Information about manufacturing, product designs, specifications, and datasheets.
  6. Information about ongoing infringement cases, where the company IP is infringed and/or accused of IP infringement.
  7. Identification and review of all documents relating to intellectual property.
  8. Information related to competitive strength, sales, and marketing.

Particularly, if any trade secrets are held by the target company, the buying company must also collect data related to:

  1. Seller’s policies and procedures for maintaining sensitive information in confidence;
  2. Lists of trade secrets;
  3. Hiring and exit interview of technology personnel including confidentiality obligations set forth in employee agreements;
  4. Confidentiality and/or nondisclosure and non-analysis agreements;
  5. Security procedures pertaining to trade secret information (i.e. restrictions on plant access and document control).

Classification of assets and determination of encumbrances

After gathering relevant information, then it’s important to classify some of the assets discovered in your analysis into different classes of intellectual property; designs, copyright, confidential information/trade secrets, and trademarks, the purpose of this is to have a catalogue of all relevant IP assets to be acquired during the acquisition of the target company.

It’s imperative that before the integration of all intangible assets into the corporate IP portfolio of the buying company, series of questions must be asked to establish the target company’s right in the IP and to double-check if those rights are free from any encumbrances. Some relevant questions to ask are:

  1. Who is the inventor?
  2. Has the inventor by writing assigned all IP rights to the target company?
  3. Have there been any third-party challenges to those rights?
  4. Are there governmental rights from funding?
  5. What is the target company’s right to transfer and assign intellectual property?

Intellectual Property (IP) Risk Management

IP risk management is the process of analyzing exposure to risk and determining how best to mitigate those risks. The responsibility of the audit team is to try to resolve all issues, if not all, the major ones in respect of the IP rights. The audit teams should analyze issues surrounding the IP rights in question and strategize for mitigating the risk to reduce liabilities. It is noteworthy to add that audit teams should also pay attention to IP assets that could be acquired to strengthen the position of the buying company within a competitive market.

Intellectual Property (IP) Valuation

The IP Valuation technique is a method used to determine the fair market value of an intellectual property asset. It is much easier to do a valuation of the IP when all the tangible assets have been discovered during the IP audit.

The results of the audit test bring the buying company closer to the goal of achieving an IP Valuation. Each IP asset is valued based on different valuation techniques.  Some of them are market recognition of the asset, the economic benefit of the IP asset life, and the cost incurred by the company to improve and develop its intellectual property.

The evaluation of the Intangible assets derived from the audit report gives a salient background into the wealth the buying company eventually acquires after the purchase of the target company.

Conclusion 

In conclusion, intellectual property audit is a major area often overlooked by investors or businesses seeking to scale through mergers or acquisitions.

Often, the buying company is focused on everything clearly visible to the transaction, ignores the intangibles which turn out to be the most lucrative side of the deal. Intangible and intellectual property assets are viable engines for innovation and economic viability.

Technology companies, investors, and organizations seeking to expand their businesses should never forget to find out what intangible assets exist within the confines of businesses they engage in commercial deals or transactions.

Vanguard News Nigeria

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