In the global, new media economy, patent due diligence has taken on increased importance in M&A negotiations. Emerging advancements have resulted in patented technology becoming the driving force behind many transactions.
Patent due diligence is crucial in these deals. In such an environment, a patent due diligence team is often required to assess whether a competitor may have a similar patent or whether a similar technology is at work in the marketplace without a patent.
Increasingly, however, patent due diligence is being carefully conducted for businesses without significant patent portfolios. This is due to the ever-transforming nature of business in the 21st Century. When patent due diligence is conducted for businesses with small patent portfolios, patentable assets are sometimes identified.
In addition, due diligence takes into account whether developing technologies and planned rollouts of new products are patentable. Such a proactive exercise can protect proprietary technology and products or services.
A number of potential red flags can also be uncovered during a patent due diligence process. Possible scenario: One of the companies in question is unknowingly infringing upon an existing patent. This information may be crucial in determining the feasibility of a deal centering around the technology or product and would likely be uncovered in a thorough patent due diligence process.
When it comes to emerging technology, the developer of the technology may own it outright rather than the company for which it was developed. This is crucial information that may make or break a deal. How the patent was registered reflects who owns the technology or service and patent due diligence can verify the ownership status.
Another factor that needs to be assessed is whether or not loans were taken out against the technology. This can affect the ownership interest of the technology. Additionally, the technology — although owned by the company — may have been licensed out to a third party. This license may be exclusive, which prevents the new owner from utilizing the technology or non-exclusive, which allows the technology to be used but lessens the proprietary value of it.
Some patents cover technology, products or services that have a higher value than others. Valuing patents is also a vital component of patent due diligence and one that tends to vary depending upon the industry involved. Generally, competitor patents are assessed to determine their value.
When it comes to new and emerging technologies, however, sophisticated forecasts are utilized to determine a patent's value. At this point in the patent due diligence process a thorough search is often conducted to identify patents that could block future integration or expansion plans.
Sometimes a 'dominant' patent exists which may thwart an expansion of the newly merged or acquired company or require that a licensing fee be paid to the third-party holder of the dominant patent.
Since the U.S. Patent Office only governs patents within the United States, each offshore country that the product or technology will be marketed to needs to be assessed to determine if foreign protection is available in each country and what the process entails to acquire it. Additional searches should be undertaken to determine if such a product or technology is already patented under the system of the country in question.
Patent due diligence is one of the most crucial factors in M&A transactions and also one of the most complex. Companies considering a merger often need to create a patent due diligence team in order to clearly determine the issues of ownership and potential infringement upon existing patents both domestically and abroad.
Obtaining an independent, formal business valuation is critical in M&A transactions. It helps illustrate that the appraiser does not have a vested interest and the value is not overstated or understated.
When buying, selling, merging or acquiring, a business valuation can be used as a starting point for negotiations and might even provide an estimate that a seller can expect to receive.
Professional appraisers use various methods to calculate the value of a business. In addition to valuing tangible assets, such as real estate and equipment, a business valuation includes intangible assets such as patents, trademarks, copyrights, royalties, customer lists, franchise agreements, goodwill, non-compete covenants and option rights.
M&A transactions are not the only reason why business valuations are performed. They can also be needed in other situations including estate planning, divorce, litigation, partnership dissolution, buy-sell agreements and shareholder actions.
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