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Selling a Business – Avoiding an own goal in due diligence – Part 2

By Peter Kroeger

How secure is your intellectual property? 

In the last blog I dealt with the tricky question of contracts and “change of control clauses”.

Another hard lot of questions you will have to answer will be to do with your Intellectual Property.

You have searched for all your IP stuff and mostly drawn a blank.  The questions you could be asked are for you to provide a list and supporting documentation covering all:

“Details of any software, web site or electronic database owned or used by the company indicating in each case whether the software, web site or electronic database is owned by the company or licensed. Supply copies of all licence agreements together with a list of fees payable and Copies of all other agreements relating to the development or operation of software, web sites, databases or hardware for or on behalf of the company.

Details of any infringements or alleged infringements of any intellectual property owned or used by the company and known challenges or disputes relating to such intellectual property including any official objection, application for rectification or cancellation or opposition in respect of any patent, trade mark, design or other intellectual property right owned or applied for by the company.”

This is the point at which you realise you have a problem.  You find that you have added a special app or routine to a database or computer programme and that you engaged a specialist IT contractor or firm to do it for you. Who owns the rights to that? And is there any way that your company could be damaged if the right to use that bespoke element was withdrawn? And you vaguely remember there was a “bit of an argument” over this bespoke element 5 or 6 years ago but you thought it was resolved.

The key point is to note that, invariably, the Acquirer is being advised by investigating accountants and lawyers and they are painting a vision of what the business would look like in a year or two if some key intellectual property is inadequately protected.  So they want to change the agreed deal to take account of this risk either by seeking an indemnity or by holding back some of the purchase price for a year or two or until the position is satisfactorily resolved.

In the meantime, you are between a “rock and hard place”.  Your options are not easy; you can walk away from the deal, or you can accept the change to the deal or to the structure of the deal, or you can try and negotiate that to be less advantageous, or you can try and get whoever developed the bespoke element to agree to ceding appropriate rights to the company in a form which will satisfy the acquirer’s advisors.

The lesson is, long before you start a sale process, do look at all your IP and ensure it is all documented and the ownership rights are fully understood.  You will have much more chance of obtaining any changes where there is no time pressure to get obtain these.

I will deal with more such sticky issues in future blogs.

For further support with selling your business, please feel free to get in touch with Peter Kroeger.

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