How does an intellectual property due diligence assist in mitigating risk during licensing negotiations?

The value of intellectual property assets in companies is often overlooked or underestimated when it comes to licensing, mergers and acquisitions. Mostly, the value of their intellectual property - as intangible assets - is far more valuable than their fixed assets and to understand the nature and the extent of risk involved, a proper intellectual property (IP) due diligence should be undertaken.

An IP due diligence involves an audit to assess both the quantity and the quality of intellectual property assets, and is usually carried out under one of two circumstances. Firstly, in preparation of a company merger, acquisition or sale of business and/or secondly, in the prospect of licensing or sale of the company assets.

As a licensor, it is of paramount importance to ensure effective IP management and control. A due diligence exercise will assist in determining royalties and/or upfront payments for the licensing and the use of the IP.

As a start towards valuing your IP, you should ensure that you have acceptable processes and policies in place, as well as documentation pertaining to the ownership and assignment of the IP. The capturing of all relevant information will be useful when you decide to sell your business or license intellectual property to a third party. All of these documents must be kept and updated on a regular basis.

From the perspective of the licensee, it is important to know that you will be able to exploit the IP commercially without the fear of getting involved in litigious matters. In this regard, it is very important for the licensee to have access to the contracts regulating the ownership and the assignment of these IP rights.

The value of the IP asset will be directly linked to the royalty amount paid for using the owner’s monopoly rights. Therefore, be aware of royalty remorse especially when it comes to the undervaluation of IP. Know your worth!