Although IP due diligence may be considered by many to be an expensive process which is time consuming, it is essential in determining the value of a company and in deciding whether or not to invest in a company or whether to purchase/licence any part of its IP portfolio. Whilst on paper the IP portfolio of a company may appear to be impressive, e.g. many patents or patent applications may exist directed towards the desirable technology, it is not until a full and proper due diligence is carried out that the worth of the IP can be assessed (and thus the value of the company). IP is the manner by which a company can protect its ideas and innovations and its brand, upon which its whole reputation is based. Arguably therefore a company’s worth may be very closely linked to the quality of its IP.
IP due diligence can investigate many different aspects of an IP portfolio. With regard to patents, IP due diligence will usually determine whether the commercial interest is protected or covered by any patents or patent applications which exist. Additionally, for patents, it is necessary to determine whether any existing patents are valid and in force, e.g. whether there is any prior art which could be used to invalidate the patents or whether the specification sufficiently describes the invention. For patent applications it is necessary to determine whether those applications are likely to be granted and with what coverage. It is also important to check the entitlement of the company to the IP portfolio and whether any third party rights exist which could potentially affect its value. Freedom to operate the commercial interest should also be determined, e.g. whether other parties have any IP rights which would prevent any aspect of the commercial interest from being pursued.
With regard to Trademarks, it should be investigated whether a company’s name or brand is registered and protected in relation to the relevant goods and services. Trademarks are an important part of a company’s IP portfolio and may be extremely valuable, where a brand or name has a good reputation associated with it e.g. with respect to quality, reliability etc.
There are several companies who offer basic IP valuation using online calculators or tools, which may be helpful for carrying out an initial rapid valuation of a business for investors or for sale. However, in order to obtain a proper IP valuation, a full due diligence is necessary, carried out by trained attorneys or solicitors. If due diligence is not thoroughly carried out, the value of a company’s IP and thus the value of the company may be incorrectly estimated, which may be a very costly mistake.
Recently, a press release appeared in The Times from equity brokers Redburn Partners, which resulted in £375 million being written off of Ocado’s share price. The press release down-rated the potential of Ocado, and stated that “Investigation of Ocado’s patent filings suggests the group’s technology is less unique than we previously thought. Ocado’s patent appears to be essentially an “add-on” to the Autostore system”. Thus, Ocado’s IP was found not to be directed to the desired technology and that a third party right to that technology was in existence. Proper due diligence at the outset would have determined exactly what commercial interests were covered by the patents and what prior art and third party rights were in existence.
The value of a company can therefore only be properly assessed by carrying out a full due diligence of its IP portfolio. Such an analysis is absolutely critical to prevent an over or under estimate of value from being made.
First published in Growth Business, October 2014