Intellectual property rights are among the most critical assets of companies in today's information- and technology-driven economies. In an M&A process, the legal status of these rights can directly influence the outcome of the transaction. Therefore, during the due diligence process, it is of great importance to thoroughly review IP assets such as trademarks, patents, designs, copyrights, and trade secrets. In particular, in scenarios where IP assets constitute the company's most valuable resources, such as software companies or film production companies, a superficial assessment of these rights may lead to undesirable outcomes for the transaction.
However, the evaluation of intellectual property rights should not merely follow a technical checklist. Instead, it should be conducted in alignment with the business model of the target company, the dynamics of the industry, and the strategic objectives of the transaction. The extent to which the target company systematically manages its IP portfolio, whether the documentation is complete and consistent, and whether strategic decisions regarding IP are embedded in institutional memory all gain significance in this context. Moreover, integration of intellectual property into the company's broader business strategy indicates that these assets are not only being protected but are also being used effectively to generate revenue and create a competitive advantage. For this reason, it is essential to assess not only what rights are held but also how those rights are managed and to what extent they are integrated into the company's structure.
That said, the scope of the IP due diligence process will inevitably vary depending on the target company. A flexible and focused examination plan should be tailored according to the company's field of activity, the strategic goals of the transaction, and the role of IP assets within that structure. For instance, in a tech-driven startup, a thorough review of patents is essential, whereas in consumer-facing brands, the main value may lie in trademark protection and registration strategy. Therefore, it is crucial to evaluate at an early stage how well the IP assets align with the company's long-term direction and revenue model.
In this context, one of the most fundamental steps is to determine who actually owns the intellectual property rights claimed by the target company. It is essential to carefully review whether these rights have been transferred to third parties via licensing, assignment, or partnership arrangements. Incorrect registrations, missing assignment documents, or failure to transfer employee-created rights to the company can result in serious legal and commercial risks down the line.
In fields like software solutions, where intellectual property and technology are deeply intertwined, determining ownership becomes even more critical. In such cases, it is not only the registered rights but also the use of third-party components within the software that must be carefully reviewed. For example, the use of open-source code components can pose significant IP risks. It must be assessed which open-source components have been used and whether the associated license terms have been respected. Some open-source licenses may require the entire software to be disclosed or made subject to the same license. This could force the company to make its software publicly available. If the company has failed to comply with its open-source obligations, the original developers may assert copyright infringement claims. If such risks are identified, contractual safeguards and indemnification mechanisms must be put in place.
Similarly, in software development projects carried out with freelance developers, determining who holds the copyright over the software is of vital importance. If there is no explicit agreement assigning the IP rights to the company, the ownership of the software may remain with the freelancer. In that case, the use or commercialization of the software by the target company could be blocked by the developer, or the company could face claims for damages. To mitigate such risks, clear and written IP assignment agreements must be in place with all freelancers the company has worked with.
Beyond ownership, it is also important to evaluate what kinds of revenue streams the IP rights generate for the company. This includes analyzing trademark licensing agreements, IP-based business models, or patent licensing income. Additionally, the potential of untapped or uncommercialized IP assets to generate future revenue should be considered. Seemingly minor or secondary rights may protect strategically critical processes or hold hidden value that the company has not fully leveraged. In such cases, a well-conducted assessment could reveal significant added value for the deal, particularly in relation to determining the purchase price.
Even though a large IP portfolio may initially seem daunting for lawyers conducting the due diligence, quantity can often be misleading. The key is to identify which rights within the portfolio are directly tied to core products and services. Therefore, the examination should be carried out not only quantitatively but with a qualitative prioritization approach.
The management of know-how and trade secrets underlying patents is often overlooked; however, these elements form the backbone of the company's technological competitiveness. As such, attention should also be paid to how internal knowledge assets are protected, not just registered rights.
From a risk management perspective, the due diligence process should aim not only to identify all risks but also to assess their significance. While not every risk requires in-depth analysis, potential third-party infringement claims or gaps in protection for key products must be identified at an early stage.
If there is an ongoing or potential IP infringement claim against the target company, it must clearly demonstrate whether the claim has any factual basis. Verifying such assertions requires more than just relying on the company's explanations; a legal and technical analysis of the IP right in question and an independent assessment of the company's defense arguments are necessary. If there is even a small chance that the claim has merit and the potential costs are high, this could warrant reconsideration of the transaction. If the buyer decides to proceed nonetheless, contractual protections such as indemnities, price adjustments, escrow arrangements, or holdbacks should be included in the deal. In particularly risky scenarios, a significant reduction in the purchase price may also be negotiated.
Moreover, the presence of abandoned or expired IP rights should also be examined. It is important to determine whether these rights were intentionally abandoned or neglected, as this can provide valuable insight into the company's strategic approach.
In some cases, IP-related risks can be serious enough to justify terminating the transaction entirely. A structure that does not sufficiently protect the target company's key offerings, or competitor patents that severely limit freedom to operate, may render the deal strategically unsound.
On the other hand, the capabilities of artificial intelligence in IP due diligence are increasingly expanding. Analyses such as portfolio assessments, prior art searches, ownership verifications, and gap detection can now be completed much faster and more effectively. Reviews that would traditionally take days can now be completed within hours, supporting more efficient decision-making processes.
Ultimately, the IP due diligence process is not just a legal compliance check – it is a tool for understanding the intellectual capital of the target company, assessing its strategic value, and managing future risks. The success of this process depends not only on reviewing documentation but also on evaluating how well the IP rights align with the company's business model. AI-powered analysis tools further enhance the depth and speed of this process, contributing to the accurate identification of potential risks and opportunities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
