The importance of IP in transaction valuations – what to look for during due diligence

December 2025 | SPOTLIGHT | INTELLECTUAL PROPERTY

Financier Worldwide Magazine

December 2025 Issue

Whether an entity is seeking to invest in a start-up or maturing company, is in the shoes of a developing company looking for further investment, or is seeking to acquire or sell a product line or other corporate assets, intellectual property (IP) often lies at the heart of the transaction.

IP and other intangible assets now comprise 90 percent of the value of companies in the S&P 500, and often a larger share for smaller players. Diligence on those IP assets has become a critical component before making any related investment.

IP encompasses a broad spectrum of assets, including IP assets that are granted or registered with federal or other governmental entities, unregistered IP assets that may be eligible for such grant or registration, and other non-registerable assets.

The first category includes patents, trademarks and copyrights, and must be filed with a governmental agency and granted or registered by that entity to obtain legal protection.

Patents protect inventions (e.g., drug formulations) or ornamental designs (e.g., jewellery), trademarks protect words, phrases, symbols or designs (e.g., brand names) and copyrights protect creative expression (e.g., books).

Unregistered IP assets, like trade secrets, customer lists and software code, often rely on maintaining confidentiality to confer enforceable legal rights. Examples include recipes, customer lists or early-stage design prototypes.

Regardless of type, all IP assets affect enterprise value. Accordingly, when evaluating corporate assets, investors should perform IP due diligence to ensure an accurate scope of IP assets, and thus a reliable basis for valuation.

Pillars of IP due diligence

Verifying ownership and transferability. A primary issue is whether the company owns and is legally capable of transferring key IP assets that are important for achieving business and congruently investment goals.

With regard to registerable assets (i.e., patents, trademarks and copyrights), government agencies often maintain ownership records. For example, in the US, federal trademark and patent assignment records are available from the US Patent and Trademark Office, and copyright assignment records are available from the US Copyright Office.

Moreover, various states grant trademark rights within their respective borders and corresponding records can be searched. These records should be reviewed to verify all employees, consultants, vendors and other third parties who contributed to the IP assets have transferred their entire rights and title in their contribution to the target company.

If public records are unavailable, further diligence should be conducted to confirm ownership. For example, the employment history of relevant contributors should be explored to determine whether contractual agreements (e.g., employment agreements, consulting agreements, etc.) contain relevant provisions covering ownership of IP generated by the relevant contributors.

Additionally, investors should give extra consideration to key IP assets that are jointly (not exclusively) owned to determine scope of the company’s ownership and use of key IP assets. For example, an IP owner may not be able to sublicense or enforce a jointly owned patent without express consent of each co-owner in certain jurisdictions. To identify potentially co-owned IP, investors should review the source of the IP, such as whether it was developed from an employee’s prior research before joining the company, or if the IP was developed by hired consultants.

Further care should be given for cross-border transactions and those involving worldwide IP, to ensure that available documentation is in compliance with jurisdictional rules and regulations. For example, provisions of employment agreements transferring an employee’s IP to their employer are valid in many foreign jurisdictions only if the employment agreement contains a wet signature.

It may also be prudent for investors to confirm that IP is unencumbered (e.g., from liens, security interests, etc.) to understand any limitations on transferability of target IP. In particular, if the IP cannot be freely transferred, the acquirer risks purchasing an asset that cannot be licensed for revenue or divested in the future.

Based on the findings and observations from diligence, investors should negotiate appropriate representations and warranties of ownership and transferability in the transaction documents.

Ensuring validity and enforceability. Once ownership of target IP assets is confirmed, investors can perform further diligence to confirm validity and enforceability and understand the economic value of key IP assets. For example, for patents, investors should identify patents relevant to the target company’s main products or services and business strategy. Investors should then review prior disclosures related to the patented invention by the company and third parties, as such disclosure can negate or limit patent rights. For example, prior disclosures can include sales or marketing materials, and disclosures at scientific conferences, at trade shows or in trade publications.

Similarly, for key trademarks, investors should ensure the marks are consistently used on the full scope of goods described in the trademark registration. In particular, failure to use a trademark for all the goods or services listed on the registration can lead to partial loss of protection or even full cancellation of the mark. For copyrights, investors should confirm the work was independently created.

With regard to these registrable assets, investors should confirm that all renewals and maintenance fees are current, as lapses can extinguish the owner’s ability to enforce the rights or remove protection altogether. If fees have not been paid, investors should identify corresponding jurisdictions and explore whether a grace period is available to cure prior failures to pay relevant fees.

For unregistered IP assets, investors should confirm that the company has taken consistent, demonstrable steps to maintain protection. For example, many companies use trade secrets to protect confidential information, like secret recipes, to maintain their competitive advantage. In that regard, the target’s internal operating policies should be reviewed to ensure adequate confidentiality and access control measures – such as required confidentiality agreements or the presence of physical constraints – exist and have been maintained and implemented.

Reviewing contractual IP rights. Investors should also perform a thorough review of contractual IP rights – including rights granted to the target company by third parties (i.e., in-licences) and rights the target company has granted to third parties (i.e., out-licences). Both licensing structures have distinct economic implications and therefore have a potential impact on the company’s valuation.

With regard to in-licences, each licence used across each area of the business should be reviewed for any potential impact upon acquisition. In particular, investors should ensure that key licence agreements are transferable or sublicensable to the post-acquisition corporate entity. For example, some licence agreements contain change-of-control provisions that can be triggered upon acquisition, such as mandatory renegotiation or termination.

Special attention should be given to licensed technology that is essential to the business, as any interruption in supply of critical components or services can result in significant costs or economic damage. Investors should also identify whether there is customised use of licensed technology. If so, the corresponding licence agreement should include appropriate language to ensure any features or modifications are exclusively owned by the company. Finally, investors should also consider whether licence agreements contain exclusivity or field-of-use limitations that might negatively impact future growth opportunities.

Additionally, if the company owns software that uses open-source libraries, the review should ensure compliance with the licence terms to avoid potential risk. Investors should confirm that both the target’s present use and potential future use by the acquirer will be compliant with the licence’s terms of use. For example, acquisition of the target and expansion of market may trigger the need for an enterprise licence.

With regard to out-licences, each licence should be reviewed for potential effect on post-acquisition business strategy. For example, if the acquisition strategy is to capitalise on a licensed patent’s exclusivity, investors should consider licence duration and termination clauses. Similarly, if the inventor wishes to reduce reliance on outsourcing manufacturing of a patented product (e.g., as part of a cost-reduction strategy) it would be prudent to review the corresponding licence to determine availability and scope of early termination.

Assessing potential liability to third parties. For key products and services, investors should consider a freedom to operate review to determine whether the IP rights of third parties will implicate how the company or corporate assets at issue are operated or sold.

At the outset, the analysis should confirm whether there are any active litigations or demand letters against the company. Furthermore, investors should identify relevant third-party IP that may overlap with the target company’s technology. For any overlapping subject matter, investors should perform risk analysis to determine likelihood of infringement, potential defences (e.g., non-infringement, invalidity of identified IP and licensing) and offensive strategies (e.g., invalidity of identified IP).

Conclusion

IP due diligence is crucial for investors aiming to accurately assess corporate or asset value. By conducting comprehensive IP due diligence using the pillars discussed above, investors can strengthen valuation confidence, justify deal premiums and lay the groundwork for more effective post-acquisition integration. Furthermore, based on the findings and observations from IP diligence, prudent investors can negotiate appropriate representations and warranties in the transaction documents.

Ashwat Rishi is a special counsel and Paul Ragusa is a partner at Baker Botts LLP. Mr Rishi can be contacted on +1 (212) 408 2585 or by email: ashwat.rishi@bakerbotts.com. Mr Ragusa can be contacted on +1 (212) 408 2588 or by email: paul.ragusa@bakerbotts.com. The authors would like to thank Jasmine Boyer, a law clerk at Baker Botts LLP, for her contribution to this article.

Ashwat Rishi and Paul Ragusa

Baker Botts LLP