In an article published on IPWatchdog, Bass, Berry & Sims attorney Shelley Thomas provided insight on the increasingly important role intellectual property plays in private equity investments. For companies of all industries, intellectual property and technology have become an imperative business component as they often boost a company’s value and allow companies to monetize their products and services. Private equity investors are capitalizing on this trend by making substantial investments in companies focused on developing and commercializing their IP.
In an IP-driven private equity transaction, it’s critical that both investors and target companies engage at the beginning to understand the target company’s valuable IP-related assets, the IP rights involved that protect those assets, and any risk associated with the use and monetization of the IP. As a result of this engagement, both sides will be driven to negotiate the terms of the investment, including elements such as representations and warranties, indemnities, limitations on liability and structure of financial investment (i.e. financial terms tied to benchmarks and ROI).
To ensure that both the PE investors and the target company have the necessary information to make well-informed transaction decisions, conducting a comprehensive due diligence analysis of the IP-related assets involved in the transaction is essential. Important issues to address in this analysis include IP ownership rights, extent to which the target company has freedom to operate without risk of infringement or competitive overlap, customer agreements, third party IP and data security.
“The impact of these issues can have real consequences for the transaction, including adjustments to the scope of the investment, the requirement for performance benchmarks for underperforming or under-developed IP assets, and the use of other tools and performance incentives for the target company that help the PE firm guarantee a return on their investment.”
The full article, “How Intellectual Property Informs the Investment in a Private Equity Transaction,” was published by IPWatchdog on July 31, 2018, and is available online.