IP Due Diligence Before Selling a Business: A Checklist for Business Owners

Intellectual Property Due Diligence (IP Due Diligence or IPDD) is a comprehensive review and assessment of the intellectual property assets and rights owned by or used by a company, as well as any third-party intellectual property rights that may affect its business operations.

In essence, IPDD is an audit of a target company’s intellectual property portfolio.

Its primary purpose is to conduct a thorough assessment of the reliability, scope of legal protection, and enforceability of the company’s intellectual property rights.

IPDD is a key instrument for understanding a company’s strategic position and identifying potential risks associated with its intellectual property assets. The value of an IP due diligence exercise lies in its ability to identify and evaluate material issues relating to intellectual property, including the existence of pledges, encumbrances, security interests, or other third-party rights affecting such assets.

Conducting IPDD enables a company to minimize legal risks, identify weaknesses, and detect potential disputes, claims, or challenges by third parties before they arise. Where a business intends to attract investment or pursue a sale, IP due diligence facilitates proper transaction preparation and allows the company to present the value of its intellectual property assets in the most favorable manner.

Companies frequently fail to maintain proper records of their intellectual property assets or adequately assess the risks associated with using third-party intellectual property. Even a single unlicensed software application, the unauthorized use of a photograph, or software code whose intellectual property rights have never been effectively assigned to the company may jeopardize the legal security of the business. Identifying such risks at an early stage is therefore essential to preventing adverse legal consequences.

When preparing a company for sale, commercial attractiveness alone is insufficient. Prospective purchasers also assess the stability of the company’s revenue streams, its dependence on particular customers, the quality of its corporate documentation, and the existence of legal or commercial risks that could affect future operations.

Among the most critical issues that purchasers and investors typically identify—and which may hinder a successful and profitable transaction—are:

• lack of transparency in financial processes;
• underdeveloped corporate governance structures and excessive dependence on a key individual (typically the owner), as purchasers generally expect a business capable of operating independently of its founder’s day-to-day involvement;
• absence of stable contractual relationships with customers, or overreliance on one or several key clients, both of which may indicate business instability; and
• unresolved legal status of assets and inadequate documentation relating to tangible and intangible assets.

For these reasons, business owners should prepare for a sale or investment round well in advance and engage qualified professionals to conduct IP Due Diligence. Ideally, the IPDD process should be completed before entering into substantive negotiations with potential purchasers or investors.

Generally, a comprehensive intellectual property due diligence review includes various measures, such as analyzing IP-related agreements, reviewing applications and registration documents relating to intellectual property assets, verifying the legal validity of the use of such assets, and assessing the risk of intellectual property disputes or litigation.

An intellectual property due diligence review typically includes some or all of the following:

1. Verification of ownership and registration. Confirming that intellectual property rights have been properly registered or otherwise validly acquired, and identifying any encumbrances, liens, security interests, or restrictions affecting those rights.
2. Assessment of enforceability. Evaluating the enforceability of the company’s owned or licensed intellectual property rights, including verification that all statutory formalities have been satisfied and that renewal and maintenance fees have been paid where necessary to preserve the validity of those rights.
3. Assessment of the scope of protection. Reviewing the territorial scope, duration, and extent of protection afforded by the intellectual property portfolio to determine whether it adequately supports the company’s business activities.
4. Evaluation of know-how and unregistered rights. Assessing the existence, commercial significance, and value of the company’s know-how and other unregistered intellectual property rights, including copyright.
5. Freedom to Operate (FTO) analysis. Conducting a Freedom to Operate (FTO) assessment in relation to the company’s principal commercial products, technologies, and trademarks. Although the concept of Freedom to Operate is not expressly regulated under Ukrainian law, it is widely recognized in international practice. An FTO analysis determines whether a company may manufacture, market, import, or otherwise use a particular product without infringing the intellectual property rights of third parties, particularly patent rights.
6. Review of IP-related agreements. Analyzing contracts concerning intellectual property rights to which the company is a party and assessing their impact on the company’s operations.
7. Review of internal IP policies. Determining whether the company has adopted internal policies governing the creation, management, protection, and use of intellectual property and evaluating the effectiveness of such policies.
8. Assessment of disputes and litigation. Identifying existing or potential intellectual property disputes, litigation, administrative proceedings, and associated legal risks.

Particular attention should also be paid to a company’s internal corporate policies governing the acquisition, management, and protection of intellectual property rights. The existence of well-developed policies contributes to sound corporate governance and strengthens the legal integrity of the business while establishing the principles that shape and protect the company’s brand.

Such policies frequently reflect the company’s core values, which today have become far more than aspirational statements—they play an important role in building the company’s market reputation and corporate identity.

We have repeatedly assisted clients in developing trademark use and brand protection policies designed to establish clear rules governing the use, licensing, assignment, and protection of trademarks while preventing infringements of the rights of trademark owners.

These policies are intended to preserve brand integrity while enhancing the company’s recognition and reputation in the marketplace.

Intellectual Property Due Diligence constitutes an integral component of the comprehensive legal review undertaken in connection with mergers and acquisitions, corporate restructurings, investments, and other business transactions. Regardless of the specific purpose of the review, a properly conducted IPDD enables parties to assess the condition and commercial value of intellectual property assets, identify potential legal risks, and verify the legitimacy of ownership and use of those assets.

Given the complexity of intellectual property law and the rapidly evolving business environment, IP Due Diligence should be conducted with the assistance of experienced intellectual property professionals. Their involvement facilitates the timely identification of deficiencies in the company’s intellectual property structure and enables a comprehensive assessment of associated legal risks.

It is also advisable to engage tax advisors to evaluate the tax implications of transferring intellectual property assets. Such a multidisciplinary approach enables business owners to address deficiencies in advance, optimize their intellectual property structure, and present their business more effectively to prospective investors or purchasers while ensuring thorough preparation for corporate transactions.