IP due diligence is the part of an investment round or business sale where things go wrong most quietly. The issue is rarely discovered dramatically — it surfaces in a schedule of findings, flagged by the buyer's or investor's solicitors, and suddenly your valuation is being renegotiated or your completion timeline has extended. Most IP problems are fixable. They are always cheaper and faster to fix before due diligence than during it.
Why IP Matters in a Transaction
For investors and acquirers, intellectual property is often among the most valuable things they are buying. The question due diligence answers is not just "what IP does this business have?" but "does this business actually own it, can it prove that, and is there anything that could undermine it?"
A business with material unregistered trade marks, IP created by contractors without proper assignment, software incorporating unlicensed open source, or domain names registered in a founder's personal name presents risk. That risk reduces valuation, requires indemnities, or — in serious cases — pauses or kills the deal.
What Investors and Buyers Examine
1. Trade Mark Registration
What they look for: registered trade marks in the company's name (not a founder or holding entity), covering current and planned goods and services, in active use, with renewals current.
Common problems: brand name in commercial use for years with no registration; registration in a founder's personal name; lapsed registrations not renewed; registration that doesn't cover current product lines.
The fix: commission a trade mark audit, register missing marks, transfer marks registered in personal names to the company. Allow four to six months for UK registration.
2. IP Ownership — The Contractor Problem
This is the most consistently identified issue in technology and creative business due diligence, and it surprises founders who believe that paying for work means owning it.
Under UK copyright law, the first owner of copyright in a work is the person who created it — unless they were an employee creating the work in the course of employment. Freelancers and contractors are not employees. Unless a written IP assignment exists, the contractor owns the work: the code, the design, the creative content.
What they look for: written IP assignment or work-for-hire agreements for every material piece of IP created by non-employees — website code, software, brand identity, marketing materials, technical documentation.
Common problems: website built by a freelancer with no IP assignment; core software written by a contractor before the company was incorporated; brand identity created by an agency that granted a licence but not an assignment; content written by a consultant who retains copyright.
The fix: audit all IP-creating contractors historically; obtain retrospective written assignments where none exists; include IP assignment clauses in all future contractor engagements. Retrospective assignments require the contractor's cooperation — approach this before due diligence, not during it.
3. Domain Names and Social Media Handles
What they look for: all domain names (particularly the primary domain and key variants) registered in the company's name; all primary social media accounts under company control.
Common problems: primary domain registered in a founder's personal name; significant domain variants unregistered and available; social media accounts in the personal name of a founder or former employee.
The fix: transfer domain registrations to the company's name; register key domain variants; ensure social media account access is controlled by company credentials.
4. Open Source Software Compliance
For technology businesses, due diligence examines open source components incorporated into software products. Open source licences vary significantly in what they permit and require.
What they look for: a record of all open source components used; confirmation that copyleft licences (GPL, LGPL, AGPL) are complied with and do not require proprietary code to be made available on open source terms.
The fix: conduct an open source audit using software composition analysis tools; resolve compliance issues; maintain an ongoing register of components and their licences.
5. Confidentiality and Trade Secrets
What they look for: confidentiality agreements with employees (in employment contracts) and with counterparties (in NDAs and commercial contracts); appropriate measures to keep confidential information confidential.
Common problems: employment contracts without confidentiality obligations; technical processes disclosed to suppliers or customers without NDAs; a business that has not maintained the confidentiality of its key know-how.
6. IP Disputes and Claims
What they look for: any outstanding or threatened IP claims against the company — trade mark infringement, copyright infringement, patent infringement; any claims the company has against third parties; any cease and desist letters received or sent.
What must be disclosed: all material IP disputes, whether or not proceedings have been issued. Failure to disclose a known dispute is a breach of warranty.
How to Prepare
The most effective preparation is an IP audit commissioned six to twelve months before a planned transaction. It should cover: all registered IP — what exists, in whose name, current status; all unregistered IP of material value; all IP created by contractors — gaps in assignment documentation; domain names and social media ownership; open source compliance for technology businesses; material IP contracts — licences in and out, assignments, co-development agreements; and IP disputes — past, current, and threatened.
Working through the remediation plan before a transaction means due diligence moves faster, the disclosure schedule is shorter, and the negotiating position on warranties is stronger.
What Happens If Problems Are Found During Due Diligence
- Price adjustment: buyer reduces the price to reflect the risk
- Specific indemnity: seller provides an uncapped indemnity for losses from the identified issue
- Retention: buyer holds back part of the purchase price pending resolution
- Condition to completion: sale conditional on the IP issue being resolved
- Deal failure: in serious cases, unresolvable IP problems cause a buyer to withdraw
None of these outcomes is as good as walking into the transaction with clean IP.
Bonsai Law advises SMEs and founder-led businesses on IP due diligence preparation, IP audits, trade mark registration, and IP strategy for investment and exit transactions. Contact us before your transaction begins.
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