Intangible Assets in PE Due Diligence
PE Due Diligence Programme — Lesson 1 of 10
I have sat across the table from PE buyers more times than I can count. In every deal, the conversation follows a familiar script: revenue quality, EBITDA adjustments, working capital, capex. The spreadsheets are meticulous. The financial model is stress-tested to the third decimal place. And yet, in deal after deal, the assets that actually determine whether the investment succeeds or fails — the brand, the technology, the customer relationships, the key people — receive a fraction of the diligence effort.
This is the intangible diligence gap. It is the single most consequential blind spot in modern private equity, and it explains a significant share of the write-downs, failed integrations, and disappointing exits that plague the industry.
In a typical mid-market acquisition, 70-90% of the enterprise value paid is attributable to intangible assets — yet most PE diligence processes dedicate less than 10% of their time and budget to assessing those assets. Closing this gap is not optional. It is the difference between informed deal-making and expensive guesswork.
The Scale of the Problem
The numbers are stark, and they are not new — they have been growing in one direction for three decades.
When a PE fund pays 8-12x EBITDA for a mid-market business, the tangible assets on the balance sheet — property, equipment, inventory, receivables — rarely account for more than 15-30% of that price. The rest is goodwill and identifiable intangible assets: the customer base, the brand, the proprietary technology, the team's expertise, the regulatory licences, the data assets.
Yet the standard PE diligence playbook — financial, commercial, legal, tax — was designed for an economy where you were buying factories, stock, and property. The playbook has not kept pace with what you are actually buying.
What PE Firms Are Actually Buying
Consider a typical mid-market SaaS acquisition at 10x ARR. The target has $20 million in annual recurring revenue, $3 million in tangible assets, and is valued at $200 million. What does the $197 million gap comprise?
Typical Intangible Value Composition in a Mid-Market SaaS Deal
| Intangible Asset Category | Typical % of Intangible Value | Diligence Coverage |
|---|---|---|
| Customer relationships and contracts | 30-40% | Moderate (revenue quality analysis covers some) |
| Proprietary technology and software | 20-30% | Low (often limited to IP legal review) |
| Brand and market position | 10-15% | Minimal (assumed, not measured) |
| Human capital and key people | 10-20% | Low (management references, not systematic) |
| Data assets | 5-10% | Very low (rarely assessed independently) |
| Regulatory licences and compliance | 2-5% | Moderate (legal diligence) |
| Residual goodwill | 10-20% | None (accepted as a residual) |
The irony is obvious. The assets that represent the overwhelming majority of what you are paying for receive the least structured analysis. A PE fund would never close a deal without a thorough review of the target's fixed assets, yet routinely commits hundreds of millions to intangible value that has been assessed through little more than management interviews and competitive positioning slides.
Why the Gap Exists
The intangible diligence gap is not caused by laziness or incompetence. It has structural roots.
1. Accounting Standards Obscure Intangible Value
Under IAS 38, internally generated intangible assets — brands built through marketing, customer relationships developed through service, software created by in-house teams — cannot be recognised on the balance sheet. The target's financial statements systematically understate its intangible asset base. The diligence team starts from a position of incomplete information.
2. Traditional Diligence Streams Are Siloed
Financial diligence analyses the numbers. Commercial diligence assesses the market. Legal diligence reviews contracts and IP registrations. But intangible value cuts across all of these. Customer relationship value sits at the intersection of financial (revenue quality), commercial (market position), and legal (contract terms). No single diligence stream owns it, so no single stream analyses it properly.
3. Intangible Assets Are Harder to Measure
A building can be surveyed. Inventory can be counted. But how do you value a brand? How do you measure the risk of losing three key engineers? How do you quantify the competitive advantage of a proprietary dataset? The measurement challenge is real — but it is solvable, as the remaining lessons in this programme demonstrate.
A mid-market PE fund acquired a UK healthcare technology company for 9x EBITDA. Financial diligence was thorough — clean revenue, growing margins, minimal capex. What the diligence missed: 62% of revenue came from a single NHS framework contract expiring in 18 months, the CTO who had built the entire platform was on a 3-month notice period with no non-compete, and the company's key competitive advantage — a proprietary patient data algorithm — had never been formally assigned from the individual developer to the company. Within two years, the contract was lost to a competitor, the CTO left, and the fund wrote down 40% of its investment. Every one of these risks was intangible. None was adequately addressed in diligence.
The Cost of Getting It Wrong
Intangible diligence failures are not theoretical. They are the leading cause of value destruction in PE portfolios.
Common Intangible Diligence Failures
| Failure Mode | Root Cause | Typical Impact |
|---|---|---|
| Key person departure post-deal | No assessment of people dependencies | 20-40% revenue at risk |
| Customer concentration surprise | Revenue quality analysis too shallow | Single customer loss destroys returns |
| Technology replatforming required | No technical debt assessment | 12-24 month delay, $5-15M unplanned spend |
| IP ownership disputes | Legal diligence focused on registrations, not assignments | Injunctions, licensing costs, deal restructuring |
| Goodwill impairment | Overpayment due to unvalidated intangible assumptions | Write-down, LP reporting issues, fund performance hit |
| Integration destroys culture | No assessment of organisational capital | Talent attrition, productivity collapse |
The Real Cost
Research from McKinsey consistently shows that 70% of M&A transactions fail to achieve their projected synergies. In the majority of cases, the value destruction is not financial or operational — it is intangible. The customers who leave because the brand promise changes. The engineers who depart because the culture shifts. The competitive advantage that evaporates because the acquirer did not understand what created it. These are intangible asset failures, and they are preventable with the right diligence framework.
What Good Looks Like
Closing the intangible diligence gap does not require reinventing the wheel. It requires adding a structured intangible asset assessment to the existing diligence framework. At its core, this means three things.
Identify the intangible asset base
Systematically map the target's intangible assets across all categories — customer relationships, IP, technology, human capital, brand, data, regulatory. Do not rely on the balance sheet. Most of what matters is not there.
Assess risk and durability
For each material intangible asset, evaluate: How durable is it? What threatens it? How dependent is the business on it? What happens if it degrades? This is where the real diligence value lies — not in the valuation number, but in the risk assessment.
Quantify and integrate into the deal model
Translate intangible asset findings into the financial model. Adjust the valuation for intangible risks. Build intangible asset protection into the deal structure (warranties, retention packages, IP assignments). Plan for intangible asset preservation in the 100-day integration plan.
The Programme Ahead
This programme provides a comprehensive, practical framework for PE intangible asset due diligence. Each lesson builds on the previous one, moving from assessment frameworks through specific asset categories to integration planning and real-world case studies.
| Lesson | Topic | Focus |
|---|---|---|
| 1 | Intangible Assets in PE Due Diligence | Why it matters (this lesson) |
| 2 | The Intangible Asset Diligence Checklist | Comprehensive assessment framework |
| 3 | Assessing Intellectual Property | Patents, trademarks, trade secrets, licensing |
| 4 | Evaluating Talent and Retention Risk | Key people, team stability, knowledge concentration |
| 5 | Valuing Customer Relationships | CLV, churn, concentration, contract quality |
| 6 | Technology and Product Assessment | Tech debt, architecture, scalability, AI readiness |
| 7 | Goodwill Impairment Risk | Overpayment risk, stress-testing assumptions |
| 8 | Regulatory and Compliance Liabilities | Hidden liabilities, data protection, IP disputes |
| 9 | Post-Deal Integration | 100-day intangible preservation plan |
| 10 | Real-World Case Studies | 3 anonymised deals, lessons learned |
The framework is practical, not academic. Every tool, checklist, and assessment approach in this programme has been tested in real transactions. The goal is not to add another layer of bureaucracy to an already complex process — it is to ensure that the diligence effort matches the value at stake.
What Comes Next
In Lesson 2: The Intangible Asset Diligence Checklist, we provide a comprehensive, category-by-category checklist for assessing intangible assets across all seven CHS categories. This becomes your working document for every deal — the structured framework that ensures nothing material is missed.
Mark Hillier is Co-Founder and CCO of Opagio. He brings more than 30 years' experience helping businesses scale, prepare for PE investment, and execute successful exits. He has sat across the table from PE buyers and knows what they need to see — and what they routinely miss. Meet the team.