Assessing Intellectual Property in PE Due Diligence
PE Due Diligence Programme — Lesson 3 of 10
Intellectual property is the intangible asset category that most PE professionals believe they already cover in diligence. After all, every deal includes a legal IP review — the lawyers check the patent register, confirm trademark ownership, and review licence agreements. Box ticked.
Except that traditional legal IP diligence answers the wrong questions. It confirms ownership and identifies disputes, but it rarely addresses the questions that actually determine deal value: How defensible is this IP? How much of the target's competitive advantage depends on it? What happens when the patents expire? Is the trade secret regime actually enforceable? Could a well-funded competitor replicate this within two years?
This lesson provides a commercially focused framework for IP assessment — one that goes beyond the legal register to evaluate the strategic value, durability, and risk of the target's intellectual property portfolio.
Legal IP diligence confirms that you own something. Commercial IP diligence tells you whether it is worth owning. Both are necessary, but only the commercial assessment informs the valuation. A patent portfolio with 50 granted patents can be worth everything or nothing — the difference lies in the strength, breadth, and commercial relevance of those patents to the target's revenue streams.
The Four Pillars of IP Assessment
A comprehensive IP assessment covers four distinct dimensions. Most PE diligence processes address only the first.
Pillar 1: Ownership
- Who legally owns each IP asset?
- Are assignments properly executed?
- Any encumbrances, liens, or pledges?
- Change-of-control implications?
Pillar 2: Protection
- Are registrations current and maintained?
- Geographic coverage adequate?
- Enforcement history and capability?
- Trade secret regime robust?
Pillar 3: Commercial Value
- How much revenue depends on this IP?
- Does it enable premium pricing?
- What is the remaining useful life?
- Licensing income potential?
Pillar 4: Competitive Defensibility
- How hard is it to replicate or design around?
- What competitive alternatives exist?
- Are there blocking patents held by others?
- How fast is the technology evolving?
Patent Portfolio Assessment
Patents are the most visible form of IP, but their presence alone tells you almost nothing about value. A portfolio of 100 patents on obsolete technology is worth less than a single patent on a core product feature.
Patent Assessment Framework
| Factor | Strong Position | Weak Position |
|---|---|---|
| Claims breadth | Broad claims covering the core technology principle | Narrow claims easily designed around |
| Remaining life | 15+ years remaining on key patents | Core patents expiring within 3-5 years |
| Geographic coverage | Granted in all major markets where the company operates | Granted only in home jurisdiction |
| Revenue linkage | Patents directly protect revenue-generating features | Patents cover peripheral or abandoned products |
| Citation frequency | Highly cited by subsequent patents (indicates foundational value) | Rarely cited |
| Freedom-to-operate | Clear FTO; no blocking patents from competitors | Dependent on cross-licences or exposed to infringement risk |
| Continuation pipeline | Active continuation/divisional applications extending protection | No pipeline; existing portfolio is the total protection |
Patent Expiry Risk
Patent expiry is one of the most predictable and material risks in IP-dependent businesses. When a key patent expires, competitors can legally replicate the protected technology — often causing rapid margin compression.
A PE fund evaluated a medical device company whose flagship product generated 70% of revenue. The product was protected by three core patents, all expiring within 4 years. The company had no continuation patents in the pipeline and R&D spending had been declining. The fund modelled a 30% revenue decline within 2 years of patent expiry based on comparable device markets. The deal was still attractive, but at 6x EBITDA rather than the 9x the seller was seeking. Without the patent expiry analysis, the fund would have significantly overpaid.
Trademark and Brand IP Assessment
Trademarks protect the brand — and for consumer-facing businesses, the brand is often the most valuable IP asset. Trademark assessment goes beyond confirming registrations.
Trademark Diligence Priorities
| Priority | Assessment | Why It Matters |
|---|---|---|
| Registration coverage | Map all registered marks against the company's operating geographies and product categories | Unregistered marks in active markets create competitor risk |
| Common law rights | In jurisdictions with common law trademark rights, assess the strength of unregistered marks | May provide some protection but is weaker and more expensive to enforce |
| Domain portfolio | Review all owned domains, including defensive registrations | Cybersquatting and brand confusion risk |
| Opposition and cancellation | Check for any pending challenges to trademark registrations | Active challenges signal competitive vulnerability |
| Licensing | Are any marks licensed out? On what terms? Any quality control provisions? | Uncontrolled licensing can weaken or invalidate trademark rights |
Trade Secret Assessment
Trade secrets are the dark matter of IP — they represent enormous value but are invisible on any register. A trade secret is any confidential business information that provides a competitive advantage, including algorithms, formulas, processes, customer data, pricing models, and supplier terms.
The challenge with trade secrets is that their value depends entirely on the quality of the protection regime. A trade secret that everyone in the company can access, that has never been documented as confidential, and that departed employees have carried to competitors is not a trade secret at all — it is just information.
Trade Secret Protection Regime Assessment
| Element | Adequate | Inadequate |
|---|---|---|
| Identification | Company maintains a trade secret register identifying all confidential information | No catalogue; "we know what's secret" |
| Access controls | Need-to-know access, technical restrictions, access logging | Available to all employees on shared drives |
| Contractual protection | All employees and contractors sign NDAs with specific confidentiality obligations | Generic employment contracts with boilerplate confidentiality |
| Exit procedures | Departing employees reminded of obligations, access revoked, devices returned | No formal exit process for IP protection |
| Non-compete agreements | Key individuals bound by enforceable non-competes | No non-competes, or non-competes unlikely to be enforceable |
| Third-party disclosures | All external disclosures covered by NDAs; clean room procedures where needed | Information shared freely with potential partners and customers |
Trade secret protection is only as strong as its weakest link. If a company relies heavily on proprietary algorithms or processes but has no formal trade secret register, inconsistent NDA coverage, and a history of employees leaving for competitors without any enforcement action, the "trade secret" provides no real competitive protection — regardless of how valuable the underlying information might be.
Licensing Income and Agreements
IP licensing can be both an asset and a liability. Inbound licences give the target access to third-party IP; outbound licences generate revenue from the target's IP. Both require careful diligence.
Licensing Diligence Framework
| Licence Type | Key Questions | Risk Areas |
|---|---|---|
| Inbound (using others' IP) | What IP does the company licence in? Is it critical to operations? What are the renewal terms? | Termination on change of control, escalating royalties, single-source dependency |
| Outbound (licensing own IP) | What revenue comes from licensing? What are the terms? Are licensees compliant? | Revenue concentration in a few licensees, geographic exclusivity limits, under-enforcement |
| Cross-licences | Are there reciprocal IP arrangements with competitors? | May limit the company's ability to enforce its own patents against the cross-licence partner |
| Open source | Does the company use open source software? Under what licences? | Copyleft licences (GPL) may require disclosure of proprietary source code |
The Open Source Trap
Open source software is ubiquitous in modern technology companies, and its use is generally unproblematic — provided the company understands and complies with the licence terms. The risk lies in copyleft licences (most notably GPLv3), which can require a company to release its own proprietary source code if it incorporates or links to GPL-licensed components. In IP-intensive targets, an open source audit is essential. Companies that have carelessly mixed GPL code into proprietary products may face a choice between releasing their source code and rewriting significant portions of their codebase.
Valuing IP in the Deal Context
IP valuation in PE diligence is not about arriving at a precise number — it is about understanding the range of value and the key assumptions that drive it. The three most common methods are:
IP Valuation Methods
| Method | How It Works | Best For |
|---|---|---|
| Relief from Royalty | Estimates value as the present value of royalty payments the company avoids by owning the IP | Patents, trademarks, technology with observable licensing rates |
| Multi-Period Excess Earnings | Isolates the incremental cash flows attributable to the IP asset | Customer relationships, technology that drives specific revenue streams |
| Replacement Cost | Estimates what it would cost to recreate the IP from scratch | Software, databases, proprietary processes |
The relief from royalty method is the most widely used for IP valuation in purchase price allocations because it anchors to market evidence — observable royalty rates for comparable IP. Typical royalty rates vary significantly by industry and IP type.
Indicative Royalty Rate Ranges
| IP Type | Typical Royalty Range | Key Drivers |
|---|---|---|
| Pharmaceutical patents | 4-12% of revenue | Exclusivity period, market size, pipeline |
| Software technology | 2-8% of revenue | Competitive alternatives, switching costs |
| Consumer brand/trademark | 3-10% of revenue | Brand strength, pricing power, market share |
| Industrial know-how | 1-5% of revenue | Uniqueness, replicability, documentation |
What Comes Next
In Lesson 4: Evaluating Talent and Retention Risk, we move from assets that can be registered and legally protected to the most volatile intangible asset category — people. Key person dependencies, knowledge concentration, and retention risk can make or break a PE investment, and most diligence processes do not assess them rigorously.
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.