In a typical mid-market acquisition, 60-80% of the purchase price is attributable to intangible assets and goodwill. Yet most due diligence processes spend 80% of their time on tangible assets, financial statements, and legal compliance — and treat intangibles as an afterthought to be dealt with during the post-completion purchase price allocation.
This is a costly mistake. Intangible asset risks — customer concentration, IP ownership gaps, technology obsolescence, key person dependency — are among the most common sources of post-acquisition value destruction. Identifying them before completion gives the acquirer leverage to adjust the price, structure earn-outs, or walk away.
Intangible asset due diligence should begin at the screening stage, not after the deal closes. The purchase price allocation is too late to discover that the target's key patent is expiring, its customer base is churning, or its technology is built on third-party dependencies it does not control.
A rigorous intangible asset audit follows four phases. Each produces specific deliverables that feed into the valuation model and the PPA.
Catalogue all intangible assets the target company owns or controls, across all five IFRS 3 classes plus the CHS strategic categories.
Verify ownership, legal standing, enforceability, and transferability of each identified asset.
Apply the appropriate valuation method to each material intangible asset. Cross-reference with the purchase price to identify the implied goodwill residual.
Evaluate concentration risk, obsolescence risk, key person dependency, legal challenges, and competitive threats to each material asset.
The identification phase aims to build a complete inventory of the target's intangible assets. Use this checklist as a starting point, organised by IFRS 3 class.
| Item | What to Look For |
|---|---|
| Trademarks and trade names | Registration certificates, jurisdictions covered, renewal dates |
| Domain names | Ownership records, traffic data, SEO authority metrics |
| Brand guidelines | Evidence of systematic brand investment and consistency |
| Non-competition agreements | Post-acquisition non-competes with key executives |
| Item | What to Look For |
|---|---|
| Customer relationships | Contract terms, renewal rates, revenue concentration by client |
| Customer lists and databases | Size, quality, segmentation, GDPR compliance |
| Order backlog | Signed but unfulfilled orders, delivery timelines |
| Contractual vs non-contractual | Which relationships are protected by contracts? |
| Item | What to Look For |
|---|---|
| Patents | Registration status, expiry dates, jurisdictions, freedom-to-operate |
| Software | Ownership of source code, third-party dependencies, licence compliance |
| Trade secrets | Documentation, access controls, NDA coverage |
| Databases and data assets | Proprietary data, collection methods, privacy compliance |
| Item | What to Look For |
|---|---|
| Licence agreements | Terms, exclusivity, transferability on change of control |
| Franchise agreements | Territory rights, renewal terms, performance obligations |
| Permits and certifications | Regulatory approvals, transferability, renewal requirements |
| Item | What to Look For |
|---|---|
| Copyrights | Registration, remaining term, licensing arrangements |
| Content libraries | Size, monetisation, licensing revenue |
In a recent PE acquisition of a B2B software company, the initial asset list included only the platform software and two patents. A thorough identification exercise uncovered customer relationships worth £4.2M (60% of the deal's intangible value), a proprietary dataset worth £1.1M, and an assembled workforce with £800K in replacement cost — none of which the seller had highlighted.
Identification tells you what exists. Validation tells you whether it is real, enforceable, and transferable.
The most common due diligence failure is discovering that IP ownership is not clean. Specific risks to investigate:
In many jurisdictions, IP created by contractors defaults to the contractor unless there is a written assignment. If the target's core technology was built partly by freelancers without proper contracts, the acquirer may not own what it thinks it is buying.
For customer relationships, which are often the most valuable identified intangible:
During due diligence, valuations serve a different purpose from the formal PPA. The goal is not precision — it is to develop a reasonable range for each material intangible asset to test whether the purchase price is justified.
| Asset | Method | Key Inputs |
|---|---|---|
| Brand / trademarks | RFR | Revenue, royalty rate (3-8%), useful life |
| Customer relationships | MPEEM | Revenue by customer, churn rate, margins, contributory charges |
| Technology / patents | RFR or Income | Revenue, royalty rate (2-6%), remaining patent life |
| Software | Cost Approach | Development hours, loaded rate, obsolescence factor |
| Assembled workforce | Cost Approach | Headcount, recruitment cost, training period |
| Data assets | Income Approach | Revenue attributable to data, growth rate |
The sum of identified intangible values plus net tangible assets should approximate the purchase price. The residual is goodwill. If goodwill exceeds 40-50% of the purchase price, it signals either that intangible assets have been underidentified or that the acquirer is overpaying.
A high goodwill residual is not inherently problematic — it may reflect genuine synergy value, workforce quality, or market position. But it should be explained and justified, not accepted as a default.
The final phase maps risks to each material intangible asset. Use this framework to score and prioritise risks.
| Risk Type | Description | Impact |
|---|---|---|
| Concentration | Revenue or value dependent on few customers, products, or people | High |
| Obsolescence | Technology, IP, or content at risk of becoming outdated | Medium-High |
| Legal / regulatory | IP challenges, regulatory changes, compliance gaps | High |
| Key person | Value dependent on individuals who may leave post-acquisition | Medium-High |
| Transferability | Assets that may not transfer cleanly on change of control | Medium |
| Competition | Competitive threats that could erode asset value | Medium |
For each identified risk, document a specific mitigation:
A complete intangible asset due diligence exercise should produce four deliverables:
These deliverables feed directly into the negotiation, the SPA drafting, and the post-completion purchase price allocation.
Intangible asset due diligence is not a compliance exercise — it is a value protection exercise. Every pound of intangible value properly identified reduces the goodwill residual, increases tax amortisation benefits, and gives the acquirer a clearer picture of what they are actually buying.
Different sectors present different intangible asset profiles. The due diligence approach should be calibrated accordingly.
The primary intangible assets are typically proprietary software, customer relationships (subscription base), and data. Key DD focus areas: open-source licence compliance, technical debt assessment, customer churn analysis by cohort, and third-party API dependencies.
Value is concentrated in customer relationships and human capital. The workforce is not separately recognisable under IFRS 3, but it is critical to understand key person dependency and retention risk. Non-compete and non-solicitation agreements should be reviewed in detail.
Patent portfolios are central. DD must cover remaining patent life, pipeline status, regulatory approvals (which are separate intangible assets), and freedom-to-operate opinions. Data assets — clinical trial data, patient registries — are increasingly valuable.
Brand value may dominate the intangible asset portfolio. DD should include brand strength assessment (awareness, loyalty, pricing power), trademark registration coverage across target jurisdictions, and any brand-related litigation history.
Customer relationships and regulatory licences are the key assets. Regulatory approvals (banking licences, FCA authorisations) may be separately recognisable intangible assets. Customer relationship valuation requires careful analysis of deposit or lending book retention.
The intangible asset DD workstream should run in parallel with financial and legal due diligence — not sequentially.
| Phase | Timing | Intangible Asset DD Activity |
|---|---|---|
| Preliminary assessment | Pre-LOI | Desktop review of target's IP, brand, technology |
| Detailed due diligence | Post-LOI, pre-SPA | Full four-phase DD process |
| SPA negotiation | Alongside DD completion | IP indemnifications, retention packages, earn-out structure |
| Pre-completion | Post-SPA signing | Customer consent, IP assignment execution |
| Post-completion | Day 1 onwards | PPA initiation, customer communication, retention execution |
In a recent £80M PE acquisition, the intangible asset DD workstream identified a change-of-control clause in the target's three largest customer contracts. These customers represented 35% of revenue. The acquirer negotiated customer consent pre-completion and structured £4M of the purchase price as a customer retention earn-out — directly protecting the £12M customer relationship asset identified in the preliminary valuation.
Tony Hillier is an Advisor at Opagio with 30 years of experience in structured finance, M&A advisory, and asset valuation. He has led due diligence on over 200 transactions across financial services, technology, and professional services sectors. Meet the team.
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