How do investors evaluate intangible assets during due diligence?

Full Explanation

Due diligence on intangible assets has become increasingly rigorous as these assets represent a larger share of deal value. Investors typically examine five areas. IP verification: confirm that all intellectual property is legally owned by the company (not founders or contractors), that registrations are current, that there are no pending infringement claims, and that freedom-to-operate opinions have been obtained for key technologies. Customer analysis: review customer contracts, assess concentration risk (a single customer representing more than 20% of revenue is a red flag), analyse historical retention and churn rates, and evaluate the quality and transferability of customer relationships. Technology assessment: engage technical advisors to review code quality, architecture scalability, security posture, technical debt levels, and the technology roadmap. Some investors conduct independent code audits. Brand and market position: analyse brand awareness metrics, organic search rankings, social media engagement, and competitive positioning. Assess whether brand value is tied to specific individuals (founder-dependent brands carry higher risk). Team and organisation: evaluate management team depth, key person dependencies, employee retention rates, and the quality of documented processes. Investors use various frameworks, some proprietary and some standardised, to score intangible asset quality and compare across portfolio companies. The quality of intangible asset documentation often correlates with management quality in investors' minds.

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