Due Diligence and Intangible Assets

Michael D. Moberly    September 17, 2009

When conducting ‘due diligence’, there are multiple objectives.  Three key ones are to (1.) recognize that 65+% of most deal – transaction value lies in the targets’ intangible assets, (2.) provide superior knowledge and insight to principals about the status of about-to-be-purchased assets relative to a deals’ terms, objectives, projected returns, and exit strategies, and (3.) examine any circumstances that may adversely affect the target and/or transaction to ensure control, use, ownership, and value of those assets under consideration (about-to-be-purchased) are sustainable in both pre and post transaction contexts.

In other words, due diligence must account for the reality that the control, use, ownership, value, and materiality of those assets can be rapidly compromised, undermined, misappropriated, eroded, and/or fluctuate to adversely impact the projected (sought after) economic and competitive advantage benefits of a transaction.

It’s essential therefore, that due diligence represent/serve a clients’ interests better by being much more than a cursory or confirmatory review of the presence, absence, and/or position of a target’s intangible assets or merely provide decision makers with subjective, snap-shot-in-time estimates.  Instead, in today’s increasingly predatorial and ‘wired’ business transaction environment in which data mining and business/competitor intelligence are routinely applied, due diligence must bring strategic clarity (certainty) to management teams decision making process, particularly regarding the status, fragility, stability, sustainability, defensibility, and strategic value of the targeted assets.

Understanding the strategic value of intangible assets starts by recognizing that the dominant value drivers of most targeted company’s assets no longer lie in tangible-physical assets, i.e., plants, equipment, inventory, etc.  Rather, today, and for the (irreversible) foreeable future, intangible assets will continue to be the overwhelmingly dominant source of most company’s value, revenue, sustainability, and foundations for future growth, expansion, and wealth. 

There are many forms – types of intangible assets, e.g., intellectual property, intellectual capital, brand, reputation, image, goodwill, etc., which is why those critical insights that due diligence should provide to decision makers cannot be correctly/properly articulated solely by using conventional templates and snap-shots-in-time techniques.  It’s also because, in today’s hyper-aggressive and globally competitive transaction environment, asset value and materiality can fluctuate rapidly especially if adverse circumstances exist which includes, among other things, the assets being subject to compromise, misappropriation, infringement, erosion, or undermining prior to or immediately following deal closure.

 

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