M&A Due Diligence Specific To Intangible Assets…Pre-Post Transaction

A routinely overlooked, but increasingly critical component to… achieving a desired outcome to a merger and/or acquisition is…

  • conducting intangible asset due diligence in both pre, and post transaction contexts.

The rationale for doing so is rooted in the indisputable economic fact that…

  • 80+% of most company’s value, sources of revenue, competitive advantage, and sustainability today lie in – emerge directly from intangible assets, and, by extension, transactions they may engage. 
  • of course, the parties to – the target of an M&A assume, should they possess sufficient operational familiarity, can utilize – further exploit the intangibles they are about to acquire.

An equally important purpose for – objective to conducting (having)  pre-post (intangible asset) due diligence in place, is to…identify specific preludes for…

  • embedding forward looking – sensing radar to detect – alert parties to the key assets’ in play. i.e.,
    • their stability, fragility, vulnerability, defensibility, and sustainability relative to risks, primarily fluctuations to value, as sources of revenue, and competitive advantage.
    • risks, which, if materialized, would variously and adversely, affect an M&A’s outcome.

My experience indicates that when advance insights – knowledge is made available, especially to…the initiating party to an M&A, via pre-post transaction due diligence which focus on essential, strategic, and sought after intangible assets, this can serve as attractive assurances to boards, investors, and other equity sources regarding M&A outcomes.

Interestingly, forehand knowledge…that pre-post transaction (intangible asset) due diligence will be conducted, does not go unnoticed by sellers – targets of an M&A.

That is, there tends to be less inclination to…inadvertently or purposefully undermine or destabilize a transaction by allowing valuable – competitive intangible assets, i.e., intellectual, structural, and/or relationship capital in advance of transaction execution.  In other words actions that would substantially alter the character – strategic components of a transaction as initially conceived and negotiated, e.g., brand, and reputation, etc.

To not engage in pre-post transaction (intangible asset) due diligence is to assume…the epitome of transaction risk.  That’s because, among other issues, risk to key intangibles can, and frequently do, materialize at keystroke speeds, often under conventional (due diligence) business risk radar.

To assume intangible assets are irrelevant to…the operational realities and sustainability of an M&A target and any other business transaction for that matter, suggests the proverbial ‘tea leaves’ are, at minimum, being substantially misinterpreted, or worse, utterly ignored.

The risks I am referring to, for M&A’s specifically…is the potential – probability that valuable intangible assets most relevant to achieving a projected – desired near term and strategic outcome, can do so, primarily and/or only when-if they…

  • remain fully intact and stable.
  • not experience some level of potentially irreversible erosion and/or undermining of their value
  • as a continued source of revenue, competitive advantage, or projected synergy, etc.

These are genuine-legitimate ‘risk realities’ which can be mitigated, if not wholly avoided by…

  • having operational level familiarity with the intangible assets in play, and
  • conducting pre-post (intangible asset) due diligence.

In today’s aggressively predatorial, and winner-take-all business transaction environments…I strongly believe a party would be wholly remiss should they not objectively determine if the about-to-be-purchased (intangible) assets can – will sustain the objectives of the desired  transaction outcome.

Therefore, negotiating ‘pre and post’ transaction covenants in advance, to function as entrées – preludes for…

  • identifying and monitoring risks to key intangible assets which can – may materialize in the interim, and
  • safeguarding and preserving asset value, current – projected sources of value, revenue, and competitive advantage.

It is for these reasons…it becomes necessary, today more than previously, to design – negotiate – execute pre-post transaction covenants to not only assess, but, monitor vulnerabilities and risks that can adversely impair the assets’ stability.

Intangible assets embedded in any merger – acquisition target…are presumably exploitable and variously liquid. Such (asset) characteristics, its important to keep in mind, can also render valuable – competitive advantage intangible assets vulnerable to being outpaced and circumvented, pre – post transaction.

Please note, I am not suggesting M&A transaction due diligence should be wholly indifferent to…conventional intellectual property enforcements, i.e., patents, trademarks, copyrights, etc.  However, transaction management teams are obliged to recognize…

  • conventional IP enforcements are largely reactive, and
  • once a ‘genie’ is out of its bottle, it’s generally costly, time consuming, and challenging to (a.) try to retrieve the assets, and (b.) return them to the bottle fully intact, without (c.) experiencing  prime value – competitive advantage erosion  which (d.) quite literally, sabotage M&A deals.

Examples of this include,, but certainly are not limited to…unabated misappropriation, infringement, product counterfeiting-piracy, poorly and/or un-monitored violations of non-compete and non-disclosure agreements, asset entanglements that routinely contribute to…

  • transaction friction, challenges, and disputes
  • that stifle – undermine deal trust, momentum and finalization.

When these, and other risks materialize, (singularly or in multiples) prior to deal finalization…the value of the about-to-be purchased assets (intangibles) can quickly hemorrhage. Once known, the terms of the deal (as articulated in the initial covenants) should be renegotiated as basis to continue to sustain the buyers’ objectives.

Michael D. Moberly August 7, 2017 [email protected], the ‘Business Intangible Asset Blog’, since May 2006, 650+ published posts, read in 137+ countries ‘where one’s attention span, businesses intangible assets, and solutions converge’!

Readers are invited to explore other published posts, position papers, books, and video at https://kpstrat.com/blog


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