This post was originally published in October 2019 and updated in September 2023.
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This post was originally published in April 2020 and was updated in April 2023.
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By Catriona Collins
Intellectual property assets long ago supplanted physical assets as the most valuable components of the typical corporate balance sheet. A recent analysis of the 500 largest public companies in America indicates the dramatic scope of that shift. Intangible assets—largely comprised of IP rights associated with inventions and brands—now account for a stunning 90% of the total value of companies in the S&P 500®, according to the 2020 Ocean Tomo® Intangible Asset Market Value Study.
This means that tangible assets—buildings, equipment, real estate holdings, etc.—now represent just one-tenth of the market value of the S&P 500, a historic change over the past few decades. In 1985, tangible assets accounted for 68% of the value of the 500 largest public companies, and they still represented 32% of total value as recently as 1995.
With businesses in all economic sectors increasingly relying on technology innovation to compete, it is all but certain that IP assets will remain the primary driver determining corporate value for the foreseeable future.
“There are reasons to suggest that the influence of tech and thus intangible assets has more steam in its engine,” according to Visual Capitalist. “The looming 5G revolution, more internet users on the horizon, and the powerful potential of new technologies are all supporting considerations.”
Most in-house counsel are now operating in an economy in which nearly every corporate transaction—on either the buy-side or the sell-side—is going to have a major IP component. Conducting thorough and thoughtful due diligence is critical to the deal-making process, as the value of a corporate transaction often hinges on the strength of a company’s IP portfolio.
It’s essential to be prepared to quickly deploy an IP due diligence plan, whether you execute it with your own internal team or supervise the work being done by outside counsel. Here are five key questions to ask before you get started on IP due diligence.
Since the value of IP assets is the leading driver of the enterprise value and overall business terms of nearly all corporate transactions, both parties need to investigate the nature of the IP assets with a thorough due diligence process. This demands that in-house counsel ask the right questions before the IP due diligence process begins. These questions and related issues are discussed in IP Due Diligence, by Practical Guidance contributors Ethan Horwitz (Carlton Fields, P.A.) and Kandis Koustenis (Bean Kinney & Korman PC), a complimentary copy of which is available for a limited time by clicking here.
For a chart that may be used to track and document IP assets during a due diligence review, see IP Due Diligence Review Charts. For a discussion of key issues in the transfer of intellectual property assets in mergers and acquisitions, see IP Asset Acquisitions.