Taking Inventory

Also consider any pending patents and their likelihood of success. “You can take a peek at almost anybody’s patent application and see what they and the examiner are saying, and you can get your own sense of whether they’re likely to get a patent,” Goldman says.

Ask the same questions about existing patents. In your lawyer’s opinion, should the target company’s patents or trademarks have been granted in their existing form? In spite of having a patent or trademark of your own, there is still the possibility that a product you market may infringe the patent or trademark rights of others.

A valid patent doesn’t necessarily give the holder the right to manufacture the item—for example, if the patented product involves components that are patented by other companies. “If an acquiring company purchases a company that makes a patented EKG machine, that machine may incorporate a circuit board or other part that has itself been patented by another company,” Goldman explains. “The acquiring company would need to have assurance that either a license is available, if not already in place, to permit them to make and use the patented part, or that patented parts can be obtained from the patent owner itself or licensed supplier.”

Product-clearance processes typically involve scanning the landscape for competing patent claims, leading to legal opinions that address potential concerns that may arise, Goldman adds.

“If a company has no product-clearance opinions and they’re in a field where there’s a lot of patent activity, that should raise a huge red flag,” Schutz says. If that’s the case, plan to spend extra time and money looking for similar patents as part of due diligence. You might also need to plan for licensing fees and product-design changes, should you ultimately decide to buy the company.

You’ll also need to know if any infringement claims have already been filed. Your lawyer can help you determine whether those claims will be successful, as well as an estimate of the legal costs of fighting them. “You might want to set aside money to fight those claims, and you don’t want to offer $100 million as a purchase price when it’s going to cost you $200 million to fight the infringement claims,” Sandberg says.

Are the company’s rights global, or only good within the United States? A purchasing company might want to expand the target company’s market, a goal that can depend on acquiring broader geographic rights.