What licensing and other contractual agreements has the company already made, and how long are those agreements in force? “Maybe you want to distribute a company’s product in the Far East, and they already have a licensing agreement with another company that covers that,” Hemphill says. “You can buy the company, but what you are really buying is a chance to collect money on the opportunity they’ve already sold.”
That’s a problem—unless the terms of the licensing agreement say that it ends when the company changes hands. “Sometimes the license is limited, and you can end it,” Sandberg says. “Other licenses are in perpetuity, and even obligate you to share the improvements [to the product or technology in question].”
When to Stop
“At some point, you’re out of time or money,” Hemphill says. “You’ve got some sense of what the problems are and how they might be fixed, and you can decide whether to go forward.”
At one end of the spectrum, you might decide that there are no problems: The company’s patents are valid, the ownership rights are clear, and the scope is broad. At the other end, you might withdraw a purchase offer for a company that has questionable claims to critical intellectual property.
Or you might find a middle ground, where there are enough problems to make you adjust your purchase price offer, but not enough to persuade you to cancel the deal. “The results very often affect what you’re willing to pay for the business, or it can put off the closing,” says Barbara Grahn, a partner at Oppenheimer Wolff & Donnelly, LLP, a law firm in Minneapolis. The seller might be able to solve some of the problems, or might be willing to offer warranties guaranteeing that everything is as the target company portrays it.
Remember that there’s no guarantee the target company’s principals will be around to follow through on those warranties. And even with the best due diligence, there’s also no certainty that the business’s intellectual property will help it succeed. A good due diligence process, though, can help you take stock of those risks—and move you closer to a profitable purchase.
