Intellectual Property Risks When Buying or Selling a Business
Intellectual property (IP) is often one of the most valuable assets of a business. Trade marks, patents and branding can give a business its competitive edge, underpin its goodwill and materially affect its long-term value.
However, IP is also one of the most common sources of risk in business sales. At ABKJ Lawyers, many of the IP issues we encounter arise not from complex theory, but from practical problems such as incomplete disclosure, unclear registration status and unresolved ownership issues. These risks frequently involve trade marks and patent applications and, if overlooked, can undermine the value of the transaction.
What follows is a practical, buyer-focused guide to the key IP issues that commonly arise in business sales. While framed from a purchaser’s due diligence perspective, the same issues are equally relevant for sellers seeking to minimise risk and avoid post-completion disputes.
Identify what intellectual property is being acquired
Before anything else, the asset sale agreement should clearly identify all IP being transferred. This requires more than a broad definition of “Business Intellectual Property”. Each item of IP should be expressly listed so there is no uncertainty about what the buyer is acquiring.
For registrable IP, sufficient detail should be included to allow the buyer to verify its status. This typically involves application or registration numbers, filing dates, the current status of each right and the jurisdictions in which protection exists. In practice, we regularly encounter issues where patent or trade mark applications exist but are not disclosed in the contract, overseas registrations are omitted, or IP relied on by the business is assumed to be registered when it is not.
Where IP is central to the business, clarity at this stage is essential, as issues overlooked at the contract stage can create unnecessary complexity after completion.
Confirm control and transferability of IP
Using IP in a business does not necessarily mean the business has full rights to it. Buyers should confirm that the seller has the legal ability to control, use and transfer the IP used in the business.
For registered IP, this process usually begins with searches of the relevant IP registers. However, register searches alone are not sufficient. Buyers should also investigate how the IP was created and how rights in it were acquired, particularly where IP was developed by founders, employees or other third-party contractors. In Australia, IP created by an employee in the course of employment will generally belong to the employer, but the IP created by a contractor will often remain with the contractor unless there is an effective assignment.
Unregistered IP, such as confidential information, trade secrets or business know-how, requires particular care, as ownership and protection depend heavily on contractual arrangements rather than formal registration. Buyers should carefully review employment contracts, consultancy agreements and any historical assignments to ensure that the IP created for the business can be retained and transferred with the sale.
It is also important to consider whether appropriate confidentiality arrangements are in place, including non-disclosure agreements, confidentiality clauses and post-termination obligations. In the absence of clear contractual protections, key know-how may be difficult to control after completion, particularly where former employees or contractors remain free to use or disclose it.
Check validity, not just registration
A common misconception in business sales is that if the IP is described in the sale agreement as “registered” or “applied for”, it can be assumed to be secure and enforceable. That is not always the case.
Registered patents and trade marks can still be challenged, revoked or lapse due to inaction or procedural non-compliance. Pending applications may never proceed to registration. In practice, issues often arise where:
- trade mark or patent applications have been refused or opposed due to infringement risks;
- applications have lapsed because procedural requirements or deadlines imposed by IP Australia were not met; or
- registrations fall due for renewal during the period between the contract date and completion.
If these issues are not identified and addressed in the sale documentation, the buyer may inherit IP that is incomplete, vulnerable or unexpectedly costly to maintain.
Understand the scope of protection
IP rights are territorial and limited in scope. Buyers should understand where protection exists and where it does not.
A trade mark registered in Australia does not provide protection overseas, and patent rights are confined to the jurisdictions in which they have been granted. Buyers should also consider the remaining term of protection. While trade marks can potentially be renewed indefinitely, patents typically expire after twenty years, which can significantly affect their value.
The scope of protection itself also matters. Trade marks only protect the goods and services for which they are registered. Patents protect only the specific invention as defined by their claims, not the underlying idea or variations that fall outside of those claims. As a result, competitors may be able to design around a patent without infringing it. A narrow scope of protection may limit the commercial usefulness of the IP, even if it is technically valid.
Check for encumbrances
IP is personal property and can be subject to security interests and other encumbrances. These can affect a buyer’s ability to obtain clear title.
In an Australian business asset sale, conducting searches of the Personal Property Securities Register is an important step. Searches should be undertaken against the seller and relevant related entities, and in some cases against the specific IP itself. Identifying security interests early allows the parties to ensure they are released or discharged before completion so the buyer acquires the IP free of encumbrances.
Assign ownership validly
Intellectual property does not automatically transfer simply because a business is sold. In an asset sale, IP must be properly assigned to the buyer to effect a legal transfer of ownership.
While an asset sale agreement will usually include provisions dealing with the transfer of IP, it is often necessary to execute separate assignment documents to formally evidence the transfer of specific rights. Many IP offices will not update ownership records without a standalone assignment document that clearly identifies the IP being transferred and complies with applicable formal requirements.
Registered IP must then be updated in the name of the buyer with the relevant IP offices, both in Australia and overseas. Requirements differ between jurisdictions, and if ownership is not updated promptly, this can create uncertainty and limit the buyer’s ability to enforce or deal with the IP.
For these reasons, business sale agreements should include clear obligations requiring the seller to provide post-completion assistance, including executing further documents and supporting ownership updates. Ensuring IP ownership is properly assigned and registered is critical to protecting the value of the IP acquired.
Consider the importance of warranties and indemnities
IP-specific warranties play an important role in allocating risk between the parties. Buyers commonly seek warranties relating to ownership, validity, non-infringement and full disclosure of all IP used in the business. However, the wording of those warranties matters.
Qualifications such as knowledge qualifiers or disclosure carve-outs can significantly limit what a buyer is able to rely on after completion, including where IP warranties are framed narrowly to address infringement risk only, rather than the existence, status or enforceability of the IP itself.
Careful drafting of IP warranties and indemnities at the contract stage can therefore be critical in avoiding unexpected disputes, liability exposure and costly remediation after completion.
Need legal advice?
If you are buying or selling a business and need advice on the intellectual property forming part of the transaction, or if you are concerned about ownership, registration or enforceability issues affecting the value of that IP, we can help.
Come in and see our friendly team at ABKJ Lawyers to see how we can assist you. Contact our Gold Coast Law Firm on (07) 5532 3199 or contact us online.
