ISO 56005: Intellectual Property Due Diligence: Preparing for a Transaction, Partnership, or International Operation

Juan Carlos Suárez D. 

Director of IP Management & Technology Transfer, Universidad El Bosque | Lecturer and International Consultant in IP Management & Technology Transfer.

María Camila Duque 

IP Management Coordinator, K-Intangibles IP Strategy & Tech Transfer | Lecturer and Consultant in IP Management.

1. Two related tools, but with a different purpose: IP Audit / IP Due Diligence.

In the previous article in this series, we described the IP audit as an internal management tool: a systematic, broad-scope process that the company carries out on itself to understand the overall status of its intangible assets, identify gaps, and align its portfolio with its strategy. The audit is usually initiated by the company itself, covers all its IP, and does not depend on any external event to be triggered.

IP Due Diligence has a different scope. It is a focused verification process, with a specific purpose and, generally, involving a third party: an investor assessing whether or not to invest in a business, a partner considering whether to join a new project, an acquirer deciding whether to buy or refrain from buying, or the company itself needing to understand the IP status of what it is about to acquire, license or participate in as a partner.

The difference lies in the purpose, scope, and context. An audit obtains organizational information on an ongoing basis. Due Diligence answers a specific question, at a particular point in time, regarding a specific transaction or operation.

2. What is IP Due Diligence and when is it triggered?

IP Due Diligence is a process for verifying and evaluating the legal, strategic, and commercial status of intangible IP assets directly linked to a specific transaction or operation. Its objective is to provide technically and legally grounded answers to questions that must be resolved before a transaction is closed:

Does the IP associated with the transaction or operation exist and remain in force?

Are the rights correctly assigned to the party claiming to own them?

Are there any encumbrances, licenses, disputes, or commitments affecting the unrestricted use of that IP?

Does the IP cover the markets relevant to the operation?

Are there risks of infringing third-party rights that could compromise the viability of the business?

Is the value attributed to that IP in the transaction justified?

Is the value attributed to that IP in the transaction justified?

This process is generally triggered in the following scenarios:

• Investment rounds: funds and investors examine the IP before committing capital. Poorly managed or only partially protected IP may reduce the valuation or block the transaction.
• Mergers and acquisitions (M&A): IP is often the most relevant asset in a technology transaction. Errors in ownership or coverage may affect the price or the closing conditions.
• Licence agreements: the licensee needs to verify that the IP it will use exists, is protected, and is free of encumbrances before paying royalties for it.
• Strategic alliances and co-development: each party must know what IP the other contributes and what prior commitments exist around it.
• International expansion: before operating in a new country, a company may need to verify whether its IP is protected in that territory and whether third-party rights exist that could prevent its market entry.

• Calls for proposals and funded projects: international programmes and calls for proposals often require participants to demonstrate the strength of their IP portfolio.

   

3. Scope of IP Due Diligence: what should be reviewed and to what extent?

One of the defining characteristics of IP Due Diligence is the definition of its scope. It does not involve reviewing all a company’s IP, but only the IP relevant to the operation in question. This structurally distinguishes it from an audit.

If an agricultural technology company, for example, is negotiating a licence for its smart irrigation technology with a distributor in Mexico, the Due Diligence will focus on the patents for that technology in Mexico, the ownership agreements for the associated software, the confidentiality agreements signed with the developers, and verification that there are no prior licences limiting the exclusivity promised to the future licensee. Trade marks in Europe or industrial designs for another company’s product remain outside the scope unless they are relevant to that specific operation.

Defining the scope of IP Due Diligence is strategic: it makes it possible to focus the available resources and time on what truly matters for the business decision.

4. The key dimensions of IP Due Diligence.

Within the scope defined by the operation, a well-structured IP Due Diligence reviews the following dimensions:

4.1 Ownership and chain of title.

The most critical point—and the one that most frequently causes problems—is verifying who owns the IP associated with the transaction or operation. In many SMEs, rights are not always formally assigned to the company: they may be held by a founder, an external collaborator, a partner university, or a software developer who never signed an assignment.

The basic questions are:

Are the IP rights formally assigned to the company through valid agreements that are currently in force?

Have assignment agreements been signed with all employees, collaborators, and partners who participated in generating the IP?

Is there IP developed in joint projects whose ownership is not fully defined or is shared with third parties?

EU-LATAM example: an SME intending to license its technology to a partner in Colombia or Peru may discover, during Due Diligence, that part of that technology was developed in a project with a Latin American university and that, without a prior ownership agreement, the rights are shared—or even belong to the academic institution. This finding may completely change the terms of the licence.

4.2 Validity, status of registrations and territorial coverage.

The IP relevant to the operation must be active and protected in the territories concerned by the specific transaction. This means verifying:

• That patents, trade marks and designs are legally in force and have no outstanding actions requiring attention for their maintenance and/or renewal, as applicable.
• That the territorial coverage matches the markets in which the operation will take place.
• That pending applications have a reasonable likelihood of being granted and do not face serious objections.
• That there are no parallel or similar third-party registrations in the relevant territories.

4.3 Freedom-to-Operate (FTO) analysis.

One of the most valued analyses in Due Diligence is the Freedom-to-Operate (FTO) analysis. It consists of verifying whether the company—or its counterparty in the operation—can use the IP or commercialize the associated products or services without infringing third-party rights. ISO 56005 identifies it in one of its annexes as a key tool for identifying and managing IP risks.

For a European SME that, for example, is negotiating entry into a Latin American market, an FTO analysis may reveal the existence of a local competitor with a registered patent covering the same technological field, which could block commercialization or give rise to an infringement claim.

4.4 Contracts and commitments that condition the IP.

The IP may be formally registered in the company’s name and still be subject to contractual limitations affecting the operation. The following should be verified:

• Exclusive licences granted to third parties that limit the use or transfer of the IP.
• IP clauses in contracts with customers, suppliers or partners that condition its exploitation.
• Commitments undertaken in publicly funded projects that include restrictions on the IP generated.
• Non-compete or non-disclosure agreements that may affect the company’s freedom to use its own IP within the new operation.

4.5 Valuation of IP in the context of the operation.

When IP is the subject of, or a relevant part of, the transaction—as in an acquisition or a licence agreement—the result of IP Due Diligence may affect the value of the transaction or operation. If the IP has any restriction and/or weakness that had not been identified when the initial economic valuation of the transaction or operation was made, there would be key grounds for reducing the value initially presented. Conversely, if the IP Due Diligence not only finds that the IP is strong but also identifies additional intangible assets and elements associated with the transaction, this would support the transaction valuation and could even provide input for achieving a better economic negotiation.

5. IP Due Diligence in the EU-LATAM context: key elements to consider.

For European SMEs operating in or seeking to expand into Latin America, IP Due Diligence involves key elements to consider:

• There is no unified regional IP system: unlike the European system, each Latin American country manages its own registrations. Verifying IP in the region therefore requires reviewing independent national systems.
• The risk of trade mark registration by third parties is significant: third parties may register the trade marks of foreign companies that have not yet formalized their presence in the country. Detecting this during Due Diligence can prevent costly conflicts.
• Enforcement timelines vary considerably: the legal strength of IP in one Latin American country does not guarantee the same ease of enforcement in another. Due Diligence should incorporate this variable when assessing the risks of the operation.

• Know-how and trade secrets depend on contracts, not registrations: their protection is only as strong as the agreements supporting them, and these must be verifiable and enforceable in the relevant jurisdiction.

   

“Entering into a negotiation involving software or technology in general without having conducted an IP due diligence is like signing a sale and purchase agreement without being certain that the seller actually owns the rights.”

6. The relationship between an audit and Due Diligence: how the former prepares for the latter.

A company that manages its IP systematically—with an up-to-date inventory, ownership agreements in order, registrations in force and a clear strategy—approaches any Due Diligence from a position of strength. A periodic audit not only improves internal management but also provides the best preparation for the moment when a third party needs to verify the status of the IP.

Conversely, a company that has never carried out an IP audit and faces Due Diligence prompted by an investment or partnership opportunity will be forced to conduct a review for a specific case that will probably reveal problems in IP management at the organizational and/or institutional level. ISO 56005 specifically seeks to ensure that companies have good practices for systematically assessing their IP at the organizational level (IP audit) and for applying tools to review the IP involved in transactions/operations (IP Due Diligence).

7. Basic IP Due Diligence checklist for EU-LATAM operations.

8. Practical Recommendations for European SMEs Expanding into Latin America

• Do not wait until Due Diligence to put the company’s IP in order. A periodic audit is the best preparation. Strength built over time cannot be improvised during a negotiation.
• Define the scope from the outset. Due Diligence without a defined scope can become as costly and extensive as an audit, but without the latter’s strategic depth. Identify exactly which IP is relevant to the operation.
• Verify ownership before negotiating. This is the most problematic point and the one with the greatest impact on the company’s credibility with the counterparty.
• Include FTO analysis as a standard part of the process. Especially in Latin American markets, where the IP landscape may include local players unknown to the company.
• Engage local legal counsel in the countries of the operation. National IP systems have particularities that require specific knowledge of the local legal environment.

• Document the findings and use them to implement improvements. Due Diligence always reveals something that can be improved. That knowledge is valuable beyond the specific operation.

   

9. Conclusion.

IP Due Diligence is not an accelerated audit. It is a different tool with a specific purpose: to verify, in relation to a concrete operation, that the relevant IP is strong, valid, free of encumbrances, and justifies the value attributed to it in the transaction.

For European SMEs with a focus on Latin America, this process has strategic importance: the risks of shared ownership, trade mark registration, insufficient coverage and varying enforcement are real and can directly affect the outcome of an investment, a partnership or entry into a new market.

Following the ISO 56005 framework, the best way to approach Due Diligence from a position of strength is to maintain systematic and continuous IP management. A company that knows well what it has can demonstrate it when requested for a specific transaction or operation.

"IP Due Diligence in a transaction or operation is a decisive test of how a company has managed its intangible assets. Preparing for that test does not begin when the investor or a potential partner appears; it begins on the day the company decides to manage its IP in an organized and strategic manner."

About the Authors

Juan Carlos Suárez Delgadillo. Director of IP Management & Technology Transfer at Universidad El Bosque and Strategy Director at K-Intangibles. Lawyer from Universidad Externado de Colombia, with a Master's degree in Intellectual Property from the University of Ankara (Turkey) and WIPO. Specialized training in IP Management and Technology Transfer in Israel, France, the United States, and Singapore. International Consultant and Trainer in IP Management and Technology Transfer for WIPO. 

🔗linkedin.com/in/ipstrategistjuancarlossuarez

María Camila Duque Díaz. IP Management Coordinator at K-Intangibles IP Strategy & Technology Transfer. Lawyer from Universidad de Caldas, with a Master's degree in Intellectual Property and Innovation from Universidad de San Andrés (Argentina) and WIPO, and a Specialization in Intellectual Property and New Technologies from Universidad Externado de Colombia. Advanced Training in IP Commercialization in Singapore. Consultant in IP Management with specialized experience in the university sector across Latin America.

🔗 linkedin.com/in/maria-camila-duque-diaz 

In other episodes...

Article 1: “Strategic Intellectual Property Management in SMEs: An ISO 56005-Based Approach”

Article 2: “How to Define an Intellectual Property Strategy Aligned with the Business Model?”

Article 3: “IP Audit: inventory, valuation, and risk management”

Article 5: “From Protection to Exploitation: Operating IP with a Strategic Approach”