Overlooked Intellectual Property Pitfalls That Can Derail Your Acquisition — And How to Fix Them Now

In the final stages of a software company acquisition, few things can unravel a deal faster than unresolved intellectual property (IP) issues. Yet, many founders and CEOs underestimate just how central IP clarity is to valuation, buyer confidence, and deal execution. Whether you’re preparing for a strategic exit or simply want to be acquisition-ready, identifying and resolving IP pitfalls early can mean the difference between a smooth close and a stalled—or failed—transaction.

This article outlines the most common IP-related risks that surface during M&A due diligence, how to spot them before buyers do, and what steps you can take now to mitigate them.

Why IP Matters So Much in Tech M&A

For software and SaaS companies, intellectual property is often the core asset being acquired. Buyers—especially strategic acquirers and private equity firms—are not just purchasing code; they’re acquiring the legal rights to use, commercialize, and defend that code. If those rights are unclear, encumbered, or disputed, the entire deal can be jeopardized.

As we’ve seen in numerous transactions at iMerge Advisors, even well-run companies can overlook critical IP hygiene. These issues often don’t surface until due diligence, when the buyer’s legal team begins combing through ownership records, license agreements, and employee contracts.

Common IP Pitfalls That Can Derail a Deal

1. Unclear Ownership of Code and IP

One of the most frequent—and most damaging—issues is when a company cannot clearly demonstrate that it owns all of its core IP. This often stems from:

• Founders or early developers who never signed IP assignment agreements
• Freelancers or contractors who retain rights to code they wrote
• Open-source components used without proper attribution or licensing

Buyers will want to see airtight documentation proving that all IP has been properly assigned to the company. If any ambiguity exists, it can trigger delays, indemnity demands, or even deal termination.

2. Improper Use of Open-Source Software

Open-source software (OSS) is ubiquitous in modern development, but not all OSS licenses are created equal. Some, like the GNU General Public License (GPL), require that derivative works also be open-sourced—something most acquirers want to avoid.

Failure to track OSS usage or comply with license terms can lead to legal exposure. Buyers will often run automated scans to detect OSS components and flag any problematic licenses.

3. Inadequate IP Protection Strategy

While not every software company needs a patent portfolio, a lack of trademarks, trade secret protocols, or copyright registrations can raise red flags. Buyers want to see that you’ve taken reasonable steps to protect your IP from infringement or misappropriation.

For example, if your brand is central to your go-to-market strategy, but your trademark is unregistered or contested, that could materially impact perceived value.

4. IP Encumbrances from Third-Party Agreements

Licensing agreements, joint ventures, or customer contracts may contain clauses that limit your ability to transfer IP or require third-party consent. These “change of control” provisions can delay or block a transaction if not addressed early.

Similarly, revenue-sharing or white-label agreements may give third parties partial rights to your IP, which can complicate valuation and post-acquisition integration.

5. Employee and Contractor Agreement Gaps

In the rush to scale, many startups neglect to update employment agreements or fail to include robust IP assignment clauses. This is especially risky with remote teams, international hires, or outsourced development firms.

Without clear, signed agreements assigning all work product to the company, you may not legally own the code your business depends on.

How to Spot and Fix IP Issues Before Buyers Do

1. Conduct an Internal IP Audit

Start by cataloging all your IP assets—source code, trademarks, domain names, proprietary algorithms, customer data models, etc.—and map out who created them and under what terms. Review all employment, contractor, and vendor agreements to confirm IP assignment clauses are in place and enforceable.

Firms like iMerge often recommend this step early in the exit planning process to avoid surprises during diligence.

2. Clean Up Contractor and Employee Agreements

Ensure every current and former employee, contractor, and advisor has signed a valid IP assignment agreement. If gaps exist, work with legal counsel to obtain retroactive assignments or waivers. This is especially important for co-founders or early developers who may have left the company.

3. Review Open-Source Usage

Use tools like FOSSA, Black Duck, or WhiteSource to scan your codebase for open-source components and license types. Flag any copyleft licenses (e.g., GPL, AGPL) and consult legal counsel on remediation strategies, which may include code rewrites or license substitutions.

4. Register Key IP Assets

Where appropriate, register your trademarks, copyrights, and domain names. While not always required, registration strengthens your legal position and signals to buyers that your IP is well-managed.

5. Review Third-Party Agreements for Transfer Restrictions

Identify any contracts that include IP-related restrictions, such as non-transferability, exclusivity, or change-of-control clauses. These should be flagged early and, if possible, renegotiated or disclosed upfront in the deal process.

6. Prepare for Buyer Due Diligence

As part of your M&A readiness, assemble a clean, well-organized IP folder in your data room. This should include:

• IP assignment agreements
• Open-source license disclosures
• Trademark and copyright registrations
• Third-party license agreements
• Documentation of internal IP policies

For a broader checklist, see our guide on Due Diligence Checklist for Software (SaaS) Companies.

IP Hygiene as a Value Driver

Beyond risk mitigation, clean IP ownership and documentation can actually increase your company’s valuation. Buyers are willing to pay a premium for businesses with defensible, transferable, and well-documented IP. Conversely, unresolved IP issues often lead to price reductions, escrow holdbacks, or earn-out structures to offset perceived risk.

In our experience at iMerge, companies that proactively address IP issues before going to market tend to command stronger offers and close faster. It’s not just about avoiding red flags—it’s about presenting a business that’s ready to scale under new ownership.

Conclusion

Intellectual property is the foundation of value in most software M&A deals. Overlooking even minor IP issues can create major friction during due diligence, delay your timeline, or reduce your exit value. By conducting a thorough IP audit, cleaning up documentation, and proactively addressing risks, you can position your company for a smoother, more lucrative transaction.

Use this insight in your next board discussion or strategic planning session. When you’re ready, iMerge is available for private, advisor-level conversations.