Due diligence is when deals get serious. It’s when promises meet paperwork, and assumptions meet evidence.
If something’s off, that’s where it shows up.
And one of the most common deal-changers during this phase? Intellectual property disputes.
It doesn’t matter how fast the business is growing or how clean the financials are. If there’s a cloud over the IP, the buyer hesitates. Questions grow. Timelines slip. Valuations shift.
In this article, we’ll break down what to do when IP disputes surface during M&A due diligence — whether you’re the buyer trying to understand risk or the seller trying to manage it before it derails the deal.
We’ll cover where these disputes come from, how to assess their weight, how to respond without panic, and how to structure around them so the transaction still moves forward — with clarity and confidence.
Why IP Disputes Matter More Than Most Founders Think
M&A Is All About Confidence
In any deal, the buyer is looking for certainty.
They want to believe that what they’re buying is real, stable, and protected.
If a company’s core value lies in its technology, its brand, or its proprietary data — then anything that puts that IP at risk changes how the deal feels.
An unresolved IP dispute doesn’t just create legal risk. It creates doubt.
And doubt slows things down, reduces trust, and reshapes negotiation.
IP Isn’t Just Technical — It’s Strategic
Too often, founders treat IP as something for the legal team to manage.
But in a sale, IP defines what’s unique about your company.
If someone’s claiming you don’t actually own that code, or that your product copies theirs, or that your brand name infringes their rights — that’s not just a legal footnote.
It’s a direct hit to your value.
It raises the question: can the buyer still use this product? Can they still grow the brand? Will they have to rebuild core systems from scratch?
These are not small questions. And they need to be answered quickly.
Where IP Disputes Usually Come From
Legacy Contributors and Unclear Ownership
The most common source of IP friction is old work — code written before the company was formed, assets created by freelancers, or features built by team members who never signed assignment agreements.
If someone shows up and claims, “That patent idea was mine,” or “I created that logo before I left,” it introduces real uncertainty.
Even if they’re wrong, the buyer doesn’t want to fight that battle after closing.
They want it resolved up front. Or, at the very least, fully disclosed and understood.
Prior Cease-and-Desist Letters
Another major flag is when a company has received legal warnings in the past.
Even if they never turned into lawsuits, a cease-and-desist letter from a competitor can still cast a long shadow.
Buyers want to know what was alleged, how the company responded, and whether the risk was truly neutralized.
A letter from two years ago might still matter — especially if the product hasn’t changed since then.
If the buyer finds out during diligence that there’s been a history of IP conflict, it becomes a matter to clarify and document in full.
Open Source Misuse
Few areas cause more sudden alarm than poor open source hygiene.
If a company used code governed by restrictive licenses — like GPL or AGPL — and failed to comply, it might have accidentally triggered obligations to disclose proprietary software.
This is often discovered through automated scanning.
Buyers don’t want to inherit that liability.
If open source code was used in a way that violated license terms, it can lead to product redesigns, loss of exclusivity, or direct legal exposure.
Active Litigation
Sometimes the risk isn’t theoretical — it’s already in court.
If a startup is being sued for IP infringement, that becomes a central topic in due diligence.
Buyers will ask: What’s the scope of the claim? What’s the potential liability? How likely is it to succeed?
They may bring in their own IP counsel to review the complaint and assess the strength of the company’s defense.
And they may put the deal on hold until they feel certain the outcome won’t gut the asset they’re acquiring.
What to Do When a Dispute Surfaces Mid-Diligence
Step One: Slow Down, But Don’t Panic
When a buyer finds a potential IP problem during diligence — whether it’s a letter, a claim, or just a gap in documentation — the natural reaction is to freeze the deal.
That’s smart.
But it’s also important not to assume the worst.
Not every IP issue is fatal. Many can be resolved with the right information, cleanup, or contractual adjustment.
The key is to slow the process just enough to get the facts — not so much that momentum is lost entirely.
Deals survive risk. What they don’t survive is avoidance, silence, or last-minute surprises.
Step Two: Identify the Actual Legal Risk
Once the issue is known, the legal team needs to dig deep.
What kind of IP is involved — a patent, a trademark, a copyright, trade secret, or software license?
Who’s making the claim, and what exactly are they alleging?
Is this a direct ownership dispute, where someone says “you don’t actually own this”?
Or is it an infringement issue, where the claim is that the company is violating someone else’s rights?
Each type of dispute comes with a different impact and response strategy.
Ownership problems affect your ability to transfer the asset. Infringement problems affect your ability to use it after the deal.
Buyers need to know which it is — and what kind of exposure they’re inheriting.
Step Three: Get Documentation in Place
The most common issue is lack of proof. Maybe there was an old founder who never signed an assignment agreement. Or a contractor who submitted work without clear terms. Or a vendor who reused code from another client.
You can’t undo the past. But you can document it now.
In many cases, disputes fade when clean documentation is provided.
Track down the original creator. Get a retroactive assignment. Or, if the facts don’t support a clean fix, explain the history honestly in the disclosure schedule.
Buyers are often open to solving problems — but they don’t like problems that hide.
If there’s risk, name it. Clarify it. And bring a plan for managing it going forward.
Step Four: Loop in Outside IP Counsel
This is not the moment for generalists.
Whether you’re the buyer or the seller, IP disputes during diligence require experienced IP attorneys — not just deal lawyers.
Your outside IP counsel should be able to evaluate the strength of a patent claim, the scope of a license, or the validity of a competing trademark.
They should also know how these risks are normally handled in transactions — and what contract tools can be used to keep the deal alive without pretending the problem doesn’t exist.
This kind of targeted advice can mean the difference between fixing the issue and triggering a full renegotiation.
Step Five: Talk About Allocation of Risk
Once both sides understand the nature of the dispute, the next step is figuring out who will take on the risk — and how.
This is where things move from legal review to commercial strategy.
Will the seller fix it before closing? Will the buyer accept it but reduce the price? Will both parties agree to set money aside in escrow in case the issue turns into litigation?
These decisions depend on how serious the dispute is and how central the IP is to the deal.
If it’s a critical patent that underlies the product, the buyer will likely want full resolution or full indemnity.
If it’s a minor claim involving a brand extension or a niche feature, they may be willing to accept some uncertainty — if it’s clearly disclosed and contractually limited.
The deal doesn’t need to die. But the risk needs a home. And it needs to be acknowledged in writing.
Using Contract Tools to Address IP Risk
When You Can’t Resolve the Dispute Before Closing
Sometimes, there isn’t enough time to fix the problem.
Maybe a lawsuit is already in progress. Maybe you can’t track down the person who claimed ownership. Or maybe it’s a licensing conflict that’s too complex to settle before closing.
If the buyer wants to move forward anyway — or if the seller insists on keeping the timeline — the contract becomes the battleground for solving it.
Here, the tools are legal language and risk shifting.
You’re not solving the problem. You’re agreeing on who absorbs the fallout if it becomes real.
This isn’t a loophole. It’s how high-stakes deals get done when certainty isn’t possible.
Tailor the IP Reps to the Risk
IP reps are the foundation for any risk-shifting strategy.
If there’s an unresolved IP dispute, you need to make sure the reps reflect it.
Don’t pretend everything is perfect. Adjust the language.
You might say: “Except as disclosed on Schedule 5.4, the Company owns all IP used in the operation of the business.”
Then on Schedule 5.4, you explain that one code module is under review due to a third-party letter, or one trademark is currently contested.
This limits the scope of the rep. It protects the seller from future claims that they misrepresented the situation.
And it signals to the buyer that they’re entering the deal with open eyes.
Strengthen the Indemnity Terms
The next layer is indemnity.
This is where the seller agrees to cover specific losses if the IP issue turns into a real problem.
Let’s say the buyer discovers a potential copyright dispute. They might say: “We’ll still buy the company, but if that claim turns into a lawsuit, you cover the defense costs and any settlement.”
This is usually done through an indemnification clause — either specific to IP or as part of a broader post-closing indemnity structure.
The key is clarity. Spell out what’s covered, how long the obligation lasts, and what limits apply.
The more detailed the risk, the more specific the indemnity should be.
Use Escrow or Holdbacks to Back It Up
Indemnity is only as good as the seller’s ability to pay.
To make it real, buyers often ask for part of the purchase price to be held in escrow — usually for 12 to 24 months after closing.
This gives them a source of funds if the IP issue explodes later.
In some cases, the escrow is general. In others, it’s tied specifically to the disputed IP.
You might see language like: “$500,000 of the purchase price shall be held in escrow to cover any losses arising from the potential trademark dispute disclosed in Schedule 5.4.”
This protects the buyer without delaying the entire deal.
It also gives the seller a clear path to getting the money back — if nothing goes wrong during the holdback period.
Cap the Exposure if You’re the Seller
No seller wants to carry unlimited risk forever.
If you’re agreeing to indemnify the buyer for an IP issue, push for caps and limits.
That might mean setting a maximum dollar amount — such as 10% of the purchase price — or a time limit for when claims can be brought.
You may also want to exclude “consequential” damages like lost profits or reputational harm, unless the dispute is severe.
The idea is to contain the liability. You want to solve the buyer’s concern without making the risk open-ended.
That balance is what keeps the deal from falling apart.
Managing Communication Without Losing Trust
Say It Early, Say It Straight
IP disputes don’t get better with time — especially in an M&A process.
If you know there’s a pending claim, a third-party conflict, or a license issue, disclose it early.
Waiting until late diligence or letting the buyer discover it themselves weakens your position. It creates doubt, even if the issue is minor.
Buyers care more about transparency than perfection. They’re not looking for a flawless business. They’re looking for one they can trust.
A founder who says, “We received this letter, we investigated it, and here’s what we’re doing about it,” builds credibility — even in the face of risk.
But one who hides it loses leverage fast.
Let Legal Take the Lead — But Stay Involved
When an IP issue shows up, legal teams take over. That’s expected.
But founders and executives shouldn’t disappear.
You need to be involved in how the issue is framed, how it’s explained, and what tone is used in communication.
This isn’t just about law. It’s about storytelling.
If you explain the background, the business context, and what steps have already been taken, the issue feels smaller.
When legal speaks alone, the buyer only sees the risk. When leadership stays engaged, the buyer sees problem-solving.
That difference can keep a deal alive.
Use the Disclosure Schedule as Your Shield
Don’t wait for a buyer to discover an issue in diligence. Use your disclosure schedules to surface it yourself.
This doesn’t just protect you legally — it shows that you’re approaching the deal responsibly.
Buyers are much more willing to accept a disclosed issue than one they had to find.
And if you’ve already structured a solution — indemnity, escrow, or cleanup steps — it tells them you’re not trying to pass the problem along. You’re owning it.
That’s the kind of maturity buyers want in a deal partner.
Making the “Go or No-Go” Decision
Buyers: Ask Whether the IP Is Core
Not all IP problems are deal-breakers. It depends on what’s affected.
If the issue involves a critical patent, or software that powers the product, the risk is high.
But if it touches something peripheral — like a logo variation, a beta feature, or an old brand name — it may not warrant a full renegotiation.
Good buyers ask: “Does this change our ability to grow this business?”
If the answer is no, the deal can likely move forward with a risk-sharing adjustment.
If the answer is yes, they’ll need stronger protections — or may need to walk.
Sellers: Know When to Fix and When to Fight
Not every claim is valid. But not every claim should be ignored, either.
As a seller, you’ll need to assess the claim honestly. Can it be resolved with a payment? A license? A settlement?
Or does it need to be defended, delayed, or carved out?
Some founders dig in and try to fight everything. Others roll over too fast.
The best strategy is to evaluate the claim for what it is, talk to experienced IP counsel, and decide whether you’re protecting value — or just trying to avoid hard conversations.
That clarity matters. Because the buyer will know the difference.
After the Deal: How to Stay Protected
Don’t Lose Sight of the Indemnity Window
Once the deal is done, sellers may be liable for a defined period if IP problems resurface.
This is usually spelled out in the survival period and indemnity clauses — often 12 to 24 months for general IP reps, and sometimes longer for key ownership issues.
Track that window. Monitor it. If an issue was disclosed or negotiated, keep records of what was agreed.
If something resurfaces, your team will need to move fast — especially if a claim hits near the deadline.
The sooner you act, the more likely it is to stay manageable.
Follow Up on Any Unresolved Fixes
Some IP issues aren’t solved at closing. Maybe the parties agreed to fix a registration. Or to complete a license transfer. Or to pursue a consent from a third party.
Don’t treat these as paperwork.
Set deadlines. Assign owners. Follow up.
Buyers expect the seller to keep their post-closing obligations — especially if money is in escrow or tied to performance.
Missed follow-ups can turn a solved problem into a reopened fight.
And no one wants to go back to legal war after a deal is done.
Keep Diligence Files Organized — Forever
Even if the deal is closed, the documents still matter.
If a buyer ever gets sued over an IP claim, they’ll go back to the diligence materials — to see what was disclosed, how it was described, and what was promised.
If you’re the seller, that trail protects you.
Keep clean, time-stamped records of the claim, the correspondence, the disclosures, and the final agreement language.
This isn’t just legal hygiene. It’s your insurance policy.
Final Thoughts: IP Disputes Don’t Have to Kill Deals
M&A is about building trust in a compressed timeline.
Intellectual property is one of the hardest parts to verify — and one of the easiest places for disputes to start.
But those disputes don’t have to be fatal.
When handled early, explained clearly, and structured carefully, IP problems can be contained.
More importantly, they can be turned into signals of discipline, transparency, and good governance.
A clean deal isn’t always a perfect one. It’s one where all the hard questions got answered — and the risks got managed like professionals.
That’s the kind of deal that actually closes.
