Intellectual Property in M&A

For most companies that change hands today, the most valuable assets are ones you cannot touch. Customer lists, software, brand names, recipes, processes, and patents often account for more of the purchase price than the equipment and real estate combined. Yet in deals involving privately held businesses, intellectual property is also where buyers most often find surprises: the founder who never assigned the code he wrote before the company existed, the contractor who still owns the logo, the open source license that conflicts with how the product is sold, the trademark that was never registered.

We have bought and sold businesses as owners before we advised others on doing it, and the pattern is consistent: IP problems found early become price adjustments and closing conditions; IP problems found late become lawsuits. This guide explains how intellectual property is reviewed, transferred, protected, and taxed in mergers and acquisitions, licensing, and financing, and what Oklahoma business owners on either side of a deal should address before signing a letter of intent.

Table of Contents

• Why IP Drives Deal Value
• The IP Assets Buyers Review
• IP Due Diligence
• How Deal Structure Moves IP
• Key Contract Terms for IP
• IP in Licensing and Financing
• Tax Treatment of IP Transactions
• Cross Border Licenses and Withholding
• Preparing Your IP for a Sale
• Oklahoma Specific Considerations
• Frequently Asked Questions
• Protecting the Value You Are Buying or Selling

Why IP Drives Deal Value

The shift toward intangible value is not new, but it keeps growing. Ocean Tomo’s long running study found that intangible assets made up about 92 percent of S&P 500 market value at the end of 2025. Private companies are smaller, but the same dynamic applies: a regional service business is often valued on its brand, customer relationships, and systems, and a software or product company is valued almost entirely on its code, data, and know how.

That has three practical consequences for a deal:

• Price depends on title. If the seller cannot prove it owns the IP, the buyer is paying for something it may not get.
• Risk shifts to the contract. IP problems that cannot be fixed before closing are allocated through representations, indemnities, escrows, and insurance.
• Taxes follow the allocation. How the purchase price is allocated among intangibles drives amortization for the buyer and the character of gain for the seller.

The IP Assets Buyers Review

Our guide to intellectual property for business owners covers trademarks, copyrights, patents, and trade secrets in more depth.

IP Due Diligence

IP diligence answers three questions: does the seller own or have the right to use what the business depends on, can those rights move to the buyer, and is anyone else claiming them. The American Bar Association’s overview of IP due diligence notes that the integrity of the chain of development and transfer is often the biggest risk. In privately held deals, the most common problems we see are:

Ownership Gaps

• Founder IP. Code, designs, or inventions created by a founder before the company was formed, or outside a written assignment, may still belong to the founder personally.
• Contractor work. Under the work for hire doctrine, an employee’s work within the scope of employment generally belongs to the employer, but a contractor’s work usually belongs to the contractor unless there is a written assignment. Logos, websites, and software built by freelancers are frequent gaps.
• Employee inventions. Inventions are not covered by work for hire at all. Without an invention assignment, ownership can be disputed.
• Unregistered marks. A brand used for years but never registered may still be protectable, but the buyer inherits the risk that someone else registered it first.

Licenses and Consents

Most businesses depend on software and content they license rather than own. Diligence should list every material inbound license and check whether it can be assigned, whether a change of control requires consent, and whether it terminates on a sale. Outbound licenses, where the target licenses its own IP to others, matter too, because an exclusive license granted years ago can limit what the buyer can do with the IP it is paying for.

Open Source Software

Open source is everywhere. Black Duck’s 2026 Open Source Security and Risk Analysis report found open source in 98 percent of audited codebases and license conflicts in 68 percent, the highest rate in the report’s history. Most open source licenses are permissive, but copyleft licenses can require a company that distributes modified code to release its own source code under the same terms. For software targets, an independent code scan is often worth its cost.

Encumbrances and Disputes

Check for liens and security interests on IP, pending or threatened infringement claims, cease and desist letters, prior settlements and coexistence agreements, and lapsed registrations or missed maintenance fees. Our guide to buying a business in Oklahoma covers how IP diligence fits into the broader review.

How Deal Structure Moves IP

How IP transfers depends on how the deal is structured. Our guide to asset versus stock purchases covers the broader tradeoffs.

Stock or Membership Interest Purchase

The buyer acquires the company itself, and the IP stays where it is. No assignment of the IP is needed, which is a major advantage when the company holds many registrations or licenses. But licenses with change of control clauses may still require consent, and the buyer inherits every liability attached to the IP, known or not.

Asset Purchase

The buyer acquires only the assets listed in the purchase agreement, so every patent, mark, copyright, domain name, and license must be identified and assigned. Anything left off the schedule stays with the seller. Federal recording follows closing:

• Patents. An unrecorded patent assignment can be void against a later purchaser without notice, unless it is recorded within three months or before the later purchase. The USPTO’s assignment guidance explains how recording works through its Assignment Center.
• Trademarks. A trademark can be assigned only together with the goodwill of the business it represents. An assignment “in gross,” without the related business, can invalidate the mark. Intent to use applications generally cannot be assigned before use begins except to a successor of the business.
• Copyrights. Transfers require a signed writing. The Copyright Office records assignments and exclusive licenses, which protects the buyer’s priority.

Mergers

In a merger, the surviving company generally succeeds to the merged company’s assets, including its IP, by operation of law. Whether a merger counts as an “assignment” under a license that prohibits assignment is a recurring question, and courts have not always answered it the same way, particularly for IP licenses. A reverse triangular merger, in which the target survives as a subsidiary, is often chosen in part to keep licenses in place. Read the anti assignment clause in every material license before choosing the structure.

Key Contract Terms for IP

The purchase agreement allocates IP risk that diligence cannot eliminate. Common provisions include:

• Representations and warranties that the seller owns or has valid rights to all IP used in the business, that the IP does not infringe others’ rights, that no claims are pending, that employees and contractors have assigned their work, and that open source use complies with its licenses.
• Disclosure schedules listing registered IP, material licenses, and known exceptions.
• Indemnification for breaches of IP representations, often with a longer survival period and a higher cap than general representations, sometimes treated as fundamental.
• Escrows or holdbacks to secure indemnity payments.
• Further assurances requiring the seller to sign confirmatory assignments and help with recordings after closing.
• Transition license back when the seller keeps IP the business still needs, or the buyer needs time to rebrand.

SRS Acquiom’s annual M&A deal terms study tracks how these provisions are negotiated in private deals. Representations and warranties insurance can cover breaches of IP representations, though policies often exclude known issues and some open source and infringement risks. When value depends on future performance of the IP, an earnout can bridge a valuation gap.

IP in Licensing and Financing

Licensing as an Alternative to a Sale

An owner does not have to sell IP to earn from it. A license grants rights to use IP while the owner keeps title. Key terms include:

• Scope: exclusive, sole, or nonexclusive; field of use; territory; and duration
• Payment: upfront fees, running royalties, minimums, and audit rights
• Quality control: essential for trademark licenses, since a licensor that does not control quality risks losing the mark
• Improvements: who owns enhancements developed by the licensee
• Enforcement: who can sue infringers and who pays
• Assignment and change of control: what happens if either party is acquired

IP as Collateral

Lenders increasingly lend against IP. A security interest in IP is generally perfected by a UCC financing statement, and lenders also record their interest with the USPTO or Copyright Office to give notice. Expect lenders to require valuation support, covenants to maintain registrations, and restrictions on licensing or selling the IP without consent.

Tax Treatment of IP Transactions

The tax consequences of an IP transaction depend on who is selling, what is being transferred, and how the deal is structured. A few federal rules do most of the work.

Buyers: Amortizing Acquired Intangibles

In an asset purchase, or a stock purchase treated as an asset purchase for tax purposes, the buyer allocates the purchase price among the acquired assets using the residual method and reports the allocation on IRS Form 8594. Acquired intangibles, including patents, trademarks, copyrights, customer lists, software acquired with a business, noncompetes, and goodwill, are generally amortized ratably over 15 years under Section 197. The Corporate Finance Institute’s overview of intangible assets explains how they are treated in financial statements. In a pure stock purchase without a step up election, the buyer inherits the company’s existing tax basis and gets no new amortization.

Sellers: Capital Gain or Ordinary Income

Sellers generally prefer long term capital gain, but intangibles do not always qualify:

• Self created patents, inventions, models, designs, and secret formulas are excluded from capital asset treatment when sold by the person or company that created them, so their sale generally produces ordinary income.
• Self created copyrights and software held by the creator are likewise not capital assets.
• Individual inventors can still qualify for long term capital gain under Section 1235 when they transfer all substantial rights to a patent, even if paid in contingent installments.
• Goodwill is generally a capital asset, which is why purchase price allocation matters. Owners of C corporations should also understand personal goodwill, which can avoid a second layer of tax.
• Trademarks transferred with a significant retained power or continuing interest, such as payments contingent on use, are generally not treated as a sale.

Buyers and sellers have opposing incentives in the allocation: buyers want more price assigned to assets they can deduct quickly, while sellers want more assigned to assets taxed at capital gain rates. The allocation should be negotiated and written into the purchase agreement, and both sides should file consistently.

Licenses Versus Sales

Whether a transfer is a sale or a license for tax purposes depends on substance, not labels. Transferring all substantial rights in IP generally counts as a sale, even when payments are measured by use. Granting limited rights while keeping significant control is a license, and royalties are ordinary income to the licensor and generally deductible to the licensee.

Research and Development Costs

For tax years beginning in 2022 through 2024, businesses had to capitalize and amortize domestic research and experimental costs over five years. The 2025 federal tax law restored immediate expensing of domestic research costs for tax years beginning after December 31, 2024, and lets eligible small businesses apply the change retroactively, as this CPA summary of the new Section 174A explains. Foreign research costs are still amortized over 15 years. In an acquisition, unamortized research costs and amended return opportunities from those years can affect value and should be reviewed in tax diligence.

Cross Border Licenses and Withholding

When IP is licensed or sold across borders, more rules apply. U.S. source royalties paid to foreign licensors are generally subject to 30 percent federal withholding, which tax treaties often reduce or eliminate if the licensor provides the proper documentation. Payments to related parties are subject to transfer pricing rules requiring arm’s length terms. Many foreign countries impose their own withholding on royalties paid to U.S. owners, which may be creditable against U.S. tax. Buyers acquiring a business with foreign licensees or a foreign IP holding company should include these issues in tax diligence.

Preparing Your IP for a Sale

Sellers who clean up their IP before going to market sell faster, with fewer price reductions and smaller escrows. Our guide to selling a business in Oklahoma covers the wider preparation process.

Employment documents are part of IP readiness. Confidentiality and invention assignment terms in employment agreements and written assignments from independent contractors are what turn employees’ and freelancers’ work into company property.

Oklahoma Specific Considerations

Patents and copyrights are governed by federal law, but Oklahoma law shapes trademarks, trade secrets, restrictive covenants, contracts, and state taxes in an Oklahoma deal. Buyers and sellers of Oklahoma businesses can work with our Oklahoma M&A attorneys.

• Trade secrets carry more weight. Oklahoma generally does not enforce noncompetes against employees, so confidentiality obligations and Oklahoma’s trade secrets statute do much of the work of protecting know how. Our guide to protecting trade secrets covers the remedies.
• Seller noncompetes are allowed. Oklahoma permits reasonable noncompetes from a seller in connection with the sale of a business’s goodwill, which protects the value of acquired IP and customer relationships.
• State trademark registration. Oklahoma offers state trademark registration through the Secretary of State. State registrations are assets to list and assign alongside federal ones.
• State taxes. Oklahoma’s income tax generally starts from federal figures, but conformity to recent federal changes is not automatic. Our 2026 Oklahoma tax legislation guide covers the latest state changes.

Frequently Asked Questions

• What is IP due diligence?

  A buyer’s review of the target’s intellectual property to confirm ownership, transferability, and freedom from claims and liens before closing.

• Does IP transfer automatically in a stock purchase?

  Yes. The company keeps its IP, so no assignment is needed, though licenses with change of control clauses may still require consent.

• What must be done to transfer IP in an asset purchase?

  Each item must be listed and assigned in writing, and patent, trademark, and copyright assignments should be recorded with the USPTO or Copyright Office.

• Can a trademark be sold without the business?

  Generally no. A trademark must be assigned with the goodwill it represents, or the assignment can invalidate the mark.

• Who owns software built by a contractor?

  Usually the contractor, unless there is a written assignment to the company. This is one of the most common gaps found in diligence.

• Why does open source matter in an acquisition?

  Some open source licenses can require release of proprietary source code or restrict how software is sold, which can affect value and the buyer’s plans.

• How are acquired intangibles taxed for the buyer?

  In an asset purchase, most acquired intangibles, including goodwill, are amortized over 15 years under Section 197.

• Is the sale of a patent taxed as capital gain?

  It depends on who sells it. Self created patents sold by their creator generally produce ordinary income, but individual inventors can qualify for capital gain under Section 1235.

• Are royalties taxed differently from a sale?

  Yes. Royalties are generally ordinary income to the licensor, while a sale of all substantial rights may qualify for capital gain treatment.

• Can a business borrow against its IP?

  Yes. Lenders take security interests perfected by UCC filings and often record them with the USPTO or Copyright Office.

• When should a seller start preparing its IP for a sale?

  Well before going to market. Missing assignments and unregistered marks are far easier to fix without a buyer’s deadline.

Protecting the Value You Are Buying or Selling

In most modern deals, intellectual property is what the buyer is really paying for. Confirming ownership, choosing a structure that moves the IP cleanly, writing representations and indemnities that fit the real risks, and planning the tax result before the letter of intent are what protect that value. For sellers, the same work done in advance turns a buyer’s diligence findings into a checklist already completed.

Owners weighing an exit can start with our guides to selling a business and qualified small business stock, which can shelter gain on the sale of C corporation stock.

Disclaimer: This article provides general information about intellectual property in business transactions and is not legal or tax advice. IP ownership, transfer requirements, and tax treatment depend on the specific assets, contracts, and deal structure, and tax rules change frequently. Laws change and every situation turns on its own facts. For guidance on your specific situation, consult qualified Oklahoma counsel and a tax professional.

About Cantrell Law Firm: We are former entrepreneurs who now guide Oklahoma business owners through acquisitions, sales, and the agreements that protect what they build. Learn more about our mergers and acquisitions practice. Contact us to discuss your transaction.