Digital Due Diligence: The Hidden Risks of Buying a Business with Significant Online IP
You've found a promising business with an established online presence and valuable digital assets. The financial records look good, but do those assets actually belong to the seller? Before investing, you need to verify intellectual property ownership, licensing rights, and transfer restrictions that could affect the business's value.
At Law Offices of Peter V Lathouris LLC, we help you examine potential legal risks before purchasing a business in Stamford, Connecticut. If the company's value depends heavily on digital assets, we can review ownership documents, evaluate contractual restrictions, and structure an agreement to protect your interests.
Identifying Digital Assets Before Closing
Digital due diligence starts by identifying which online assets drive a business's value and whether the business actually owns them. Important assets to examine include:
Websites and domains: Domain registrations, website content, design elements, and hosting arrangements.
Software and technology: Proprietary applications, source code, databases, and development tools.
Brand assets: Trademarks, logos, product names, and other distinctive branding.
Digital accounts: Social media profiles, advertising accounts, online storefronts, and associated access rights.
Customer information: Subscriber databases, transaction histories, and marketing lists.
Not all digital assets constitute intellectual property. Some involve contractual access rights, while others are subject to separate legal restrictions.
In an asset purchase, you acquire specified assets and rights. In an equity purchase, you acquire ownership of the business entity, which generally retains its assets and obligations. Either way, you must verify ownership and contractual restrictions, including provisions triggered by a change in control.
Verifying Software and Copyright Ownership
A seller may have hired an independent developer to build its website. Paying for that work does not necessarily transfer copyright ownership. Specially commissioned work qualifies as work made for hire only under specific statutory conditions, including a signed agreement and qualifying categories of work. Otherwise, a valid copyright assignment may be necessary.
Under federal copyright law, transferring copyright ownership generally requires a written document signed by the rights holder or an authorized agent, unless ownership passes by operation of law. Before purchasing the business, review employment agreements, contractor contracts, copyright assignments, and software development arrangements.
Also determine whether proprietary software incorporates open-source components. Certain open-source licenses impose conditions concerning attribution, distribution, or source-code disclosure, depending on how the software is used and distributed.
Finally, check whether intellectual property is subject to security interests, competing ownership claims, or pending infringement disputes. A seller may own an asset while still facing restrictions or claims that affect its value.
Checking Trademark, Domain, and Account Transfers
Verify trademark, domain, and online account rights separately because owning or controlling one does not automatically grant the right to transfer another. Trademark due diligence should establish whether relevant marks are registered, who owns them, whether disputes exist, and whether competing businesses may have conflicting rights.
Under federal trademark assignment requirements, registered trademarks generally must be transferred with the goodwill associated with their use. A purported transfer that fails to satisfy applicable requirements may not convey enforceable rights.
Pending intent-to-use trademark applications generally cannot be assigned before the required use filing, except to a successor to the ongoing business or the relevant portion of it.
Domain names present different concerns. Confirm the registered holder, renewal status, and any transfer restrictions. Registrar procedures can delay a transfer, even when the purchase agreement includes the domain.
Social media and advertising accounts require similar attention. Some platforms restrict account transfers or require specific authorization procedures. Access to a username and password does not necessarily establish ownership or permission to transfer the account.
Assessing Customer Data and Privacy Risks
A substantial customer database may increase a company's purchase price, but acquiring the information does not automatically give you unrestricted rights to use it.
The Connecticut Data Privacy Act imposes obligations on covered businesses concerning personal data, including consumer rights, security, and certain uses or disclosures.
Amendments effective July 1, 2026, expanded the Act's reach by lowering the general consumer-data threshold to 35,000 and extending coverage to certain businesses that process sensitive data or offer personal data for sale. Since October 1, 2026, Connecticut has prohibited the sale of consumers' precise geolocation data.
Beginning January 1, 2027, covered data brokers must register before selling or licensing brokered personal data. Applicability depends on the business's activities, data practices, and statutory exemptions.
A qualifying transfer of customer data during a business acquisition may be excluded from the Act's definition of a data sale. However, that exclusion does not eliminate applicable privacy notices, data security requirements, or restrictions on subsequent use.
During due diligence, examine:
What personal information the business collects and retains.
Whether its privacy notices accurately describe its data practices.
Whether required permissions exist for marketing and other intended uses.
Whether existing service-provider agreements adequately address data protection.
You should also investigate previous security incidents, unresolved complaints, and weaknesses in the company's access controls. Under Connecticut General Statutes ยง 36a-701b, qualifying data breaches can trigger notification obligations, generally within 60 days of discovery. Undisclosed incidents may expose the acquired business to notification expenses, remediation costs, and other legal consequences.
Reviewing Trade Secrets and Technology Contracts
Trade secrets require strong confidentiality protections, while technology contracts may limit your ability to keep using essential systems after an acquisition. Under Connecticut's Uniform Trade Secrets Act, proprietary algorithms, customer information, internal processes, and confidential business strategies may qualify as trade secrets if they derive economic value from remaining secret and are subject to reasonable efforts to protect their secrecy.
During an acquisition, determine whether the seller has taken appropriate steps to protect that information. Confidentiality agreements, restricted access, and employee departure procedures may be relevant.
Cloud hosting contracts, software subscriptions, and vendor agreements may also require consent to assignment or contain provisions triggered by a change in ownership. In our business sales and purchases practice, we review contractual restrictions so you can obtain required consents or arrange alternatives before closing.
Protecting Digital Assets in the Purchase Agreement
The purchase agreement should address identified digital IP risks through protections such as:
Detailed asset schedules: Identify the intellectual property, accounts, licenses, and other digital rights included in the transaction.
Ownership representations: Require the seller to make appropriate statements about its ownership or authorization to use relevant assets.
Required consents: Identify third-party approvals or assignments that must be obtained before closing.
Indemnification provisions: Allocate responsibility for specified losses arising from breaches of contractual promises or other identified risks.
Escrow or holdback: Place part of the purchase price in escrow or withhold it for an agreed period to help cover specified post-closing IP or privacy claims.
Closing requirements: Set deadlines for delivering ownership documents, account controls, technical records, and necessary access credentials.
Seller representations cannot replace independent ownership verification, and if significant problems emerge, you may need to renegotiate the price, require corrective action before closing, or reconsider whether the purchase is worth the investment.
Discuss Your Business Purchase with Law Offices of Peter V Lathouris LLC
Our attorney, Peter V. Lathouris, has practiced law in Connecticut since 1982 and has decades of experience in business transactions, commercial agreements, and business disputes. At Law Offices of Peter V Lathouris LLC, we assist with due diligence, negotiations, purchase agreements, and the transfer of applicable copyrights and trademarks.
As business law attorneys in Stamford, Connecticut, we serve Fairfield County and New Haven County, including Darien, Greenwich, Norwalk, Danbury, and Westport. If you are considering purchasing a business with valuable digital assets, contact us for a complimentary 30-minute consultation.