“EXIT-READY IP”
February 28, 2024
Planning ahead to ensure that your intellectual property is in good shape for an acquisition
I was the type of kid who always left revision for exams until the last minute. I did okay but, with hindsight, I now recognise that life could have been a whole lot less stressful if I had planned ahead.
The same can be said for due diligence in the context of an acquisition. Whilst a lot of businesses will wait until they are in the midst of negotiations to consider what is required of them to satisfy prospective acquirers’ due diligence requirements, the whole exercise can be less stressful and run more smoothly if you take the time to plan ahead and, especially in the case of intellectual property, plan from the outset to be “exit-ready”.
What do acquirers want?
Stating the obvious, I know, but at a high level an acquirer’s aim is to generate a return on their outlay on the purchase. A particular acquirer may be motivated by a whole variety of other factors. They may see opportunities to take what you have and grow it further. There may be synergies with their current operations that will increase revenues. It may be a strategic play. Whatever the motivation, it is extremely unlikely that any deal will be reached if, on the face of it, there is no prospect of a return over time.
For a technology business, their intellectual property position will play a significant role in any decision to purchase.
A prudent acquirer will want clear answers to all of the following questions before committing to buy.
Does the company have its own or licensed intellectual property that gives exclusivity and, with it, a better chance of success in the market?
Are they at risk of infringement of a competitor’s intellectual property rights, which in the worst case could stop them dead in their tracks?
Do they actually own, or in the case of licenced intellectual property have the appropriate rights to use, the intellectual property that underpins the value in the business?
Business owners who are prepared in advance to answer questions such as these and who have a clear understanding of their intellectual property position will not only have a less stressful due diligence experience but will instil confidence in prospective acquirers.
What is IP?
If you are innovating, then you are creating intellectual property. As an aside, more of which below, so are your competitors.
You can think of “intellectual property” (or “IP”) as the fruits of your labour; the assets created through your innovation work: software code, inventions, product designs, etc. These IP assets can represent a large proportion of the value in a business.
Intellectual property rights are the legal rights that can be used to protect the underlying IP and include registered rights (patents, registered designs, etc), which are obtained through an application process, and unregistered rights (trade secrets, copyright, database rights, etc), which come into existence automatically.
Technology innovations will often encompass multiple different types of intellectual property assets that can be protected with a corresponding mosaic of intellectual property rights.
Ownership
“I paid for it, so I own it.” Right?
Wrong! Well, not always right.
The rules around ownership of intellectual property are not always straightforward and vary based on the type of IP, the jurisdiction and the relationship between the creator of the IP and the business.
It is perhaps not surprising that IP ownership issues are a common problem that is uncovered during a due diligence process. Whilst these issues can often (but not always) be sorted, if they are only discovered during negotiations they can delay proceedings and may scare some prospective acquirers away.
By checking the ownership position ahead of a sale, a business can save themselves this angst. Better still, if you set things up from the outset to ensure that the relevant IP is owned by the business then you avoid the problems, and the associated costs of sorting it out, altogether.
Risk
Your intellectual property assets and rights are not the only IP that a prospective acquirer will be concerned about. They will also want to know about competitors’ IP (including trademarks and patents) and the risks it creates for your business.
It is often assumed that owning IP rights that protect a product gives you freedom to commercialise the product. Sadly this is not the case. IP rights give you the ability to stop others commercialising the product, but your own commercialisation can still infringe the rights of others.
Let’s illustrate this with a simple example. Imagine that you have invented and patented the light bulb. I then have the bright (pun intended!) idea of using your light bulb in a hand-held torch and I patent that. Even though we each have our own patents, neither of us is free to use the other person’s invention. If I sell my patented torches with your light bulb installed, I infringe your patent. And if you sell your light bulbs to a competing torch manufacturer, you could be liable for infringement of my patent.
Without appropriate checks and procedures in place, it is all too easy to stumble into infringement of another company’s IP rights.
A prospective acquirer will recognise that you can never avoid risk altogether, but they are much more likely to be interested in a business that identifies and manages the potential risks associated with competitors’ IP, as opposed to a business that is ignorant of these risks or buries their head in the sand.
Protection
As we have already learnt above, intellectual property rights (patents, trade secrets, etc) are the tools that a business can use to prevent others from misappropriating their IP, protecting the investment they are making in their innovations.
It is important to think about the creation and protection of IP from the outset of an innovation project. For some types of IP rights, it can be crucial to take timely action to secure valid protection. For example, patent applications must be filed before the invention you are seeking to protect has been disclosed.
It is also important to understand the costs involved in seeking IP protection and ensure that a business is spending wisely to support their goals and to build value in the business.
A well-structured and thought through mosaic of IP rights will present a significant barrier to the competition and help to give a business exclusivity in the market – an attractive proposition for any potential acquirer – without breaking the bank.
Strategy
An ‘IP strategy’ (or plan) is a framework that allows a company to appropriately manage the intellectual property risks and opportunities that arise as the business innovates.
The strategy ought to address intellectual property holistically in the context of the business, looking at IP ownership, risk and protection. However, it does not have to be complicated or jargon filled. The strategy should be something that you (and potential acquirers) can relate to, incorporating simple processes that can be effectively and efficiently implemented in the day-to-day operations of your business.
An IP strategy should be put in place at the earliest opportunity and revisited regularly as a business grows or pivots, so that the strategy and your approach to IP remains aligned with your business goals.
“Exit-Ready IP”
With an appropriate strategy in place, a business can extract the maximum value from their IP, manage risk presented by the IP rights of others and demonstrate to prospective acquirers that they have an “exit-ready” IP position.
Get in Touch
For further advice or support, please contact Stephen Carter at stephen@theintellectualpropertyworks.co.uk
If you’re interested in further information on a share sale, get in touch with us here.
