Your Selling Your Business Checklist Should Include an IP Audit
This post is part of the Mergers & Acquisitions blog series focusing on selling your business.
By April Price
Nearly every business has intellectual property concerns when selling their business. Unfortunately, many business owners fail to recognize or appreciate the valuable intellectual property rights they have.
Some common examples of intellectual property that go unrecognized include customer lists, marketing information, pricing strategies, business names, and logos used in the operation of business. Of course, more recognizable intellectual property such as patents and copyrights can often be overlooked as well. A business owner’s failure to recognize intellectual property means they may not capture the entire value of their business in a sale. Below is a list to help you prepare for a transaction that involves intellectual property.
- Inventory Your Intellectual Property
In the early stages of any potential transaction, the business owner should inventory their intellectual property; prospective buyers and lenders will request this information as part of their due diligence. In order to help create your inventory, consider:
- What names, brands, taglines, domain names, or logos does your business use;
- Does the business own any patents or have any inventions that create value for the company;
- Are there any materials such as customer lists, formulas, algorithms, marketing plans, or business strategies that are closely held and create value for the company;
- Is there any software code, marketing materials, website content or other materials that are owned or used by the company; and
- Are there social media accounts associated with the business?
- Document Ownership of Intellectual Property
It may help to review intellectual property ownership with an attorney as some ownership is governed by applicable laws. In conducting such a review, consider the following:
- All employment agreements that include intellectual property provisions;
- All agreements in which the business may have acquired intellectual property rights, including independent contractor agreements, software licenses, web development agreements, and any other assignments or licenses.
- If you find a gap in ownership, take steps to fix it.
- For unowned (licensed) intellectual property, review the agreement for to see if it can be transferred.
- Review Registration and Enforcement Issues Related to Intellectual Property
Once ownership and/or rights and licenses have been documented, the next step is to consider any challenges to the business’s intellectual property:
- Gather any cease and desist letters received or sent, and ensure all matters have been resolved.
- Gather any lawsuit documents or documents threatening lawsuits and ensure all matters have been resolved.
- Gather all administrative proceeding documents (PTAB, TTAB) and ensure all matters have been resolved.
- Gather all registration and filing documents (both at the federal and state levels), and ensure all renewals and maintenance fees are current and that the chain of title is correctly indicated.
Types of Intellectual Property:
Copyrights protect “original works of authorship” including website content, marketing materials, software code, etc. Copyright does not protect facts, formula, ideas, or data. Copyrights may be registered with the United States Copyright Office and there are several benefits of registration including the availability of statutory damages in an infringement action. The cost of copyright registration is generally minimal.
In the most simplistic terms, a patent protects devices, processes, machines, and compositions of matter. Patents are granted by the federal government through the United States Patent and Trademark Office (USPTO). A patent grants the owner the right to exclude others from making, using, offering for sale, selling the invention, or importing the invention in the United States for a term of 20 years. Design patents are also available to protect the ornamental design of a product. Patents take a number of years to secure and can be cost prohibitive.
A trademark includes any word, name, symbol, or device used or intended to be used to identify and distinguish the goods of one seller from those of others. Like patents, trademark registration is through the USPTO. Although federal registration of a mark is not mandatory, it has several advantages, including notice to the public of the registrant’s claim of ownership of the mark, legal presumption of ownership nationwide, and the exclusive right to use the mark on or in connection with the goods/services listed in the registration. A trademark registration can take about a year to process and does have some attendant fees. Registration at the state level is also available for a nominal fee but such registration is not examined by the state and therefore has little value other than visibility.
Unlike the other forms of intellectual property protection, trade secrets cannot be registered. Trade secrets have value because the information is not known to the public. Generally speaking, a trade secret: (a) must be information that derives economic value from not being generally known, and (b) must be subject to reasonable measures to maintain its secrecy. Common examples of a trade secret includes: formulas, patterns, programs, devices, methods, techniques, and processes. Until recently, trade secrets were governed exclusively by state laws. Now trade secret owners have federal protection as well; check out our blog on the Defend Trade Secrets Act.
Quasi Intellectual Property:
There are other intangible assets that are often included in Purchase Agreements that do not expressly fall into one of the four categories of intellectual property listed above. However, these items should also be considered in a transaction. For example, licenses for computer software, domain names, and social media handles and pages are not generally considered intellectual property but may have substantial value.
When you prepare to sell your business, conducting an intellectual property audit like this might be low on your priority list. However, reviewing your business’s IP assets can show additional value not otherwise documented for potential buyers and better prepare your business for sale.