Intellectual property issues arising when buying or selling a business

Whether buying or selling a business one of the most overlooked aspects of the transaction is the intellectual property of the business. Proper identification, scrutiny and valuation of intellectual property will have benefits for both the purchaser and vendor.

The value of intangibles such as intellectual property as a proportion of an organisation’s value has been on in the increase for many years. Recent surveys have indicated that for most organisations the value of their intellectual property and other intangibles now exceeds the value of the hard assets like buildings, plant and machinery.

In this environment it is essential that in a sale of business the intellectual property of the business is identified, scrutinised and properly valued.

From the perspective of a proprietor of a business who intends on selling their business the key issues include:

• Identification of IP: in a lot of cases IP is overlooked, undocumented and unknown to the vendor mainly as it is not recognised as IP. Quite often this includes confidential processes and methodologies used by the employees of the business. In other cases licensed IP is overlooked as it not owned by the business when in fact the licence can be regarded as an IP asset.
• Registration of unregistered IP: in cases where IP has been identified and is capable of registration, for example, a distinctive colour scheme used by the business or the name and/or shape of an existing product, such IP should be registered.
• Recording IP: IP should be recorded in schedules for ready access and for mapping against products and/or services offered by the business.
• Valuing IP: there are various different approaches to valuing IP and some are more appropriate than others. Ideally a proprietor of IP will want to value the IP by reference to the income that it generates or facilitates.

Identifying and valuing all of intellectual property used by a business in advance of its sale will have a number of positive effects. Firstly It reduces the chance that an issue will be discovered during due diligence that could cause the sale to derail. Secondly, comfort will be derived by a purchaser who sees that key processes have been reduced to writing and protected as confidential information reducing the risks associated with employee departures. Thirdly, by properly valuing the IP assets of a business, the sale price can be better justified or even increased.

From the perspective of a potential purchaser of a business the key issues include:

• Ownership of IP: The issue of ownership often arises in cases where the business being sold had been conducted by one or more predecessor entities and also in cases where 3^rd party contractors or certain employees have developed IP for the business but where ownership has not passed to the business.
• The IP of others used by the business: has 3^rd party IP been properly licensed and what are the risks surrounding withdrawal of those rights? Are there change of ownership provisions which would render the licence inoperable?
• Infringement of 3^rd party rights? Will selling the products and/or services of the business post sale infringe the IP of others? Consideration should be given to having a freedom to operate advice prepared in which the products and services are examined in the light of all relevant IP registered to 3^rd
• Valuation of IP: vendor’s should be asked to provide evidence and methodology used to value key IP assets.

By carefully considering the IP position of the vendor, a purchaser can avoid many of the common issues that can befall unwary and ill advised purchasers. The most common of which is the prevention of ongoing sales of goods and/or services that are core offerings of the business being purchased.