When buying or selling a business there is a lot to think about and often, the intangible assets such as intellectual property can be overlooked.
This is surprising when you consider that for many businesses intangible assets have a higher value than their tangible assets.
Imagine for example the cost to a business of a capital investment such as replacing a key piece of machinery. This would be significant for the business and that asset is going to feature in any business sale. Imagine by contrast, the fall out if a business needs to change its name because it has failed to obtain a trademark registration. The cost of this re-brand and the impact on future trade would generally be significantly more than the cost of replacing the capital asset.
Despite this, businesses throughout their life-cycle often undervalue the intellectual property (IP) assets, but never more so than during a sale or acquisition process.
Below are some of the key mistakes we see in corporate transactions from an intellectual property perspective. Many of these are easy to avoid and our expert team is well placed to discuss any queries you may have on these topics.
Key intellectual property mistakes that businesses make
#1 – Assigning goodwill where there is no trademark registration
In the absence of a trademark registration a business’s reputation is protected through their goodwill. Goodwill is a way in which the law recognises and offers limited protection to the effort that goes into developing a reputation (whether that reputation is good or bad).
Goodwill is inherently attached to the business that generates it. It is not possible to separate goodwill from the business which underlies that goodwill. Despite this, we frequently see businesses attempting to value and sell goodwill as if it is a standalone asset.
A transfer of goodwill where a business is not being sold as a going concern (e.g. an asset sale) will not be effective at law. Only where the whole business is being sold as a going concern (both the good bits and the bad bits) will goodwill also be assignable.
In order to avoid this risk, businesses should ensure that they have trademark registrations in place. A trademark registration should be basic housekeeping for all UK businesses but is often overlooked. The sale of a business is often one of the first times a business will realise they should have dealt with this important issue. For more information on trademark registrations please read our article here.
#2 – Intellectual property licences without quality controls
Often businesses will attempt to licence intellectual property, such as a trademark registration, for example, across a group of companies. This is a common structure where one company owns the brand name but licences others to use it, perhaps in a particular territory or for a particular market segment.
However, businesses often business neglect to put in place the necessary control provisions needed to make this licence sustainable and to protect the owner’s interest in the brand.
The fundamental issue here is that trademarks serve two key functions.
The first key function is to protect the reputation of the business by enabling it to stop other people from taking advantage of their reputation. It also helps that business to commercialise the value in their brand by for example licencing it or setting up a franchise.
The second key function, which is often overlooked, is that trademark registration also protects the consumer. In other words, as a consumer making a purchase, the trademark applied to the goods or services you are purchasing, gives re-assurances about the nature and quality of those goods and services.
As soon as a brand owner becomes blasé about the quality of the goods that they are providing, it puts the trademark registration at risk. This is because the mark risks becoming deceptive. It no longer guarantees to the consumer the nature or the quality of the goods and services on offer. That’s not to say that the goods and services have to be of an outstanding quality, just that the quality has to be consistent.
Where a rights owner licenses their trademark to a third party but fails to put in place checks and balance or quality controls to ensure the consistency of that product or service, then their trademark risks becoming deceptive and (in time) invalid. This can see a business losing its most valuable asset.
The solution here is to make sure that any trademarks licenses have in place effective quality control provisions.
#3 – Ownership of intellectual property assets of the business
Many businesses will find when they start doing due diligence for an acquisition or a sale that they do not own the assets they thought they did. Sometimes this is because when the business was set up, the founder registered assets, such as domain names, in their own name rather than in the company name. This situation can be resolved on most occasions by assigning the rights into the relevant company, but this needs to be done effectively at law. There may also be tax and other considerations.
The second area where this commonly arises is where third parties have been involved in the creation of content. Many business do not realise that where they work with third party contactors those contactors will own the intellectual property they create (unless there is a written agreement to the contrary). Take for example a web designer or a logo designer who is contracted to do a piece of work for a company. The contracting party may have told them what to create and have paid them for the work but, unless there is an effective agreement in writing assigning the copyright, the designer will continue to own it.
This will often come to light during a due diligence exercise where an organisation may be required to prove that it owns the rights behind, for example, it’s website or other key assets. If it hasn’t got in place the necessary assignment at the beginning of the process, it may need to go back to developers at this late stage and ask for the assignment to be put in place. There may then be a commercial discussion around the price which needs to be paid to the developer in return for the assignment.
#4 – Breaking IT contracts
All business will have a variety of IT contracts for the software, hardware and services which make their business work. Whether this is for individual programs installed on their own servers or a wider managed service agreement. In all cases there will be a contract governing the relationship.
Many of these IT contracts will contain change control provisions. These change control provisions will enable the IT provider to get out of their obligations under the contract if there is a “change of control” in their client business.
This means that for example, a change in shareholding or other structure could result in the IT contracts being invalidated. This could result in the new owners having to re-negotiate new contacts or being left high and dry without the IT systems which they rely upon.
#5 – Checking the data
Many businesses are familiar with the requirements of the data protection legislation. However, many are not aware of the impact this can have when it comes to the sale of assets such as often occurs on a business sale. For many businesses, a list of current customers will be crucial. Take for example a holiday business where one of the key assets may be future bookings.
Details of customers, future bookings, and historic sales where the same contains personal information will be protected by the data protection legislation.
A buyer will want to be able to see that a seller has complied with the letter of the data protection legislation in the collection, storage and use of that data. Otherwise, a potential purchaser could find that the assets which they are purchasing are not worth the asking price.
Making sure that effective data protection warranties are in place and that contracts with third parties such as IT providers who may be storing personal data are compliant is increasingly becoming essential.
Many of these issues can be easily avoided by making sure that the intellectual property elements of a business are considered early during the sale or acquisition process.
All too often these issues are omitted from the deal altogether which can mean that certain elements of the transfer are void or they are considered too late, in which case they can have a significant and not always positive impact on the asking price.
Another key point to consider is that these issues apply across all sectors. There is a common misconception that concerns around intellectual property are only really for businesses with significant R&D budgets. This is not the case. Almost every business has a website, a brand and other intellectual property which forms key parts of their assets, regardless of which sector they work in.
Regardless of what your business does, your hard won reputation protected by your brand will be one of your key assets. Making sure that it and the other key assets which you rely upon are protected, owned by the right people, and managed in a sustainable fashion, will help make sure you maximise the potential when it comes to a business acquisition or sale.
If you are considering selling or buying a business, our team would be happy to help.