Increasingly, in today’s digital/information-based economy, a company’s most valuable assets are its intangibles. Intangible assets include trademarks, patents, copyrights, trade secrets, domain names, customer data, social media profiles, and databases of customer loyalty metrics. Because of the portability of intangible assets, it is often the case that a business owner may find that a sale of those assets separate and apart from its tangible assets, working capital, and operating liabilities will generate a more positive outcome for both the buyer and the seller.
Intangible assets comprise the key elements of what informs a company’s brand or corporate identity and are at the heart of a company’s “value proposition.” Since, by their nature, intangible assets provide a strategic market advantage, buyers who are going to place the highest value on intangible brand assets typically are strategic buyers. Strategic buyers often have their own scalable platforms upon which to layer those assets. This is especially the case if the seller is in the same industry or serves, or is seeking to serve, the same or related markets.
In situations where the likely buyers of a business are strategic buyers, it may be the case that few, if any of the operating assets of the seller, provide meaningful value to the buyer. Indeed, the operating assets can often be impediments to a transaction with a strategic buyer if they are assets with attached liabilities such as real estate, employee or union claims, or regulatory compliance obligations. In this circumstance a sale of the intangibles accomplishes the buyer’s goal of acquiring the seller’s advantageous attributes while leaving the seller to manage the liquidation of its tangible assets and liabilities.
While most buyers of intangibles have strategic motivations, there is also a market among financial buyers.” These financial buyers of intangibles do not use the intangibles they buy to support an operating business that makes or sells anything. Rather, the business they engage in consists of creating and managing license agreements with different licensees and protecting and enforcing their rights to the intangible assets. These non-operating investors are most often (but not exclusively) interested in acquiring registered intangibles such as trademarks, patents, and copyrights, that have strategic value to multiple entities and around which they can build a portfolio of income producing intangible assets. Financial buyers of this sort are almost never interested in acquiring operating assets, working capital and related liabilities.
When a seller determines, or the market dictates, that the best strategy to maximize proceeds from the sale of its business is to sell its intangible assets, the seller will need to address a number of issues. A primary consideration should be the retention of an expert in the structuring and management of intangible asset sales in order to assist the seller in maximizing value. Among the issues that an experienced intangible asset broker will consider are as follows:
In the first instance, a seller will need to create an inventory of its intangible asset portfolio. At its most basic level, this requires the Seller to identify any intellectual property assets for which formal registrations have been acquired, including patents and trademarks (registered with the US Patent and Trademark Office), copyrights (registered with the US Copyright Office), and domain names (registered with various private registries). The seller should make sure that maintenance requirements have been satisfied, including payment of continuation fees and timely filings of affidavits of use. Finally, a seller should also give careful consideration to what types of unregistered intellectual property it owns. This includes unregistered copyrights, trade secrets, recipes and formulae, and customer data.
The chain of title to an intangible asset can be of significant importance to a buyer. This is especially true of patents, which are the product of an individual’s invention but often assigned to a corporation. Making sure that any assignments and other agreements relating to the transfer of intellectual property are preserved and available to prospective buyers will help the seller avoid a mismatch in expectations when she gets to the closing. In general, the prosecution, use, and enforcement records related to any intellectual property that goes through a sale process should be maintained and available to potential buyers.
The concept of encumbrances with respect to intellectual property is very broad. Making sure that any encumbrances are clearly understood and disclosed prior to a sale is critical to ensuring a successful closing. Encumbrances are any interest of a third party in the intangible assets being sold that limit their use by the owner. A typical encumbrance is a license by the owner to allow the use of the intellectual property by a third party, but can also include agreements limiting the markets served or categories of products and services traded utilizing the intellectual property.
Sellers often overlook the fact that there are many physical manifestations of their intellectual property that are important elements of what a buyer may be expecting to acquire in an intangible asset sale. For example, if the seller manufactures or designs products, maintenance of product samples, customized tooling, design files, tech-packs, and other records of manufacturing and design specifications is a critical element of value. Make sure data is preserved by downloading the data onto detachable hard drives (with backup copies), or is stored in a secure cloud based cache. Preserving marketing materials, web content and software manuals and code is also important.
Making sure that a seller’s intangibles are marketed to the right potential buyers is critical. Obvious strategic buyers typically include competitors, vendors, customers and licensees. Further digging often reveals other entities that have a strategic interest in the market that the seller serves. Different markets may respond to different messaging. Making sure that the seller understands the cues and key words that will help potential buyers connect the dots is of critical importance.
Potential buyers have limited time and bandwidth, and are often asked to evaluate several buy-side opportunities on a daily basis. Providing a coherent offering supported by a well written descriptive memorandum and well organized data room will increase the likelihood that prospective buyers will pay attention to your offering. Having a reputable intermediary working on behalf of the seller will ensure that the opportunity is taken seriously and viewed by the right buyer representatives.
Too often there are situations where sellers agree to open-ended deliverables which, at closing, result in re-trades or failed transactions. At the outset of any intangible asset sale process, the seller must be very clear about what it can deliver at closing and limit any undertakings it makes to those deliverables. It is recommend the use of schedules in offering memoranda and asset purchase agreements that clearly set forth what the seller has in its possession and is able to deliver to a buyer of its intangible assets. Representations and warranties should be limited to the scheduled assets thereby reducing future liability and recourse to the seller.
[Editor’s Note: To learn more, please check out our webinar on fraudulent transfer or preference attacks.]
As the foregoing discussion demonstrates, there are many occasions where the most effective method for achieving the sale of a business will be through the sale of the business’s intangible assets separate and apart from its operations, working capital and liabilities. Intangible asset sales generally provide the seller and buyer more certainty and are more easily effectuated. This article outlines many of the key considerations a seller should address in connection with the sale of its intangible assets. Ultimately, a careful assessment of a seller’s key intangibles and a well-structured and executed sales process will ensure a successful transaction.
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