Maximizing the Value of a Company’s Intangible Assets

In today’s digital and information-based economy, a company’s most valuable assets are often its intangible assets. These assets can include:

• Trademarks, patents, copyrights, and trade secrets
• Domain names
• Customer data, including customer loyalty metrics and purchase behavior (in some cases, anonymized)
• Social media profiles
• Proprietary software

The portability of intangible assets has meant that the sale of these assets, separate from the company’s tangible assets, working capital, and operating liabilities, can generate a more positive outcome for both the buyer and the seller.

Understanding The Strategic Buyer

Intangible assets are the key elements that inform a company’s brand, identity, or technological differentiator. This positions them at the heart of a company’s ‘value proposition.’

Given that they inherently provide a strategic market advantage, the buyers who place the highest value on intangible assets are typically buyers in the same or related industry. These are called strategic buyers. Financial buyers, in comparison, may be looking to break a business up into pieces.

Seeking Synergistic Value in Intangible Assets

Strategic buyers will often have their own scalable platforms into which they can integrate highly desirable intangible assets.

For example, strategic buyers might purchase a target company’s patent portfolio to fill a gap in their patent coverage. In the event that a strategic buyer is infringing, purchasing a patent portfolio could also be a litigation-avoidance tactic.

Cherry-Picking Assets in a Sale

Few, if any, of a seller’s operating assets provide value to a strategic buyer. Operating assets with attached liabilities, such as unfavorable leases, employee or union claims, or regulatory compliance obligations, can often impede a transaction with a strategic buyer.

A sale of the intangibles allows the buyer to acquire the seller’s more appealing attributes while leaving the seller to manage the liquidation of its tangible assets and liabilities.

Understanding The Financial Buyer

While most buyers of intangibles have strategic motivations, there is also a market among financial buyers.

Financial buyers almost never intend to use intangible assets to support a business operation. Rather, they are often interested in acquiring registered intangibles to leverage as investments. Trademarks, domain names, patents, copyrights, and social media assets are all assets that have strategic value. Purchasing them would enable the buyer to 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.

A Sale Process Is Imminent. What Next?

A seller may determine, or the market may dictate, that the best strategy to maximize proceeds from the sale is to market its intangible assets for sale.

The seller will need to address numerous issues, often in short order. Sellers of intangible assets tend to have numerous other usually unrelated workstreams. They may also be liquidating other assets or focusing on their core business while non-core assets are managed through a sale process.

A sale of intangible assets will require the seller to identify and harness all of its related deliverables. Some of these assets may not have previously been considered assets independent from the operating business.

Sellers of intangible assets often need an expert to manage the sale and structure a transaction. Bringing in a seasoned advisor as early as possible will allow them to make recommendations prior to launching the sale process. This will, in turn, serve to maximize value during the process.

Here are the key steps a seller should take to execute a well-structured sale process that satisfies the buyer, while maximizing the value of its intangible assets.

1. Identify and Preserve the Company’s Intangible Assets

A seller first needs to create an inventory of its intangible asset portfolio.

Registered Intellectual Property Assets

At the most basic level, the seller must identify registered intellectual property assets. These include:

• Patents and trademarks registered with the US Patent and Trademark Office.
• Copyrights registered with the US Copyright Office.
• Domain names registered with various domain registries.
• Social media profiles.

Any maintenance requirements on these assets must be satisfied, including payment of continuation fees and timely filings of affidavits of use. For patents in the prosecution phase, the seller should also work with its counsel and intellectual property advisor to preserve the status quo for the buyer’s benefit.

Unregistered Intellectual Property Assets

A seller should also consider what types of unregistered intellectual property it owns. This includes:

• Unregistered copyrights and trade names
• Trade secrets, recipes, and formulae
• Software
• Customer data

Software and customer data need to be physically collected by someone knowledgeable about how and where they are stored. They should be able to explain the asset’s historical use and what is actually included when it is delivered.

For example, when preserving customer data, it is important to consider what data was actually maintained by the company and how the company interacted with the customer. When preserving software, the seller should be able to describe the capabilities of the software, whether it had been commercialized, and how it could be transferred to a buyer.

2. Understand and Disclose the Chain of Title

An intangible asset’s chain of title can be of significant importance to a buyer. This is especially true for patents, which are the product of an individual’s invention but are often assigned to a company.

Any assignments and other agreements relating to the transfer of intellectual property should be preserved and available to prospective buyers. This will help to avoid a mismatch in expectations upon closing. The prosecution, use, and enforcement records related to any intellectual property that goes through a sale process should also be maintained and available to potential buyers.

3. Disclose All Encumbrances

The concept of encumbrances on intellectual property is very broad.  A typical encumbrance is an owner licensing the use of the intellectual property by a third party. It can also include agreements limiting:

• The markets served.
• The categories of products and services traded that utilize the intellectual property.
• In the case of software as a service (SaaS), the use of the software by customers.

Any encumbrances should be clearly understood and disclosed prior to a sale to ensure a successful closing.

4. Reserve the Seller’s Tangible Assets

Intellectual property may have physical manifestations that are important to the buyer. The buyer may also expect to acquire them in an intangible asset sale. This is a fact often overlooked by sellers.

Let’s say the seller manufactures or designs products. The maintenance of product samples, customized tooling, design files, tech packs, patterns, and other manufacturing records and design specifications would all be critical elements of value.

This data should be preserved, either downloaded onto detachable hard drives (with backup copies) or stored in a secure cloud-based cache. Preserving marketing materials, web content, and software manuals is also important. In the case of software, the code is essential.

5. Identify the Right Markets for Assets

It’s important to market the preserved assets to the universe of potential buyers who are likely to ascribe value to them. Obvious strategic buyers typically include competitors, vendors, customers, and licensees. Further exploration will often reveal other entities that also have a strategic interest in the market the seller serves.

Different markets may respond to different messaging. It’s important to use cues and keywords that will help potential buyers connect the dots.

6. Run a Credible Sale Process

Potential buyers have limited time and bandwidth. They are often asked to evaluate several buy-side opportunities on a daily basis.

To get them to pay attention, sellers need to provide a coherent offering supported by a well-written descriptive memorandum, a well-organized data room, and a clear call-to-action. A reputable intermediary working on behalf of the seller will ensure that the opportunity is taken seriously and viewed by the right buyer representatives.

7. Manage Closing Deliverables Up Front

Too often, the sellers agree to open-ended deliverables, which result in re-trades or failed transactions at closing. At the start of any intangible asset sale process, the seller must be very clear about what it can deliver.

The schedule of the offering memorandum and asset purchase agreement should clearly lay out what the seller has in its possession and the intangible assets the buyer will receive. Representations and warranties should be limited to the scheduled assets, thereby reducing future liability and recourse to the seller.

A Well-Structured Sales Process Leads To a Successful Business Transaction

Sometimes, the most effective method for selling a business is through the sale of intangible assets separate from the operations, working capital, and liabilities of the business.

Intangible asset sales generally provide the seller and buyer more certainty and are more easily effectuated. When carefully assessed and sold through a well-structured process, it can lead to a successful transaction that leaves both parties satisfied.

We think you’ll also like:

1. ‘Housekeeping’ Tips To Consider To Maximize Business Value Before You Sell
2. Strategic vs. Financial Buyers: Distinctive Ways of Acquiring Businesses
3. The Importance of Valuing Your Online Business Assets for a Sale

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Valuing Your Brand and Other “Soft” Assets
2. How To Sell A Business A Step By Step Guide: How to Prepare for Sale
3. Intellectual Property 101

This article was originally published on February 8, 2023.]

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