In today’s digital- and information-based economy, a company’s most valuable assets are often its intangible assets. These 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, business owners may find that a sale of those assets separate 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 – the heart of a company’s “value proposition.” Because intangible assets inherently provide a strategic market advantage, those buyers placing the highest value on intangible brand assets are typically buyers in the same industry or a related one. These are called strategic buyers, as opposed to financial buyers, the latter of whom may be looking to break the business up and part it out. Strategic buyers will often have their own scalable platforms to integrate with highly desirable intangible assets.
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 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 more appealing 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. Financial buyers aren’t looking to 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 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 in 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 a business is to sell its intangible assets, the seller then needs to address a number of issues. For starters, the seller should obtain an expert to help structure and manage intangible asset sales to maximize value.
From there, an experienced intangible asset broker will consider the following:
Here, a seller needs to create an inventory of its intangible asset portfolio. At the most basic level, this requires the seller to identify any intellectual property assets that come with formal registrations, including patents and trademarks registered with the U.S. Patent and Trademark Office, copyrights registered with the U.S. Copyright Office, and domain names registered with various private registries. The seller should ensure that maintenance requirements are 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. Buyers will then help the seller avoid a mismatch in expectations upon closing time to make sure that any assignments and other agreements relating to the transfer of intellectual property are preserved and available to prospective buyers. 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. 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, the 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 onto detachable hard drives (with backup copies), or 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 also 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. For instance, different markets may respond to different messaging. Make sure that the seller understands the cues and keywords will help potential buyers connect the dots.
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. The use of schedules in offering memorandum and asset purchase agreements that clearly set forth what the seller has in its possession will outline a buyer’s intangible assets. Representations and warranties should be limited to the scheduled assets, thereby reducing future liability and recourse to the seller.
There are many occasions where the most effective method for achieving the sale of a business will be through the sale of the business’ intangible assets separate from its operations, working capital and liabilities. Intangible asset sales generally provide the seller and buyer more certainty, and are more easily effectuated. Ultimately, a careful assessment of a seller’s key intangibles and a well-structured and executed sales process will result in a successful transaction.
[Editor’s Note: To learn more about this and related topics, please check out the following webinars: Valuing Your Brand and Other Soft Assets, and Valuation 2018. Read about Business Transition and Exit Planning.]
David Peress is the Executive Vice President of Hilco Streambank. He most recently served as President of Hudson Capital Partners where he led the company’s investment review and management processes. David has twenty years of experience working in the corporate restructuring and distressed investing industry. Until 2000, he was a partner in the bankruptcy department…
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