In today’s digital- and information-based economy, a company’s most valuable assets are often its intangible assets. These assets include trademarks, patents, copyrights, trade secrets, domain names, customer data including customer loyalty metrics and purchase behavior (in some cases, anonymized), social media profiles, and proprietary software.
Because of the portability of intangible assets, companies may find that a sale of these assets separate from their 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, identity, or technological differentiator — the heart of a company’s “value proposition.” Because intangible assets inherently provide a strategic market advantage, buyers placing 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. Strategic buyers will often have their own scalable platforms into which they can integrate highly desirable intangible assets. In the case of patent portfolios, strategic buyers could see a target company’s patent portfolio as filling a gap in their own patent coverage, or, in the event a strategic buyer is infringing, purchasing a patent portfolio could be a litigation-avoidance tactic.
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 be impediments to a transaction with a strategic buyer. 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. While they almost never intend to use intangible assets to support a manufacturing or sales business operation, financial investors are often interested in acquiring registered intangibles. Assets such as trademarks, domain names, patents, copyrights, and social media assets can have strategic value to multiple entities, enabling 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.
When a seller determines or the market dictates that the best strategy to maximize proceeds from the sale is to market for sale its intangible assets, the seller then needs to address numerous issues, often in short order. Sellers of intangible assets often have numerous other, and in many cases unrelated, workstreams, whether the liquidation of other assets or the focus on its core business while its non-core assets are managed through a sale process.
A sale of intangible assets necessitates identifying and harnessing all intangible asset-related deliverables, some of which may have not previously been considered assets independent from the operating business. Sellers of intangible assets often find that it’s necessary to retain an expert to manage the sale and structure a transaction. Bringing a seasoned advisor in as early as possible will allow the advisor to make recommendations in advance of launching the sale process which will, in turn, serve to maximize value during the process. Experienced experts will hit the ground running.
A seller needs to create an inventory of its intangible asset portfolio. At the most basic level, this requires the seller to identify registered intellectual property assets including patents and trademarks registered with the U.S. Patent and Trademark Office, copyrights registered with the U.S. Copyright Office, domain names registered with various domain registries, and social media profiles. The seller should ensure that intangible asset maintenance requirements are satisfied, including payment of continuation fees and timely filings of affidavits of use. The seller should also ensure that if patents are in the prosecution phase it works with counsel and its intellectual property advisor to preserve the status quo for the benefit of a buyer.
A seller should also consider what types of unregistered intellectual property it owns. This includes unregistered copyrights, trade names, trade secrets, recipes and formulae, software, and customer data. In the case of software and customer data, the assets need to be physically collected by someone knowledgeable about how and where these assets are stored and who can describe the asset’s historic use and what is actually included when the asset 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 will want to be able to describe the capabilities of the software, whether it had been commercialized and how it could be transferred to a buyer.
An intangible asset’s chain of title can be of significant importance to a buyer. This is especially true of patents which are the product of an individual’s invention but are often assigned to a company. Buyers should ensure that any assignments and other agreements relating to the transfer of intellectual property are preserved and available to prospective buyers 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 be maintained and available to potential buyers.
The concept of encumbrances with respect to intellectual property is very broad. It’s critical to make sure that any encumbrances are clearly understood and disclosed prior to a sale to ensuring a successful closing. A typical encumbrance is an owner licensing the use of the intellectual property by a third party but it can also include agreements limiting the markets served, categories of products and services traded utilizing the intellectual property, or in the case of software as a service (SaaS), the use of the software by customers.
Sellers often overlook the fact that intellectual property may have physical manifestations that are important to the buyer and which the buyer may expect to acquire in an intangible asset sale. For example, if the seller manufactures or designs products then the maintenance of product samples, customized tooling, design files, tech packs, patterns, and other manufacturing records and design specifications can be critical elements 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 is also important and, in the case of software, the code is essential.
Marketing preserved assets to the universe of potential buyers who are likely to ascribe value to the asset is key. Obvious strategic buyers typically include competitors, vendors, customers, and licensees. Further exploration often reveals other entities that have a strategic interest in the market the seller serves. Because different markets may respond to different messaging it’s important that the seller uses cues and keywords that will help potential buyers connect the dots.
For example, in the immediate aftermath of the outbreak of the COVID-19 pandemic, the potential buyer universe for brands with an ecommerce presence expanded, as (i) consumers increased ecommerce spending and expanded that spending into new categories of products they had previously only purchased in physical retail stores, and (ii) department stores and other retailers experienced distress, forcing them to shutter entirely or substantially curtail their vendor purchases, disintermediating many vendors from the customer. Identifying those potential buyers and bringing them to the table was imperative to maximizing value of brands with an ecommerce presence.
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, a well-organized data room, and a clear call-to-action will increase the likelihood that prospective buyers will pay attention to the offering. A reputable intermediary working on behalf of the seller will ensure that the opportunity is taken seriously and viewed by the right buyer representatives.
Sellers too often agree to open-ended deliverables which at closing result in re-trades or failed transactions. The seller must be very clear about what it can deliver at closing at the start of any intangible asset sale process. Schedules, used in offering memoranda and asset purchase agreements, should clearly set forth what the seller has in its possession and outline the intangible assets the buyer is to receive. Representations and warranties should be limited to the scheduled assets thereby reducing future liability and recourse to the seller.
Sometimes the most effective method for achieving the sale of a business will be 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. A careful assessment of a seller’s key intangibles and a well-structured and executed sales process will result in a successful transaction.
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This is an updated version of an article originally published on August 13, 2019]
©2023. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
Richelle Kalnit manages intellectual property disposition engagements for Hilco Streambank. On the sell side, she assists clients in developing a marketing plan for their brand and other intellectual property assets and implementing that plan by thoroughly canvassing the marketplace. Her ultimate focus is bringing that process to a value maximizing conclusion, whether through an auction…
David Peress serves as Executive Vice President of Hilco Retail Services where he provides critical oversight and vision for all Hilco retail valuation and monetization client teams. In 2017, David added this new role to his existing responsibilities as a principal at Hilco Streambank, where he has successfully built one of the top intangible asset…
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