Most companies own intangible property (not of a physical nature) important to the success of the business. Broadly referred to as Intellectual Property (IP), these creations of human intellect often provide significant benefits in marketing (branding, trade names), sales (customer lists), products (design), and services (trade secrets, process know-how). While certain elements of IP may show up in financial statements (e.g., amortization of product development costs that resulted in a patent), those GAAP entries rarely reflect the full value of the IP. In our June 7, 2022, edition of Deal Notes, Managing Director Bruce Andrews discussed the importance of properly valuing IP. In today’s Deal Note, we emphasize the importance of protecting IP and its impact during the sale process.
The security of a firm’s IP can dramatically affect a potential buyer’s valuation of the business. IP can be protected legally by a variety of means, including but not limited to:
- Government documentary evidence including, but not limited to, patents, trademarks, copyrights, and approvals from regulatory agencies (DOD, FAA, DOE, DHS, etc.)
- Contractual rights agreements (with customers and suppliers, and employment agreements).
There may be situations where a company may decide not to protect a design, such as Tesla’s release of its patents as part of an effort to fight climate change. Other circumstances may cause firms to not patent an element of a design, such as when it is attempting to establish an industry standard.
However, in most situations, IP protection is highly desirable. If appropriate steps have been taken to perfect these safeguards, buyers will have greater confidence that the firm’s competitive advantage is assured and that optimistic projections of future performance can be achieved, which could potentially lead to a higher value. Conversely, if a company is lax in protecting its IP, buyers will have a more draconian view of both future prospects and current value.
We encourage all owners who may want to sell their businesses someday to carefully examine their IP protections and make certain all reasonable steps have been taken to ensure their integrity. Correcting any weaknesses well in advance of selling will provide tangible benefits in the future when they decide to sell.
Have a great day everyone.