Contributed by: Singh & Associates
Intellectual Property (IP) assets although being intangible are regarded as the most valued asset often surpassing the tangible assets owned by a company or an individual. The main IP assets include a bouquet of Trademarks, Patents, Copyrights, Industrial Designs, Utility Models, Domain Names and Trade Secrets. An Industry could be associated with one or more of the said IP assets, either with the production of goods like the inventive process of production or could be related to marketing of goods like its shape or name or logo of the company among others. In contemporary times, it is imperative for a Company to identify and register its IP assets at the outset, try to create and build IP assets around its businesses, and diligently protect its IP assets.
Registered and well-enforced IP rights are of great value for any business and play a key role in the evaluation of the sale or purchase of businesses. The IP owned by an entity not only attracts customers but also builds a reputation in the market exclusively associated with the entity attracting investors. A well-known or reputed IP in a market, be it a trademark, patent, or registered design, provides a glut of trusted customers to a business.
Businesses are often evaluated for future prospects or growth while taking the baseline of the present reputation of the business and IP assets affiliated or owned by the business. The better the prospect of growth and the larger the portfolio of strong IP assets, the more are the chances of attracting good investors and buyers of the business.
In addition to the current reputation and value attributed by IP assets, the same IP assets also enable security and easy cash flow for the buyer by way of pledging, franchising, or royalty income from the IP assets.
IP assets like copyrights and trademarks are owned or become proprietary by creation whereas IP assets like patents and designs can be owned or proprietary is allowed only after registration of the same with the Government. Further, registration in all IP assets provides a bundle of benefits especially the right to file suit for infringement of the IP except for copyrights where a suit for infringement can be filed without registration.
A well-maintained IP asset with documentation and updated records are often linked with a business’s progressiveness and marketability while assessing the value of a business.
Assessing the Value of a Businesses
Just like any other type of asset, all IP assets are not equally valuable while assessing a business. Three commonly known methods for valuation of IP assets:
Cost Estimate – the method includes the cost of creation of IP and having such created IP registered at the authority. Basically, the evaluator looks into the costs towards salaries of IP creators in an organization or cost to acquiring an IP and further costs towards having the said IP registered, maintained, and enforced in a country. This is a simple way to determine the value of IP and is applicable mostly for newer businesses.
Market Estimate – Under this process, the evaluator draws a comparison between the IP in question and the competitor IP from the market. The Market Estimate is more subjective than the Cost Estimate, however, involves practical parameters like the standing of the IP and the market value of the innovation or market disruption value.
Past/Future Estimate – Another method often employed for the evaluation of IP Assets is to define and consider a set of parameters depending upon the type of IP and market. Such parameters can include locations, products, services where the IP assets including trademarks, copyrights, patents, and/or other IP assets could be used. A chart of profitability vis-à-vis IP assets connected with the product or service is drawn up for evaluation and the historical records with milestone market changes would show the current and future estimation of IP assets. This process follows a trend or pattern plotting, hence, when combined with the above simpler evaluation methods gives a holistic view of the present and future prospects of the IP assets in question.
Key factors that determine the value of an IP asset includes assessment of the following:
IP critical to the target business;
IP critical to the buyer’s future plans or businesses;
IPs owned by the target both registered and unregistered;
Pending registrations, upcoming maintenance, and abandoned IP applications and registrations;
IP owned by third parties and licensed or otherwise used by the target company, and whether those licenses may be freely assigned by the target company;
Current and future potential of the IP assets including the remaining life cycle of IP;
Relevance of IP assets over time and IP disputes ongoing or closed;
Check Exclusive Licenses if any – is IP licensed to a third party on an exclusive basis, the target may have relinquished or restricted its right to use;
Termination Rights – critical IP license agreements may allow the licensor to terminate without cause, resulting in lost value, and under certain circumstances, copyright assignments may be terminated by the creator;
Jointly-Owned IP – shared with third parties may be subject to certain restrictions or accounting obligations;
Assignment Restrictions – critical IP license agreements may prohibit or restrict the assignment of agreement or a "change in control" of the target company, creating the need to obtain the assignor/licensor's consent before transferring the rights to the buyer;
License of Affiliate IP – a license or other agreement may license the IP of the target “and its affiliates,” thereby potentially including the buyer’s IP in the license after the transaction closes;
Group/Enterprise Licenses – in a carve-out transaction, the target may lose licenses made on a group or enterprise basis to the target’s parent company;
Open Source IP – use of open source code may subject the target’s IP to restrictions or cause it to lose potential IP protections;
Non-Use and/or Inappropriate Use of Trademarks – registered trademarks must be used continuously in commerce and in a consistent manner to avoid rectification/cancellation action from third parties;
Trademark Coexistence Agreements – may limit the ability of the company to expand into new businesses under a certain brand name;
Limited NDAs – trade secrets may lose protection if confidentiality obligations are limited in time or scope.
Apart from the factors listed above, if IP assets of a Company are recently registered and/or not well integrated with the businesses and marketing, such IP assets usually have low values and are generally valued as per actual costs, i.e., the official costs of registration, maintenance and professional fee for registration and maintenance. However, if IP assets are the core of the business and are very well integrated with the product manufacturing and marketing, they are considered as having higher market value and future market value.
Once all assets (physical and IP) of a company are to be assessed, there comes a need for strict due diligence. The same is a very crucial step for a buyer. An audit or due diligence about the business should be conducted with respect to various categories like legal, financial, IP, and relevant technologies employed by the business. The importance of due diligence in the IP area should not be underestimated whenever any valuable intangibles change hands.
Tools of Buying or Selling business with IP assets
Once the buyer or a seller draws up the intention to acquire or sell intellectual property, an agreement needs to be carefully drafted encompassing all assets, liabilities, and due diligence findings. Further, the buyers may have special provisions of warranties to cover the risks associated with assets that are not completely disclosed or poorly maintained.
There can be cases where the seller does not want to sell out its IP assets and continue to use them to their advantage, leasing or licensing has proven to be an effective alternative. Just like any other physical asset, IP assets could also be leased or licensed. Such license could be either given to the buyer or an agreement could be drafted such that even after selling the IP assets, the seller will be the exclusive licensee for the sold IP rights and will provide royalties to the buyer for commercial use of these assets.
Role of IP professionals
Buying a business could be very uncertain as it is difficult to assess every parameter that governs the business and its activities. IP professionals can help assess the value of IP assets and provide due diligence on the same, thus minimising the risks associated with buying an IP asset. Further, IP professionals can provide their services in skillful drafting of the assignment for purchase or sale of a business with IP assets, keeping in mind the various assets the buyer wishes to have and the liabilities the buyer wishes to avoid. Although no one can provide a clear picture of a business and provide advice thereupon, but an agreement based upon extensive due diligence will minimise the risks of failure of a business deal.
Contributed by Singh & Associates
The above article is authored by Mr. Shrimant Singh(Partner) and Mr. Aayush Sharma(Senior Principal Associate)