Why you need an effective IP exit strategy
Business Management

Why you need an effective IP exit strategy

This is a contributed piece from Jon Calvert, CEO of ClearViewIP

When embarking on a merger, acquisition, public listing or an exit of any kind, the management team’s number one objective is to maximise their business’s value.

Major business transactions require meticulous planning and detailed strategy to ensure that they run smoothly, efficiently and to schedule. Any chink in the armour can significantly delay, or halt projects, which we all know are highly expensive processes.

While tangible assets are routinely inventoried and assessed in order to determine the value of the business alongside the financial performance and projections, certain crucial aspects of a business’s worth are often overlooked. This can have potentially disastrous results.

The value of intellectual property is often misattributed, with large corporations sometimes overlooking their IP positioning. IP can be a hugely valuable asset.

A year after Twitter went live on the NYSE in 2012, IBM contested “at least three” of its patents, resulting in the social platform purchasing 900 IBM patents. Figures from this transaction were not disclosed, however due to the size of the transaction, we can assume the final figure was astronomical. While this was a hard pill for Twitter to swallow, it ultimately was their fault in having an incomplete IP portfolio which held only nine confirmed patents and 95 pending applications (a significant, but relatively small amount) when it first went public.

IBM has tens of thousands of active patents. Sales deals and licencing agreements accounted for about 1% of its yearly revenue in 2013, or $1 billion.

IBM has also sold patents relating to smartphone software to Google Inc, and similar transactions of 750 patents from Yahoo to Facebook illustrates the vulnerability of young companies to industry giants with mature IP portfolio strategies. 

 

The dangers of ignoring IP

Issues can arise during due diligence when IP strategy has been swept under the rug or in fact never really considered properly. During M&As, surprises can lead to delays which can become incredibly costly, especially if the deal falls through.

Uncertainties can materialise when the actual ownership of the IP portfolio is not clear. For example, software companies may have a dependency on open source code in their solution and not realise this until due diligence is underway. During an acquisition, this open source code might pose a threat to the company’s valuation as due diligence determines their developers have been contributing their ideas to the open source community, leaving it open to exploitation by competitors. Or the domain names under which they operate may be registered in the name of the founder and not the company. Or, a critical piece of foundational IP on which the company’s product is built may be licensed in from academia under an agreement that cannot be assigned to a new owner without the University’s express permission. In-depth knowledge and preparedness of the IP portfolio is therefore critical to a smooth exit process.

Legal proceedings or historical assertive approaches from patent owners may affect value or risk in closing an exit transaction. For example, an ongoing patent infringement allegation from a third party may, depending on the merits of the case, either scupper a deal, or require settlement as a closing condition. Best case, some of the consideration may be held back by the buyer as insurance.

Another aspect of IP that is often overlooked is the “know-how” tucked away in the minds of individuals that make the business tick. While trademarks, logos, and patents can be easily documented, this know-how poses a different IP exit strategy conundrum: how can you measure and value IP that walks out of the building every night? Businesses wishing to exit, must devise strategies to either retain individuals in the longer term or transcribe their know-how into more transferable IP assets so these can be appropriately valued, retained and leveraged by others.

 

Why develop an IP exit strategy?

IP exit strategies are designed to maximise valuation, and minimise risk of a transaction falling through ensuring any exit runs smoothly and in your favour. With so much potentially at stake, the real question is why do businesses still risk exits failing as a result of not having their IP in order?

Below I have compiled a few sample pointers highlighting some key aspects of a successful IP strategy for exit:

1. Compile a single file of all IP and ideally produce an IP dashboard. This allows the IP assets to be easily reviewed and valued and can speed up due diligence processes. Having proof of ownership documents to hand and current contracts compiled will also be useful in speeding up due diligence and preventing costs from racking up.

2. Ensure all registered IP is up to date and relevant fees are paid. Keeping on top of key deadlines and office action responses is key to ensuring no value is lost and gives the buyer confidence.

3. Actively review third party dependencies, especially license agreements and software assets to identify any areas that need addressing prior to entering an exit process. Fix the problems up front.

4. Know your portfolio. Brief and train a member of the negotiation team on the ins and outs of the company’s IP position. This will give them good understanding of the IP, and ensure intellectual assets are positioned correctly during the transaction process, and help you negotiate the best exit deal.

 

In the end IP is an integral part of any innovative business’s market value, and now is the time to consider building a robust IP position for exit. When the time comes to execute a merger, trade sale or IPO, having all the pieces in place will ensure businesses maximise their valuation and reach their full potential.

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