IP strategist: Maximising IP value and reducing risk in a corporate sale
Tech company owners hoping to sell their businesses must be able to tell a coherent and convincing story about their IP evolution. Buyers need to realistically assess the value potential and possible risks contained in their target’s IP portfolio
Technology companies tend to own very little outside of their intellectual property. Their investors and founders hope to exit by way of a trade sale at many times their original investment. However, at the time of an exit, many companies do not have a robust IP story; they are unprepared for due diligence and fail to articulate a clear IP strategy. On the buy side, acquirers often find it difficult to understand the IP risks involved in an acquisition. The results are failed deals, money left on the table and unnecessary risks incurred.
What can technology companies do better?
Technology company executive teams need to be well briefed and able to articulate the value and relevance of their IP assets. The onus is on the seller to maximise the company’s sale value. Just as selling a product for the best price requires that its virtues be described, the IP assets of a technology company need to be articulated as part of the value proposition.
Each company has a story, from inception to the present. It can be fascinating to learn how a piece of intellectual property was created – from identification to protection and exploitation. It can also give a buyer confidence that the intellectual property supports the product differentiation or growth story in which it is investing.
If a company sale is launched by a seller, it has time to organise a prospectus and plan presentations. But in cases where the buyer initiates a deal, the due diligence process can start very rapidly, meaning executives need to be up to speed at all times. In either case, the management needs to be confident in the role intellectual property can play in supporting its market position and maximising value. To achieve this, an IP strategy and the supporting processes need to be in place, understood, used and current.
The processes used by major corporations are often too onerous and expensive for small and medium-sized enterprises (SMEs), but the same principles apply. Innovation needs to be captured and protection sought in the most cost-effective way possible. The relationship between the company’s IP assets and those of its competitors needs to be documented; it can then be displayed in an IP dashboard, used to inform board meetings periodically and be ready for exit.
Know what buyers look for in a technology company
A purchase is rarely driven by intellectual property alone. In established companies, most buyers are interested in product sales, customers and territory; the metrics of the profit and loss account will drive the price paid. However, for start-ups and newer companies, the technology – and the intellectual property behind it – is a far more significant element and underpins the overall value. Hence, buyers must understand what intellectual property they are buying, why it is important and the risks and mitigation plan.
A checklist of things that buyers consider includes the following.
What am I buying?
A story best sets this out. How did the company get to where it is? What is owned? What is public and what is secret? Who knows what – who are the key people that must be retained?
What are the dependencies?
What licences are needed? Are they patent licences or software? What operating system is being used? If free, what obligations apply and how do they affect know-how/software secrecy strategy?
What do competitors have?
What is the competitive advantage in what you are buying and is the related intellectual property enough to allow the company to grow? Could competitors use their intellectual property to stop or disrupt sales or tax them to destroy profit margins? Does the company have patents that apply to others and could be licensed or held as counter-assertion collateral?
What is the IP plan?
What is there? What are the costs to prosecute/maintain now and in the future? Why is this the right plan? Could costs/scope be reduced and how much does this alter risk? Investors want to be sure that a company is on top of what it spends and the financial consequences of its plans.
How easy will it be to integrate the company?
Sometimes companies are acquired with a view to being managed as a standalone venture, but most buyers want to integrate their purchase in order to realise cost efficiencies. Either way, the buyer needs to identify the key people involved – the IP team will have unique knowledge of where the company’s inventive core lies.
Maximise value and reduce risk by knowing your IP story
Selling a company is a stressful and demanding process. Experience shows that intellectual property comes up quickly, but not always in the initial bid. Unless there is a coherent story and credibly documented plan in place, the price will be eroded as the buyer identifies and then plays on risk. The best deals are struck by confident executives who can answer questions and demonstrate a depth of knowledge. In these negotiations, intellectual property is an area where preparation can result in substantial rewards.