Legal: Intellectual Property

July 6, 2017 No Comments
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Increasing Value For Today And Tomorrow

by Mark R. Privratsky

toc_columns50pxThe price someone will pay for an entire manufacturing business goes up when the intangible assets of the business present well. The state of the intellectual property owned by the company – which often is a main reason for the buyer’s interest – must be easy to understand. Business owners who have been proactive in managing these assets will prevent finding themselves facing, in the months leading up to sale, the realization that the exit value could have been significantly higher had some simple steps been taken in the years prior.

Owner-managed business owners eventually are asked the same questions by the advisors retained to sell that business:

  • “What patents, trademarks, and copyrights does the company own?”
  • “Identify any trade secrets and confidential information that make the company competitive.”
  • “Provide copies of all licenses under which the company has granted or been given rights to others’ intellectual property and software.”
  • “What policies and procedures pertain to data storage, backup, and recovery?”

There is usually not a drawer nearby from which the answers and related information may be pulled. The process requires digging, which means meetings with employees and other advisors, looking through current and old files, and simply trying to remember. The process seems all the more daunting the longer the company has existed.

Keeping track of the intangible assets along the way, however, allows for quick access to information for due diligence questions later. Moreover, having a clear understanding of the company’s intellectual property increases today’s value too, putting more money in the owners’ pockets. To get one’s arms around the issues, best practices include seeking answers to those future due diligence questions today.

Intellectual property exists in every company and in every deal. Its impact goes straight to the bottom line by enabling activity or providing exclusivity. Thus, the first question an owner should ask is, what intellectual property makes my company stand out in my industry? Once identified, ask whether the company holds good title to those assets. Further, inquire whether the intellectual property is valid and provides true exclusivity (i.e. might others be stopped from copying). Finally, does the company itself have the freedom to use the assets, and are they transferrable so another may use them in the future without someone else’s consent?

TYPES OF INTANGIBLE ASSETS
A manufacturing company’s intangible assets fall into various buckets:

  1. Patents may stop others from making or selling the inventions disclosed therein. They do not necessarily permit the owner to make his/her own invention, though. Patents also may be U.S. based or arise in other countries, and all require maintenance fees to keep from being abandoned. For issued patent assets, concentration should be on their remaining terms, how they relate to other patents and applications, and what their scope is as set forth in their claims. And applications that may become patents one day have value too, but “patent pending” provides no guarantee that a patent will ever issue.
  2. Copyrights are created when a work is made, and may be registered or not. Such intangible assets may exist in software code, user manuals, and catalog and website content. A critical question is whether the works in which the copyright rights exist were created by employees or independent contractors and, in turn, whether proper assignments of those rights has been executed.
  3. Trademark is a bucket into which every manufacturing company can include assets, too. The company’s name and the names of its products and services represent the goodwill the business has garnered because of its proven quality. Trademarks may be registered or not and exist in both state and federal contexts. Because they are used for domains and social media, securing related rights with internet-based registrations is also important.
  4. While patents disclose their intellectual property, trade secrets and confidential information are kept hidden by businesses. These may be documented (e.g., source code or profit margins), or they may take an even more intangible form as the owner’s or employees’ know-how. These assets retain their value as long as reasonable steps are taken to keep them secret. The value of processes, formulae, know-how, and other confidential information could last forever.

CONCLUSION
Although founded on an idea and few resources, the successful enterprises that result deserve to sell at the highest possible price. Identifying and protecting intangibles, building upon those sound assets, and keeping clear records assures value for today and tomorrow. The money earned along the way (and saved from lower professional fees at exit) will make the ongoing efforts more than worth it.pm_endmarkred-e1320337243152


 

MARK PRIVRATSKY is an attorney at Lindquist & Vennum, LLP. He may be reached at mprivratsky@lindquist.com or 612-371-3524.

Copyright © 2017 Minnesota Precision Manufacturing Association. For permission to use or reprint this article please contact Nancy Huddleston, publications manager for Precision Manufacturing Journal.

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