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Buying or selling a business? Handle your IP assets with care

published in McAfee & Taft tIPsheet | September 1, 2013

By Jeremy M. Black

Think about this: What is the value of a technology company without its patents? Or a soft drink bottler without its trademarks? Or a restaurant chain without its secret recipes?

These days, the embedded value of increasingly more companies is heavily dependent on its trademarks, patents, trade secrets, and other intellectual property assets. Whether this is a product of the ongoing technological “arms race,” the business dictum of “faster, better, cheaper,” or the result of decades of marketing to build customer loyalty, one thing is clear: If you are buying or selling a business or entering into any other type of transaction that involves intellectual property, you must ensure the necessary due diligence is completed in order to guarantee the transaction’s goals are realized and both parties walk away from the table excited about the future.

Central to any buy-sell transaction is the question of who actually owns the intellectual property. Often, the record ownership of the intellectual property is held in the name of the owner or a key employee instead of the company. Patents, for example, must be filed initially in the name of the individual inventor(s). As transactions are often structured as the sale of stock instead of assets for tax efficiency, regulatory necessity, or other reasons, the record owner of the intellectual property is very important as the stock transfer will not necessarily result in the transfer of the intellectual property if it is not owned by the company.

If you’re buying a business, you will want to ensure that the necessary intellectual property assets are included in the purchase agreement in order to increase the odds of the continued success of the company. This will require the parties to negotiate the necessary assignments, releases, licenses, etc., as the failure to do so could result in a costly interruption of the post-closing business or a litigious dispute between the buyer and seller over the ownership of the intellectual property.

If you’re selling a business, you will want to ensure the intellectual property assets are structured so as to return maximum value. Depending on all of the facts and circumstances surrounding the intellectual property, if you are the owner of record of the intellectual property, it may make the most sense (and the buyer may require) that you assign the intellectual property to the company or directly to the buyer as part of closing. However, it may also be worth pursuing an arrangement whereby you enter into a license agreement with the company as part of the transaction if the buyer does not require the record ownership to be included in the transaction. The terms of the license agreement could be negotiated as exclusive or non-exclusive and either fee-based or royalty-based. The license agreement may allow the buyer to still achieve their goals but provide the seller with the flexibility to potentially capture more value through additional licenses (if non-exclusive) or additional upside potential (if royalty-based). There may also be reasons to utilize a license instead of an assignment in order to maintain a relationship with the seller as one with specific technical knowledge needed to guarantee the success of the business.

As each transaction is unique, it is important to have the appropriate experts on your transaction team to increase the likelihood of having a successful transaction. Whether you are a buyer or a seller, you are strongly encouraged to talk to your attorney early in the process in order to discuss the various options that may be available to you.