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Maximizing a Business Exit: The Importance of Documenting and Securing Intellectual Property

Maximize Business Value with Intellectual Property

The Importance of Documenting and Securing Intellectual Property

When I interview a new client, one of my first questions is “what do you ultimately want to do with the business?”   Very few people want to keep their business forever (for example, forgo retirement), and selling the business, hopefully for the maximum amount of profit, is the goal of most entrepreneurs.

When a business is about to be sold, the buyer asks a ton of questions in a process called due diligence.  This process is usually controlled by legal where the buyer asks pages and pages of questions which cover the business operations, financials, employment contracts, vendor contracts, assets owned, and the intellectual property held.  There are many reasons for the due diligence process, one being to collect evidence to decease the price of an original offer.

So, anticipating that there will most likely be a question: “Please list all intellectual property held, and provide all documentation of protection”, the answer cannot be “none” if any entrepreneur wants to maximize an exit.

What is IP?

Intellectual property (IP) is any work, creation or invention that comes from the creativity of the human mind.  By its very nature, IP covers many different industries and types of creations.

IP means different things to different people.  To an engineer or a biotechnologist, their emphasis is on inventions which are usually protected by patents.  To an author, an artist, or designers and computer coders, the focus on IP is generally on copyright or sometimes even trade secret law.  Marketers and business owners worry a lot about the brand which is usually protected by trademark (or also trade secret law).   In summary, any business person should be familiar with all types of IP and how they work together to provide a tightly knit sweater of protection.

Patent

Patents offer IP protection for inventions and is protected through filings at the United States Patent and Trademark Office (USPTO).  For example, if a business created a new type of stapler, they could prevent others from manufacturing that new stapler design if they get a patent. There are three types of patents:

  • Utility – This is the most common patent and covers any new invention and improvements on an invention.
  • Design – This patent protects the shape or ornamentation of a useful manufactured object.
  • Plant – This patent protects an inventor who has created a new type of plant life that cannot be found in an uncultivated state.

A utility or plant patents typically last 20 years from the date the application was filed while a design patent generally lasts 14 years.

Copyright

Copyright is actually a right provided in the United States Constitution and is overseen by the Library of Congress.  Copyright offers IP protection for original works such as books, music, film, and computer software. For example, if a business created a smartphone app, they may secure copyright protection for the computer code, images, and sounds/music. They may also get copyright protection for any instructional manuals they create as long as those works are original.

Copyright protection typically lasts for the life of the author plus 70 years.

Trademarks

A trademark (or service mark) can be secured at either a state level or Federal level.  It protects any word, phrase, symbol, or design that distinguishes the source of the goods/services of one business from another.  You can register a trademark and receive protection for your logo or taglines nationally. But you don’t need to register your mark to get trademark protection. Once you begin using your mark, you may receive protection in the geographical area where you do business.

Federal trademark registration lasts 10 years but can be renewed at 10 year intervals.

Trade Secrets

A trade secret is any process, device, procedure or other business information that allows a business to function and maintain an advantage over competitors. There is no way to officially register a trade secret in the way you would register a trademark, patent or copyright. But there are a few things a business can do to protect trade secrets.

  • Make an effort to keep the trade secret confidential.
  • Use non-disclosure agreements with employees who have access to the trade secret.
  • Limit public access to trade secrets.

When an employee discloses trade secrets without permission, the employer may sue for damages and injunctive relief….but it really needs to be a trade secret.  This is why the main way to keep trade secrets protected is to limit the number of people who have access to them.

When Does IP Protection Matter?

Protecting IP matters at all stages of a company’s growth. It primarily a) keeps away competitors and b) creates value in the company’s assets.

At the acquisition table, the buyer/acquirer places a monetary value on the intellectual property.  Obviously, if the intellectual property is not documented and protected, or holes can be poked through the protection through e.g. pointing out lack of formal registration or documentation, the sales price goes down, sometimes the potential acquirer even walks away.

In summary, most entrepreneurs spend a great deal of time and money creating goods or services that are perceived to be unique in the marketplace. The unique aspects are protected through intellectual property law which is usually much cheaper the earlier it is protected.  To not take advantage of this protection is not only not penny wise, but also pound foolish.

Strategy First

Good IP protection requires a strategy and good strategies (usually) require consultation with an intellectual property attorney who is experienced in building, valuing and protecting intellectual property portfolios.

EmergeCounsel offers a free initial consultation and is well versed and experienced in these matters.