Service oriented businesses that create intellectual property (IP), such as software, data, and applications, need to be nimble so they are ready to take advantage of unexpected opportunities. One important opportunity to anticipate is the sale of your business. Large service oriented businesses wishing to expand their underlying capabilities or client base could now be on the hunt for just what you do. Because such an offer could come at any time, will you be ready to exploit the opportunity advantageously?
At such a time, you will be faced with a variety of decisions and actions requiring a quick turn-around. This article poses a series of questions and identifies concrete steps that every business owner should incorporate into her business operations. Then, like the proverbial Boy Scout, you will “be prepared.”
1. Are You Ready for the Due Diligence Inquiries That the Buyer Will Be Make?
It goes without saying that as a seller, you will be confronted by a close examination of your organizational and operational documents by the potential buyer. Therefore, at least yearly, you should:
- Review and update your entity’s documents (enabling and owner related agreements) and keep them current.
- Maintain your business entity’s legal good standing in all jurisdictions in which you function.
- Verify licensure and other regulatory requirements.
- Review management and operational procedures, especially as they relate to your IP products.
- Confirm that NDAs, employment and contractor agreements assure your control over your IP.
Unfortunately, business owners frequently fail to conduct this type of annual self-examination. Perhaps surprisingly, a common oversight is the failure of a business to maintain its good standing in all the jurisdictions where it is organized and doing business. This lapse, along with the failure to have documents signed or to keep licenses current, can quickly derail what otherwise seems to be a marriage made in heaven.
2. If Some or All Of Your Business’ Assets Are Tied to the Good Will Associated With an Individual, What Steps Are You Taking Now to Allow for a Smooth Changing of the Guard?
From a seller’s point of view, it may not be what the founder wants to hear, but if others are not being groomed for a change in control, then the business’ value is likely to be diminished in the eyes of a potential suitor. Especially in a business where the key asset is “its people,” if this asset is not going to be preserved in a change of control, the buyer is going to move on. The necessary preparatory actions for a potential seller are to have the hard discussions, be willing to anticipate changes, have contractual obligations in place and be comfortable with those changes well before a potential buyer comes to call.
3. If Your Business Relies Heavily on Intellectual Property Assets, Do You Control What You Need?
Conduct an inventory of all of the intellectual property (IP) assets that your company uses. Know whether you IP is subject to copyright, trademark, patent, or trade secret laws and regulations not just in the United States, but in all the countries where you conduct business.
Not surprisingly, business owners understand the need to inventory and value their hard assets if, solely to have such listed and depreciated on tax returns. Conducting a full inventory of a business’ IP assets can be harder because it is not always clear who actually owns the assets. But it is of equal importance because those assets do add great value to your business’ bottom line.
The inventory should cover an assessment of what you have and close review of your documents to be sure they comport with your expectations of ownership and control. Once you have the inventory, periodically re-evaluate it to be sure all permissions are current and available for your continued use and exploitation of the IP.
Can you answer the following questions in the affirmative? If not, then you could be leaving money on the table.
- Are procedures in place to identify the ownership of the IP that your business uses?
- Are you living within the limits of any licenses to which you are a party?
- In the case of copyrighted works, trademarks, and patented or potentially patentable works, have you registered them?
- Are all IP registrations current?
- What steps are you taking to police your IP to prevent others from infringing upon it?
- Do your contracts with third parties include the IP protections you need?
- Are you complying with the IP related laws of relevant other countries?
4. Do You Have a Good Team of Consultants in Place Who Can Watch Your Back?
By employing a good team of advisors, you will have the necessary documents in place and you may be able to delegate some of the preparatory work outlined in this article. The obvious players are your corporate and IP lawyers and CPA. But your insurance agent and marketing specialist can be equally important advisors who can help you ask the hard questions and position your business in the most favorable light either to acquire or be acquired.
5. Do You Know What Your Business Is Worth?
Offers to be purchased can come from a variety of unexpected places. An insider may want to make a play for control or a larger firm may have identified your company as a strategic acquisition. Similarly, you may conclude that it is important to expand. Knowing what your business is worth will be helpful in evaluating an offer to buy you or in obtaining financing for an internal expansion.
Therefore, regularly analyze the value of your assets. Your CPA’s reports and even feedback from your banker should give you a good idea of the “fair market value” of your business as a whole and its various assets.
6. Are the Business’ Assets Transferable?
For valuable assets such as your IP and commercial leases and licenses, it is important to know whether they are transferable or assignable. A periodic review should answer questions such as: whether restrictions exist on the transferability of licenses; whether a new owner can use the software or data on which you rely; whether your commercial lease can be assigned in connection with a third-party acquisition. Going forward, a word of advice: when negotiating new deals, try to avoid restrictions on your ability to transfer assets.
Answering these questions should go a long way in helping you be ready should “the call” come from a potential buyer. As with anything worthwhile, you need to take the time and make the investment in advance to have your business ready to respond with agility to whatever opportunities come along, including being bought.