Intellectual Property (IP) issues wield substantial influence over the valuation of a target company. In the dynamic landscape of modern business, safeguarding patents, trademarks, and copyrights can significantly affect a company’s worth. This discussion explores the intricate interplay between IP and company valuation, shedding light on its critical importance.
Among the many assets that a company may possess, particular attention must be paid to its intangible assets, such as intellectual property rights. During due diligence process, the parties should pay attention on valuation of these assets to determine a company’s value. Their valuation must consider several factors to be as realistic as possible in order to make a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential.
1. The various intellectual property assets
Trivially speaking, the more a company protects its commercial aspects by registering its rights, the more it is able to differentiate itself from the rest of its competitors.
The wide range of protection offered by intellectual property law thus covers an enormous number of aspects of a company’s economic life, and in particular its relations with its customers and competitors:
- Trademarks help to create a graphic identity that is unique to the company and that customers can identify with;
- Industrial designs or layout-designs will also help build the company’s commercial identity, ensuring that the external graphic aspects of a product (its combinations of shapes, curves, colors, and patterns) can be properly linked to the company;
- Patents, used in particular to protect inventions or industrial processes or methods, provide a monopoly on the intrinsic characteristics of a product (its internal functioning), or on the processes leading to its manufacture: patents represent the most significant technical asset;
- Copyright is also a determining factor in a company’s potential, since it generally applies to all types of creation (and represents an effective subsidiary protection to any other special protection), and can particularly concern computer programs, databases and, more generally, any artistic creation;
- Trade secrets are often overlooked as intangible assets, yet they represent an important corporate asset, especially when they are subject to preventive measures. They may be information obtained from activities of financial or intellectual investment, which has not yet been disclosed and which can be used in business, such as industrial recipes, processes, or confidential sources of supply;
- Finally, in a very specific market, plant varieties also represent a sine qua non requirement for the takeover or perpetuation of a market based on the sale of seeds for sowing or seedlings for agricultural use.
2. Estimate intellectual property assets
The mere existence of these rights is not enough to value them: these assets must be observed with regard to their real value, which implies paying particular attention to certain points.
These rights must indeed be the subject of a thorough examination to assess them at best and avoid certain unpleasant surprises.
Ensure that the company owns the rights
This may seem obvious but ensuring that the evaluated company is the owner of the intellectual property rights it seeks to value is a necessary step.
Indeed, and particularly in large corporate groups, it sometimes happens that intellectual property rights are wholly owned by the parent company, which then concedes licenses of use to its subsidiaries. In this specific case, you will not become the owner of the rights by absorbing a subsidiary, but simply a new licensee, whose authorization may in principle be revoked.
Therefore, ensure that an agreement is found to secure these rights (whether granted to the company you are evaluating, or their estimate is reviewed).
Moreover, it may also happen that some intellectual property rights are jointly owned by several companies or more simply that these rights have been granted under license: This necessarily leads to an off-discount of these rights, since the decision-making power is not only in the hands of the assessed company.
Ensure that intellectual property rights are valid on the valuation date
A registration document or a certificate of registration does not always presume the validity of the intellectual property rights held by the company.
Although in practice there are very few risks, it is recommended at least to check whether these rights do not infringe certain conditions of public policy in the concerned country (violations of morals, political values of the State, and others). Particular attention must therefore be paid to foreign protection titles.
Analyze the lifespan of these rights
Apart from trademark rights, which can be renewed indeterminately and therefore offers eternal protection, intellectual property rights will one day fall into the public domain.
This step is crucial for a company, since in practice it loses its monopoly of exploitation on a determined asset. This is particularly the case for patents, as well as industrial designs, whose lifespan is relatively limited to stimulate innovation and creation.
Considering what precedes, an intellectual property right asset will necessarily have less value if it is transferred while it is ‘end-of-life’.
Ensure that the necessary steps and diligences have been taken for their conservation
This remark concerns rights whose survival depends on their legal renewal and the payment of the charges necessary for their preservation in the official registers.
For example, the validity term of a trademark registration in Vietnam is ten years from the date of filing and can be renewed each time for ten years unlimitedly. A request for trademark renewal is required to be submitted to IP Vietnam within 6 months prior to the expiry date of the trademark registration.
A design, which is protected for 15 years counted from the filling date when priority is claimed, can also be renewed 2 times for a duration of 5 years/time.
Concerning patents, an annuity must be paid at each anniversary date of the issue of the certificate, the amount of which varies according to the number of claims.
If an agreement is reached for the sale of the company’s assets, it is therefore necessary to ensure that the renewal formalities have been followed and that none of these titles is in the process of forfeiture.
Finally, in the case of exclusive rights based on confidentiality (trade secrets, industrial know-how), it is important to observe all the measures taken by the owner to ensure that these assets are properly preserved, such as the regular signing of non-disclosure agreements in relations with subcontractors and employees directly involved.
Prevent the risk of cancellation of a trademark for lack of use
As regards trademarks in particular, additional attention must be paid to these titles.
For maintaining a registration, though, a trademark owner or its licensee must use the mark or risk cancellation for non-use. The IP Law stipulates that if a mark has not been used by its owner or a licensee without justifiable reasons for five consecutive years prior to a request for cancellation, except where the use is commenced or resumed at least three months before the request, the registration is vulnerable to cancellation.
Consequently, it is crucial to assess the state of use of the mark in order to identify, in its field of protection, its commercial aspects that may incur the cancellation.
This verification shall include ensuring that the mark is properly used, in its application aspect or a form that does not alter its distinctiveness, for the categories of goods and services for which it has been registered. This examination makes it possible to estimate the transfer price more precisely.
Verify that these rights are free from any legal claim
In evaluating the intellectual property assets of the company, it is essential to determine whether the company peacefully enjoys its rights, or whether these rights are being contested by third parties.
It is not always easy to detect the existence of proceedings or pre-litigation disputes, given their confidential nature. However, intending to purchase a company, it is important to include clauses in the transfer of assets that allow the seller to be held liable in the event of litigation proceedings brought by a third party.
If one of the rights held by the company is disputed, it is necessary to assess the seriousness of these disputes to estimate the chances of success of the action. In view of the above, the intrinsic value of the contested right may be revised.
In conclusion, the value of IP assets will affect the value of M&A transactions. All the intellectual property rights held by a company that is to be valued represent, if not passive intangible assets, the company’s future potential. Therefore, businesses need to pay attention to the notes we have listed above to ensure that the legal review and valuation of the target company are carried out effectively, honestly and to avoid risks in the M&A transaction process.