AJPark

What are intangible assets?

Intangible assets can include several value drivers.   Some examples of intangible value drivers include the different types of intellectual property (IP) such as patents, designs, trademarks (with their associated goodwill) and copyright, as well as contractual rights (including employee contracts), proprietary software, data populated systems, client data, know-how and trade secrets. This list is not exhaustive, and different business can have a wide variety of intangible value drivers.

Know what you’re buying!

However, in a business merger or acquisition, too often the buyer is in the dark about what they are paying a premium for.  A classic example was when Volkswagen bought the Rolls Royce car manufacturing business for £430 million. They had the main intention of acquiring the Rolls Royce name, and had no intentions (or use) for the manufacturing plant or employees, which they intended to let go. After the sale, they found that while they had acquired the rights to the Bentley name, they did not acquire the rights to the Rolls Royce name. These were held by a separate company, Rolls Royce Aerospace business!   Worse still, their rival BMW bought these rights from Rolls Royce Aerospace for £40 million—a tenth of the price!  (This is why, today, Volkswagen makes really nice Bentleys). 

This scenario could have been avoided by Volkswagen doing proper due diligence.  They should have asked for a list of the intangible property owned by the Rolls Royce car division and proof of ownership.  They should also have checked on ownership of the Rolls-Royce trademark.

Due diligence is a smart move

While a buyer can insist on such a due diligence list, it is also in the interests of the seller to be able to draw one up at short notice (or preferably to maintain a list throughout the lifespan of a business).   Having a list, as well as proof of ownership of the items on the list, allows a seller to see what the value drivers of their business are, and what they are paying for.   It adds substance to the sale price and reduces the general vagueness of the term ’goodwill’.

While buyers may focus on one important piece of IP (like a patent), having an up-to-date list also allows the buyer to see the bundle of associated rights that complements the main product or service.   Examples of this might be registered design rights associated with the same product, ownership of copyright in the design drawings for a product, or rights to a popular brand associated with the product or in a similar product field.

Keep a list of your intangible assets up-to-date

For good housekeeping, each of the items of intangible property should to be listed. For intellectual property, proof of ownership of rights should be available for inspection (for example assignment documents, patent certificates etc).  Copies and originals of contracts should be safely stored (since you never know when these could be required).  It’s good practice to keep the list up-to-date during the normal course of business.   Trying to get signatures of inventors, draftsmen and designers three years after the fact, and especially once employees have left the company, can be a nightmare!

Don’t forget trade secrets and confidential information

New owners will want to keep the business operating as successfully as it has been in the past (which is why they are buying it in the first place).  Another concern is that key employees can leave, leaving the new owner struggling to operate their new business efficiently. This scenario can be mitigated by having other intangible value drivers, such as manufacturing or other business processes or procedures (such as marketing, sales, design, etc) well documented. In many cases, these processes can be regarded as trade secrets or confidential information.   Employee knowledge is transferred to paper (or PC) and to ensure long-term access to this intangible information, and the seller is able to reassure the buyer continuity of the business with a minimum of takeover hiccups.  

Good housekeeping will pay in the long-run

When a buyer can see a list of intangibles and rights that they are buying, in black and white you have more chance of asking for a higher purchase than with the general promise of ’goodwill’. They also know that they are buying into a well managed business.

Also, when buyers can see the rights available to them, they will be able to better plan for the future use of those rights—sometimes in ways that they may not have otherwise considered. This can sweeten the deal even further for them.

Good housekeeping of your intangible assets will pay dividends in the long-run.   If you need help, ask an IP professional sooner rather than later.

An edited version of this article was published in Engineering News, May 2010

• 

  Mike Biagio

  Associate