Protecting intellectual property when buying or selling a business

6th July, 2016

There are many reasons why a business may be sold and there are some important considerations to be made in that event.

For instance, a business owner may wish to retire, and the business sale may be expected to fund retirement. This is increasingly the case as many business owners from the baby boomer generation look at retirement in the next five years.

Alternatively, a business owner may wish to simply move on to another project, or other career.

The purchase or sale of a business involves numerous legal considerations. However, a key issue for both buyers and sellers (and lenders!) is whether the business has adequate intellectual property protection. Intellectual property is usually one of the factors that business brokers use to determine the value of a business.

The following are four common issues that buyers and sellers should be aware of:

1. Every business has IP

Every business has at least one intellectual property asset — its ‘brand’ (or ‘trade mark’).

The trade mark is a major component of business goodwill and value. It has often been described as ‘the title deed’ to the business. It should therefore be protected as diligently as any other asset.

A common misconception is that a business or company name protects the brand of a business. Registering a business name is a legal obligation. You can get punished if you don’t do it, but there are no rights granted to you for doing it.

Only a trade mark gives enforceable rights in a brand name. A trade mark can stop someone else using a similar brand name, business name, company name, or domain name.

A registered trade mark also provides a defence to infringement of other registered trade marks. It is therefore both a sword and a shield.

2. Do I really need to register the trade mark?

A trade mark can be registered or unregistered.

A registered trade mark is much more preferable because it gives stronger and more easily enforceable rights, and it is also published on an official government database.

An unregistered trade mark is much more difficult and expensive to enforce. It depends heavily on proving evidence of reputation. This means more lawyers doing more hours, and more cost!

Sometimes, businesses will have one core trade mark and other secondary trade marks (for example, for individual product lines). Each is a separate and potentially valuable asset and should be registered if possible.

3. Value must be perceived

Intellectual property is often not well understood because it is intangible. This means that the perceived value of IP can be diminished.

This can be countered with some simple steps. For instance, an intellectual property portfolio report can be prepared, outlining all properties in which IP may exist (trade marks, domain names, business names, business manuals and procedures, graphics, logos and more).

A portfolio report helps to convey that IP is real and valuable, and an essential asset in the sale of the business.

4. Once I sell, it won’t be my problem

This may be true. But without IP protection, you may be selling your business for less than its true value. It is important that intellectual property matters be discussed prior to the sale or purchase of a business.

From a seller’s perspective, offering a business for sale that has secure protection of its intellectual property (particularly its key brands) is likely to be much more attractive to potential buyers, and increase the sale price.

From the purchaser’s perspective, its rights to register or enforce a trade mark in future may depend on proving use of that trade mark in the past by the seller.

Business records, advertising materials and old invoices may therefore be crucial evidence, and should be obtained as part of the sale if possible. Importantly, a purchaser cannot always rely on the seller to provide assistance after the sale. The seller may be uncooperative, or they may have disposed of old records.

What should I do?

Prior to advertising the sale of a business, the seller should review:

  • Current level of protection of the business’s intellectual property assets;
  • Possible obstacles to protection and registration of intellectual property;
  • Options for protecting unregistered intellectual property.

Similarly, a potential purchaser of a business should be mindful of these issues when considering the attractiveness of a business, and its purchase price.