Key Takeaways

  • Understanding Intellectual Property (IP): IP includes trademarks, copyrights, patents, and trade secrets, all of which can be bought or sold.
  • Valuation of IP: The value of IP assets should be carefully assessed, considering both financial and strategic implications.
  • Legal Due Diligence: A thorough review of IP rights, contracts, and potential legal risks is essential before purchase.
  • Transfer Process: The acquisition process involves contracts, assignments, and regulatory filings to ensure a valid transfer of ownership.
  • Common Pitfalls: Risks include unclear ownership, pending litigation, and improper valuation of IP.
  • Alternative Ways to Acquire IP: Licensing, joint ventures, and mergers offer alternative methods to gain access to valuable IP assets.
  • UpCounsel Assistance: Legal professionals can assist in IP acquisition, ensuring compliance with all legal and contractual requirements.

How to Buy Intellectual Property

Intellectual property may either be owned by a person or by a company. Although most companies choose to retain their own creations, some own IP with the intention of selling it within the scope of the law. There are instances when a person may want to sell the IP instead of keeping it.

There are many forms of intellectual property, including:

  • Music labels
  • Recordings
  • Software
  • Movies
  • Chips
  • Artwork
  • Inventions
  • Discoveries

It is clear to see that there are many different areas of IP available.

You may be wondering when it is beneficial to sell intellectual property. Not all people have the means to implement something they have created. Instead, they have to turn to someone else to help. For instance, if a person invents a tool that is unique but does not have the money to produce it, they would have to turn to someone who does have the means to get it into production. The inventor of the tool would be able to see the materialization of their tool by locating a company that is willing and able to take the idea to market. The company could pay a sum of money for the idea to obtain legal rights through a patent sought in the name of the company.

There are times when a person has written a book or song and is not able to publish the work themselves. This is a case when the owner of the IP can sell it to someone else. The same can be said for photographs.

Understanding Different Types of Intellectual Property Transactions

When considering how to buy intellectual property, it's essential to understand the different types of transactions that can take place:

  1. Outright Purchase: The buyer obtains full ownership rights, which may include copyrights, trademarks, patents, or trade secrets. This is common when acquiring an entire business or specific IP assets.
  2. Licensing Agreements: Instead of purchasing IP outright, companies can obtain a license to use intellectual property while the original owner retains ownership.
  3. Assignments: A legal transfer of ownership rights from the original owner to the buyer, often requiring formal documentation and registration.
  4. Joint Ventures and Partnerships: Two or more entities share ownership and rights to intellectual property, often in exchange for shared profits and investment in R&D.
  5. Mergers & Acquisitions: Businesses may acquire another company to gain access to its intellectual property portfolio.

Understanding these options can help buyers choose the most suitable approach based on their business goals and financial strategy.

IP Issues Arising When Buying or Selling a Business

The valuation of intangible objects like IP in accordance with the value of the organization has been on the rise for years. New surveys indicate that for many organizations, the value of their IP along with other intangible items has begun to exceed the value of their hard assets such as plants, machines, and buildings.

From the view of a business owner who plans on selling a business, there are some key issues including the following:

  • Identification of intellectual property: In many cases, IP is commonly overlooked and unknown to vendors as it is not recognized as intellectual property. This often includes the confidential processes and methods used by the employees. Other times, licensed intellectual property is overlooked because it isn’t owned by the business, but the license is an intellectual property asset.
  • Registration of an unregistered intellectual property: In the cases where intellectual property is identified and is able to be registered, such as a certain color scheme used by a business or the name of a product, the intellectual property needs to be registered.
  • Recording intellectual property: IP needs to be recorded in a schedule that is ready to access and to map against other products and services provided by the business.
  • Valuing intellectual property: There are different ways to approach valuing intellectual property. Some are more appropriate than others. In general, the proprietor of the intellectual property would like to value the IP to the income that it generates.

The identification and the valuation of IP used in a company before its sale has many positive effects. First, it lessens the chance that any issues will be discovered while doing the due diligence that could alter the sale. Second, there is a sense of comfort that is derived by the buyer that sees that the processes have been written down and deemed confidential, which reduces the risk that comes when employees leave the business. Third, through the proper valuation of IP, the sale price can be better justified.

Conducting Intellectual Property Due Diligence

Before purchasing intellectual property, conducting IP due diligence is critical. This process helps buyers assess the quality, enforceability, and ownership of the IP assets they seek to acquire. Key aspects of due diligence include:

  • Ownership Verification: Ensure that the seller has a clear title to the IP and no disputes exist regarding ownership.
  • Registration and Documentation: Verify that patents, trademarks, and copyrights are properly registered and up to date.
  • Legal Risks and Liabilities: Investigate whether the IP is subject to litigation, infringement claims, or licensing restrictions.
  • Scope of Rights: Determine whether the rights being transferred include global protections or are limited to specific jurisdictions.
  • Contractual Obligations: Review existing licensing agreements, employee contracts, and third-party agreements that may affect the use of the IP.

A thorough due diligence review mitigates risks and ensures the buyer receives full, enforceable rights to the IP they purchase.

Ownership of and Right to Use the IP

One of the first issues, and often the most important component when reviewing the IP rights of a target company, is determining that it owns or has a license for any key IP and technology it uses.

This will involve the review of the company’s registered IP ownership records and looking at any intellectual property or tech-related agreements to make sure that the company has the right to use the IP henceforth. It is also important to find any broadly represented ownership or warranties related to ownership of the IP in the purchase and sales agreement.

Making sure that the company is legally allowed to use the IP and any technology is one aspect of dealing with IP when you purchase a business.

You also need to ensure the company has not given the rights away and still has the IP and technology before closing.

How to Ensure a Smooth Transfer of Intellectual Property Rights

Once a deal is finalized, ensuring a smooth transfer of intellectual property rights is essential. Key steps include:

  • Drafting an IP Transfer Agreement: A legally binding document outlining the terms of the sale, warranties, and representations of ownership.
  • Filing Official Documents: Some IP rights, such as patents and trademarks, must be formally transferred through government agencies like the USPTO.
  • Notifying Third Parties: If the IP is subject to existing licensing agreements, relevant parties must be informed of the change in ownership.
  • Updating Business Records: The new owner should update records, contracts, and branding materials to reflect the change.
  • Implementing Security Measures: Ensure that proprietary trade secrets or software are securely transferred without risk of data breaches.

By following these steps, buyers can fully secure their intellectual property rights and prevent disputes after the transaction.

Common Risks When Buying Intellectual Property

Buyers should be aware of potential risks when purchasing IP assets. These include:

  • Unclear Ownership: IP rights may be disputed or shared among multiple parties, complicating the transfer process.
  • Legal Challenges: Pending lawsuits or infringement claims can reduce the value of IP and pose financial risks.
  • Expiration of Rights: Some IP assets, like patents and copyrights, have expiration dates that may impact their long-term value.
  • Lack of Proper Documentation: Incomplete or missing registration records can result in unenforceable rights.
  • Contractual Restrictions: Some IP may be subject to licensing agreements or territorial limitations that restrict its use.

By identifying these risks in advance, buyers can negotiate terms that minimize exposure and ensure a successful transaction.

Understanding IP Valuation Methods

Determining the value of intellectual property is crucial before finalizing a purchase. Several valuation methods can be used:

  1. Market-Based Valuation: Compares the IP asset to similar intellectual properties that have been sold in the market.
  2. Cost-Based Valuation: Estimates the cost required to create or replace the IP asset. This includes R&D expenses, legal fees, and production costs.
  3. Income-Based Valuation: Calculates the present value of future earnings expected from the IP, including licensing revenue and sales growth.
  4. Relief from Royalty Method: Determines the value by estimating the hypothetical royalties that would be paid if the IP were licensed instead of owned.

Proper valuation helps buyers negotiate fair terms and avoid overpaying for IP assets that may not generate the expected return on investment.

Frequently Asked Questions

  1. What is the first step when buying intellectual property?
    The first step is identifying the type of IP you want to acquire and conducting due diligence to verify ownership, legal standing, and potential risks.
  2. How can I determine the value of an intellectual property asset?
    IP valuation can be done using market comparisons, cost-based estimation, income projection, or the relief from royalty method.
  3. Can I buy intellectual property without an attorney?
    While it is possible, hiring an attorney ensures compliance with legal requirements, protects against risks, and facilitates a smooth transfer process.
  4. Are there alternatives to buying intellectual property?
    Yes, alternatives include licensing, joint ventures, and acquiring businesses that own valuable IP instead of purchasing it outright.
  5. How do I register my newly acquired intellectual property?
    After purchase, you must file transfer documents with relevant government agencies (e.g., USPTO for trademarks and patents) to legally record the change in ownership.
     

If you need help with buying intellectual property, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.