Key Takeaways

  • An intellectual property asset sale can involve copyrights, trademarks, patents, and trade secrets, each with specific legal requirements.
  • Preparing for sale involves verifying ownership, registration, and ensuring clean title through assignments and documentation.
  • IP valuation considers market value, potential revenue, exclusivity, and litigation risk.
  • Tax implications vary based on IP type and sale structure (e.g., asset vs. stock sale).
  • Due diligence is critical to avoid legal pitfalls, such as unclear ownership or licensing issues.

The sale of intellectual property may involve just the IP or a business that owns various types of IP. There are sometimes hidden IP that business owners must be aware of to facilitate a smooth sale.

Selling a Business With IP assets

When IP owners properly protect this property, it increases its value. Before going to market, savvy sellers increase their IP assets' legal protections and quality to at least a minimum base level of best practice. They should tackle this at least six to 12 months before trying to sell.

Best practice includes using up-to-date IP registrations and documentation. Using lower levels of protection can lead to buyers and their advisers discounting the IP's value.

To maximize IP value, an owner should prepare the following:

  • Business documentation
  • Intellectual capital register
  • IP registration or codification

Valuing Intellectual Property Assets

Before entering into an intellectual property asset sale, it's crucial to assess the fair value of the IP. Valuation helps both parties agree on price and can be influenced by:

  • The type of IP (e.g., patent, copyright, trademark, trade secret)
  • Its potential to generate future income or licensing fees
  • Existing market comparables or similar IP sales
  • Duration of protection (e.g., patent life, trademark registration period)
  • Whether exclusivity can be legally enforced
  • Any ongoing or potential litigation risks

Engaging an IP valuation expert or using established valuation methodologies—such as the income approach, market approach, or cost approach—can help support pricing and negotiation.

Intellectual Property Issues in a Business Sale

Selling a business can cause a variety of emotions in an owner, including joy or stress. When a business has “hidden” IP, it can be a hassle, but it doesn't have to be this way.

A lot of business owners don't think their business has any IP if they haven't registered a trademark or copyright or obtained a patent. They may not realize that trade secrets, domain names, and their special know-how are also forms of valuable IP.

In addition, the following constitute valuable IP:

  • Third-party licenses, such as Microsoft Office
  • IT maintenance contracts
  • Web-hosting contracts

It's important to consider and properly handle these items in a business sale. Failing to do so can result in problems for the seller.

Consider this case study: A business owner, Mary, retained an independent consultant, Frank, to create a copyrightable work. Mary didn't register the work, however, so the records are unclear regarding the copyright's authorship or ownership. Over the years, one of Mary's employees updated the work, as required. Mary didn't secure an assignment from Frank, who she can no longer find.

Now, neither Mary nor her business owns the entire copyright of the updated work. She had a potential buyer for her business, but due to this muddy copyright issue, the buyer withdrew his offer.

There are two lessons to take away from this.

  1. The need for business owners to register their copyrights. This makes a future sale of the business easier since its IP is readily identified. Without holding the necessary rights to critical material, a buyer has cause to back out of a deal or pay a significantly reduced price.
  2. The need to obtain an assignment from all independent contractors that any work they do for a business belongs to the business.

If the independent contractor owns any part of the business's IP, the business owner has to get permission from the contractor to sell it. Otherwise, the owner has to accept a lower price or risk the buyer walking away.

This, and other cases like it, illustrate the need for business owners to fully understand their company's IP component before trying to sell their businesses. In today's world, owners must be aware of IP concerns, even those who aren't in the business of intellectual property.

Third-party licenses are often overlooked as IP, so sellers may not disclose them as part of a sale. In addition, a lot of businesses don't have the correct number of licenses to match the number of employees. At a minimum, if a buyer discovers that a company doesn't have the right number of licenses, he may demand to pay a lower price for the business. He could also claim breach of contract if he discovers this issue later.

More troubling is that the Business Software Alliance polices license purchases. The BSA could file a claim against the business for failing to purchase the appropriate number of third-party licenses and impose punitive damages for these violations, even well after the violations have been mitigated. If there's only a small number of missing licenses, the risk is relatively low, but the more unauthorized licenses there are, the greater the risk.

Business owners should practice good intellectual property housekeeping to prevent problems if they ever decide to sell their business. Knowing the ins and outs of their IP can lead to a quicker, less stressful sale.

Tax Considerations in an Intellectual Property Asset Sale

Tax treatment varies depending on the type of IP and sale structure. Some key considerations include:

  • Capital gains vs. ordinary income: The seller's tax rate may differ based on how the IP was developed and held.
  • Self-created intangibles: Under IRC Section 1221(a)(3), self-created copyrights or trademarks may not qualify for capital gains treatment.
  • Amortization and depreciation recapture: Buyers may be able to amortize the cost of acquired IP, while sellers may face depreciation recapture for previously deducted amounts.
  • State tax implications: Multistate businesses may have to allocate gain across jurisdictions depending on where IP was used.

Consulting a tax professional during the transaction planning phase is strongly advised to avoid unexpected liabilities.

Preparing IP for Sale: Legal and Practical Steps

A smooth IP asset transfer requires due diligence and proactive legal preparation. Sellers should:

  • Verify ownership: Confirm that the IP is owned by the entity selling it, not an individual or third party.
  • Ensure registration is up to date: For patents, trademarks, and copyrights, registrations should be active and reflect the correct owner.
  • Secure assignments: Any contributions from employees or contractors must be assigned in writing to the business.
  • Review encumbrances: Ensure no existing liens, licenses, or disputes encumber the asset.
  • Prepare documentation: This includes assignment agreements, registration certificates, and records of use (for trademarks).

Clear records streamline negotiations and reduce the risk of post-sale disputes.

Structuring the Intellectual Property Asset Sale

An intellectual property asset sale can be structured in multiple ways, depending on business needs, tax strategy, and buyer preferences. Common structures include:

  • Outright sale: Full transfer of IP ownership to the buyer.
  • Assignment: Used for registered IP, such as patents and trademarks. Must be in writing and often recorded with the USPTO or relevant agency.
  • Exclusive license: Gives the buyer full rights to use the IP for a defined scope and time without transferring ownership.
  • Non-exclusive license: Permits the buyer to use the IP while allowing the seller to retain or license it to others.

The structure impacts legal obligations, future use restrictions, and tax treatment, so careful planning is essential.

Frequently Asked Questions

  1. What types of intellectual property can be sold?
    You can sell copyrights, patents, trademarks, and trade secrets. Each type has its own legal requirements and transfer process.
  2. Do I need to register intellectual property before selling it?
    While not always required, registration strengthens your ownership claim and makes the sale process more straightforward, especially for trademarks and copyrights.
  3. Can I sell just the IP without selling my entire business?
    Yes, you can sell individual IP assets separately from the business, provided you have clear ownership and no conflicting agreements.
  4. How do I ensure legal ownership of the IP before the sale?
    Ensure all contributors (employees, contractors) have signed assignment agreements and that your business entity—not individuals—owns the rights.
  5. What happens if the buyer finds a licensing or ownership issue after purchase?
    This could lead to legal disputes or breach-of-contract claims. Proper due diligence and legal review before the sale can help prevent such issues.

If you need help with the sale of 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.