Sale of Intellectual Property: Everything You Need to Know
The sale of intellectual property may involve just the IP or a business that owns various types of IP.3 min read
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
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.
- 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.
- 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.
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.