It’s a simple fact. The price a potential buyer will pay for a manufacturing business is higher when the intangible assets of the business present well. Business owners who have been proactive in managing and protecting their company’s intellectual property assets have an easier time demonstrating that those assets will continue to bear fruit after the transition. Furthermore, business owners who have been proactive in managing and leveraging their company’s intellectual property assets tend to have had more financial success along the way.
Manufacturers tend to be justifiably proud of the quality of the products they produce. Some of that quality is attributable to the capital equipment in which the company has invested. Other significant contributors to quality, though, include, for example: the unique processes utilized by company employees; the designs, plans and specifications for those products; and the proprietary knowledge the company has developed about the needs of its customers. Furthermore, manufacturing companies develop intellectual property in the specific ways in which they market, brand and sell their products. There are very few manufacturers who would be satisfied if they were to sell their businesses for book value. It’s the intangible assets, which often don’t appear on the manufacturer’s balance sheet, that drive successful transactions.
Perform Internal Audits
Intellectual property exists in every company and in every deal. Its impact goes straight to the bottom line by enabling activity or providing exclusivity. Thus, the first question an owner should ask is what intellectual property makes his or her company stand out in its industry? For purpose of this inquiry, “intellectual property” means more than rights that can be federally registered. It includes information, methods, systems and processes whose value lies in their not being generally available to a company’s competitors. Once that intellectual property is identified, the owner should investigate whether the company holds good title to the assets. Where possible or prudent, have the rights been registered? If not, are reasonable steps being taken to protect the assets. Focus should be directed to intellectual property that provides true exclusivity (i.e. where others could be stopped from copying or using the asset). In addition, owners will want to make sure that key intangible assets can be transferred to others without someone else’s consent. Finally, for strategic planning purposes, owners often explore whether there are any barriers to expansion by their company of technology or processes being employed. Could growth initiatives cause the company to start infringing intellectual property held by others?
Plan and Implement from the Results of Internal Audits
It goes without saying that internal audits are of little more than academic value if manufacturers don’t make active use of the information they uncover when conducting those audits. Understanding and leveraging a company’s intellectual property puts more money in its owners’ pockets during the life of the company. Furthermore, a company’s ability to develop successful business long-term strategies are interwoven with its ability to understand, enhance, protect and harvest intellectual property assets.
Preparing for Information Transfer and Due Diligence
A second good reason for undertaking regular internal intangible asset audits is to be prepared for transition events. In the short term, that may simply be change of key employees. In the longer term, it may be change of owners.
When it comes time to sell, owners of manufacturing businesses eventually are asked the same types of questions by prospective buyers and, consequently, by the advisors retained to help the owners sell their business. Example of those questions include: “What patents, trademarks, and copyrights does the Company own?”; “Identify any trade secrets and confidential information that make the Company competitive”; “Provide copies of all licenses under which the Company has granted or been given rights to others’ intellectual property and software”; and “What policies and procedures does the Company maintain for data storage, backup and recovery?” Most manufacturers don’t have a drawer from which the answers and related information can be easily pulled. The process requires digging, meetings with employees and other advisors, looking through current and old files, and simply trying to remember. The longer the company has existed, the more daunting the process. Proactive management of intangible assets along the way allows for quick access to information for due diligence questions later.
Assets That Can be Protected by Registrations
Manufacturing company’s intangible assets fall into various buckets. Patents are a type of intellectual property in which rights are granted by a governmental entity after the owner has gone through an application process. Applications that may become patents one day can have value, too. There are strict rules about how soon after an invention becomes publicly known that the application process must begin. Patent holders have the right to stop others from making or selling the inventions disclosed in the issued patent within the country that issued the patent. Enforcing patents can be expensive and there are often disputes over whether someone else’s technology infringes the relevant claims of the patent being enforced. However, there is clear value in holding issued patents, especially if a manufacturer’s patent portfolio is broad enough to deter others from trying to emulate products or methods that work well for the manufacturer.
Copyrights are another form of intellectual property that can be registered with a governmental office. Copyrights are created when a work is made. Registration grants the owner broader rights if others infringe the owner’s work. Examples of copyrighted material often created by manufacturers are software code, user manuals, catalog and website content, and marketing materials. A critical question to be asked when conducting internal audits is whether the works in which copyright rights exist were created by employees or independent contractors. If it’s the latter, a second question is whether proper assignments of those rights have been executed.
Trademarks are another key intellectual property asset that almost every manufacturing company possesses. The company’s name and the names of its products and services represent the goodwill the business has garnered because of its proven quality. Trademark rights are built through actual use. However, there are registration systems throughout the world that enable owners of trademarks to protect and enhance their worth. Securing related rights with Internet-based registrations, including domain names, is also important.
Assets That Must Be Protected Internally
In contrast to patents, which by definition publish the invention being protected, the value of trade secrets and confidential information depends on their being kept hidden by businesses. These assets may be documented (e.g., source code or profit margins), or they may take an even more intangible form as the owner’s or employees’ know-how. They retain their value as long as reasonable steps are taken to keep them secret. If properly protected and consistently used, the value of processes, formulae, know-how, and other confidential information could last forever. However that requires active coordination with human resources managers because reasonable steps to protect the assets necessarily means restricting disclosure or use by employees.
Manufacturers build great products and great companies. Obtaining full value for those companies is often dependent on being able to demonstrate that critical intangible assets can be successfully transferred to new owners. It makes good business sense to implement a program for continuously identifying, enhancing, protecting, planning, managing, and harvesting a manufacturer’s intellectual property.
Mark Privratsky is a partner at Lindquist & Vennum, LLP, who regularly counsels companies on a variety of intellectual property matters in both the transactional and litigation contexts. Mark may be reached at firstname.lastname@example.org or at (612) 371-3524.