Intellectual property is a legal term which refers to intangible assets, such as patents, trademarks, and copyrights. Any established business will have at least some type of intellectual property, whether it be a trademark of their brand or copyright of their content.
Intellectual property is what makes a business worth buying because customers are already drawn to it. And since no other company has the legal right to use your intellectual property, this makes it quite valuable when you go to sell your company. Remember that intellectual property is different from physical assets, such as real estate, vehicles, machines, etc. While these assets are valuable too, intellectual property can be even more valuable if you’ve built your business around it.
For instance, if you’ve spent years successfully marketing and selling your products or services to consumers, then your brand name and product or service names are already familiar with your target customer base. If someone were to then purchase your company and intellectual property, they wouldn’t need to build any name recognition for the business because it is already there. They can just take over and let the customers come to them.
Consider the Value
As the seller of a business, you must consider the value of your intellectual property as you negotiate a sales price with the buyer. Don’t make the mistake of only considering the value of your physical assets. Intellectual assets are likely more valuable if your company has been around a long time.
Make sure you actually possess full legal rights to your intellectual property before you sell your business with it included. All your patents, trademarks, and copyrights need to be registered with the appropriate government and legal authorities. If another business or person can claim any amount of ownership to your intellectual property, then you need to get a release of ownership from them first. Otherwise, you won’t have the authority to sell their percentage of ownership.
There are three methods for valuing intellectual property. They are as follows:
- Cost Estimate – This is a simpler way to determine the value of your intellectual property. This method is more effective for newer businesses to use if their intellectual property is not too well established yet. Basically, you consider the cost of registering your trademarks, and patents with the government. If you hired any artists or copywriters to help you create your intellectual property, then the cost of their services is also factored into the value too.
- Market Estimate – This is where you do a comparison between your intellectual property and other intellectual property on the market that is similar in nature. This can be difficult to estimate because different companies have been around for longer than others. But if you analyze how buyers respond to your intellectual property versus similar ones from other companies, you’ll have an idea of how much yours is worth.
- Past/Future Estimate – This is the best method for estimating the value of intellectual property. You look at all the locations, products, and services where your trademarks, copyrights, and other intellectual property are being used. You look at the results and profits from their use. If past records show that your profits have grown because of this property, then you can estimate it to be highly valuable in the future.
Intellectual property may not always be worth including in the sale of your business. Many sellers like to keep legal ownership of their intellectual property and then just license the rights out to their buyer.
Either that or the seller could sell ownership of the intellectual property under the condition that the buyer must license it back to them. The exact deal that you negotiate with your buyer will depend on various factors about your business and the overall sales price that you set.
Video: Protecting intellectual property before selling your business | IIya Kazi of Mathys & Squire
Let’s suppose you go to sell your business with intellectual property included but you’re unable to get the sales price you want for it all. So, you remove the intellectual property from the deal and then lower the sales price. As a result, buyers start becoming more interested in purchasing your business.
When they inquire about the intellectual property, you offer to license it to them after they purchase the business. In return, the buyer agrees to pay a small licensing fee to you every month and/or a commission on their sales.
Reasons to Sell Intellectual Property
Trademarks and patents are costly to maintain. If you’ve been using this type of intellectual property in your business and never made much money from it, then you might be better off selling the property to a new buyer. There is no sense in paying to keep intellectual property which is not giving you any return on your investment.
Besides, if your intellectual property doesn’t have name recognition behind it, no buyer would want to license it anyway. You’d basically be stuck with property that has no use to you. But if you include it with the sale of your business, a buyer may have a plan to make the property more successful after they take over the business. Meanwhile, you’ll make back the money you spent to register and maintain the property.
On the other hand, your intellectual property may have customer loyalty and a huge customer following behind it. Now you’re probably thinking, why would I want to sell my intellectual property if it’s popular and profitable? Well, it really depends on your future plans.
Some business owners may want to profit from licensing their intellectual property to their buyer and earning a passive income from it. However, the sales price of your business will probably be less if you do this. To maximize the sales price, it is better to include all your profitable intellectual property in the purchase agreement.
Buyers are willing to pay huge amounts of money for businesses that can draw in customers with these assets. If you’re looking to purchase a new home or business and you need a lot of funds right away, then selling your intellectual property is a better idea.
Intellectual Property Transfer Process
Intellectual property can be transferred by either an Asset Purchase Agreement or Asset Assignment Agreement. A purchase agreement means you are selling the rights of the intellectual property to your buyer. An assignment agreement means you’re assigning your rights to the buyer. Each type of agreement is good to use in different circumstances.
Assignments usually have more provisions and stipulations which don’t necessarily mean transferring ownership. For instance, if you want to give your buyer temporary rights to your intellectual property for a certain amount of time, then an assignment agreement would be used. But if you just want to sell 100% ownership of the rights to the buyer, then a purchase agreement is used. It is best to consult with an attorney on which one to use.
Consult with a Legal Professional
There are a lot of legal aspects to intellectual property that most business owners don’t understand. Do not feel bad about this because intellectual property law is a legal practice of itself. There are business lawyers who specialize in this area of law, although there are not too many of them. They go through extensive legal training in intellectual property laws in order to better serve their clients. That is why you should seek out and consult with a business lawyer who is an intellectual property specialist. They’re the most qualified professional to advise you on how to go about selling or licensing your intellectual property during a business sale.