How to acquire IP from another company

You acquire IP to exploit it. If you think it’s worth it and that you can get benefit out of owning the IP, then acquire IP. If it’s an exercise in vanity, then forget about it.

For that reason, valuation of IP is important. Just because you can acquire IP doesn’t always mean that you should.

There are companies that are desperate for cash. They won’t mind if you acquire IP from them. Your acquisition is a great help to them.

Because a cash strapped company needs to raise funds as soon as possible.

Because the directors may be worried about getting sued for their business debts.

And because when the company is wound up, and its assets are sold, the IP may be sold at a much lower price than your offer.

Like my pastor once said, you never know if the person who knocks at your door is an angel in disguise.

Some companies appear prosperous, but a company search could reveal that it is dormant, without any returns. Perhaps they lodged their accounts for the past year — a loss.

Perhaps their business model doesn’t work well in the tanking economy.

Perhaps they have shareholder tussles, and the owners just want to wind it up and move on.

Perhaps they have the income tax department breathing down their necks.

It doesn’t matter what the company looks like.

It matters what their IP portfolio looks like.

You could look for these sort of things. When you find them — acquire IP (we can help).

These take the form of a trademark, or a business name. With it comes goodwill, just not the type they tell you about at Christmas. Instead, it’s business goodwill, i.e. brand recognition and a bunch of loyal customers who look at the brand and their eyes mist over, and they heave a happy sigh as they recall the brand from their childhood days.

Brands can be transferred to a new owner, without needing to take over the company. Or a brand could be licensed out across continents, to big players who want to experiment with something small and cosy.

The concept of the brand came from farmers who heated up pieces of metal and placed the white-hot pieces on their cows and cattle. That way their cows and cattle (and sheep, too, perhaps) could be identified. Law enforcement officers also branded convicts in the same way so that innocent folk would be able to identify wrongdoers. In old Japan for example, convicts were tattooed.

So take a look at the brand of the company and decide whether it’s something that you could reset and reboot from scratch. You would get all their goodwill with none of their liabilities. In case you get sued, calmly point out that the owner of the brand was so-and-so, and not you.

These are similar to brands, but different in some way. It’s like this. Think of Nestle, the food company. They own a bunch of different product lines that include Maggi, Milo, Nescafe, Dolce Vita, and so on and so forth. Nestle is the brand. Maggi, Milo, Nescafe, etc. are trade marks within their portfolio. Each of these trade marks is its own brand, but a brand is something of a persona that is built up through “brand recognition”. This means that the previous owner of a trade mark must have invested heaps of money into making the trade mark popular. When that happened, it became a brand. Otherwise, it was just another trade mark.

Take a look at the register of trade marks, and you’ll see all sorts of trade marks that never made it to market. You might feel astonished, so let me explain. Some entrepreneurs hatch a business idea and decide that they want to use a certain trade mark or service mark. To prevent others from using similar trade marks, they register a trade mark first. If the business idea takes off, the trade mark becomes their brand. If not, it’s left to linger in the corner and gather dust, until it expires.

Even so, expired trade marks can be revived by late renewal. It might have value to you, which others might not see. After all, beauty is in the eye of the beholder.

These are absolute bars to others producing the same item, using the same technology, but only for 20 years from the date of filing. If the patents have been passed, and published, then they are in force. In that case, if you buy these patents, you can become a manufacturer of the item that has been patented. Or you could license it to a manufacturer who wants to manufacture it, without threat of competitors. Or if you are really sneaky, you could become a patent troll and threaten all those who manufacture things that infringe your patent (or so you would claim).

If you are benevolent and generous, you could harvest these patents into a patent pool and open it up to the industry, so that they might build on top of it without threat of litigation. Think of the QR code. Think of Linux. Think of how much fame the IP owners have gotten, thanks to their role as catalysts of innovation. That fame might be worth more than the patent.

Patents could be worth a lot, and they could be worth nothing. A patented product which has become popular in the marketplace is worth a lot. Manufacturers would want to license the patent. But a patented product that is so diametrically different from anything in the market and is perceived as too weird for use, is of no use to manufacturers who do not want to educate the market. Because educating the market takes a long time, a patent licensee might not benefit from the patent. It’d be more logical to wait for the patent to expire and then start exploiting the patent.

Like patents, these are bars to others producing the same design. But since it’s design, and designers are good at imagining workarounds, it’s very possible that someone could copy the feel of the design without copying it 100%. Nevertheless, acquiring an industrial design could be a good thing if the product is doing well in the market. You would not want to copy someone else’s design and suddenly find that the product is doing very well. You would have nightmares that the original design owner might one day sue you. And of course, all business owners want to avoid being sued, or having to sue, but if you really had to choose, you’d be better off suing than being sued.

These may consist of drawings, writings, films, songs, jingles, and the like. They are a part of the persona of the company, and have value due to their long life. Once the TPPA required amendments kick in, copyrights will be for the life of the author plus seventy years. If you acquire that, you have a long, long time to exploit the copyright. Think of Michael Jackson and the Beatles’ catalogue. Think of the Walt Disney cartoons. Think of Philip K Dick and how he died poor, but his books became blockbuster movies. You could pick up copyrighted works and turn them into something else tomorrow.

These things are rather tricky. Many things are secret, even in the course of business. We don’t usually blare to the public whatever the board of directors has decided or is considering. But certain things become very valuable. Think of the Coca-Cola recipe. Think of the Famous Amos cookies. Their recipe is a trade secret. Even though it’s only food, housewives around the world who tinker in their kitchen would decline to conduct experiments to break the recipe. You can never be too sure whether it’s the right recipe or not, and with food, different combinations might produce the same result.

A trade secret is worth nothing once it is divulged to the public. That’s why there is a secret industry known as industry espionage. Agents of your competitors who masquerade as interns and attachment students come into your company and try to learn your secrets. That’s no different from you sending people to work in a company with a trade secret. The trade secret is worthless if it cannot be exploited. Or it might also be that they haven’t learned how to exploit it yet. If you’ve ever watched the Korean movie, Makgeolli Girls, you’ll know what I mean.

So we want to help you acquire IP. Here’s our checklist. Follow it.

1. The Letter of Intent (a.k.a. LOI). Send a letter of intent to the company to state your intention to acquire their IP. Say that you want to enter into discussions and/or negotiations. Wait for response.
2. The Non-Disclosure Agreement (a.k.a. NDA). You’ll get this before they start talking to you. This is to ensure that you do not divulge whatever they disclose to you to any third parties. For all they know, you might be fishing for information. Or you might be a competitor. They might send you a Non-Disclosure and Non-Competition Agreement (a.k.a. NDNCA). Get your lawyer to look at it.
3. The List of IP Assets. If they are interested, they might send you a list of what they have. They might want you to take it lock, stock and barrel. That’s like saying, “Could you take this whole heap over here?” (But then again, maybe not since that’s bad negotiating tactic.)
4. Verify the validity of their list. This means getting your lawyer to check to see whether they have ownership of the IP. In some cases, they might have to show you that they own the IP, e.g. the brand or the trade mark.
5. Get a valuation. You’ll want to get the IP valued. For trade marks and service marks, use the Interbrand method. For patents, look at how much the patent is generating, not how much it cost to patent the thing. Patents cost a lot to register, but many patents are duds.
6. Check patent claims. Since a strength of a patent lies in its claims, you might want a patent agent or patent attorney to evaluate whether the patent’s claims could stand up in court. Some patents get published even though they should not.
7. Consider whether the IP is a fit for your business. Is the IP aligned with your company’s direction? If no, don’t worry. I remember the Friendster deal that a Malaysian company snapped up some time back. They sold the Friendster patents to Facebook and recouped their costs. In the process they dismantled the Friendster social networking website and turned it into a game coupons vending site. Young people everywhere migrated to Facebook.
8. Evalute how much it is going to cost to maintain the IP. Patents need an annual fee to continue to be valid. If a patent lapses and someone starts manufacturing the patented item, the patent holder cannot sue that person, even though the patent is later reinstated. You might as well give the patent away for free if you cannot maintain it. Better yet, don’t buy.
9. Check whether the IP has been licensed out. In case you thought that you were going to acquire them and then license them out (pays for itself), check first. The company may have already licensed it. Some guy in Dubai or India may have gotten the manufacturing rights. Some company in Indonesia may be allowed to manufacture a cheaper version of their product, with the same brand. Imagine having to deal with grey imports. You make the high quality originals, and some guy imports the same brand from a third-world country.
10. Ask for previous valuation reports from their side. They need to justify their asking price. Of course, their valuations are always sunny.
11. Get details of any claims, potential litigation, on-going litigation, and past litigation. For all you know, the IP you are eyeing is the subject matter of a highly contentious claim. It could be invalidated in a court case somewhere, after which it would be worth nothing.
12. Interview their IP manager, if possible. Find out what their strategy was for their IP and why their IP did not save their company. They may blame it on : Lack of funding, lack of marketing, slow market adoption, litigation. Listen and nod. Sort the bullshit from the truth.
13. Talk to people in industry about the potential value of the IP that you’re getting. You can’t name names, and you can’t mention who you are dealing with. You can’t mention what you are acquiring, because the deal might fall through. But you can ask what direction the industry is headed, and whether similar IP has been a boon or a bane. You can’t say anything yet you must say something, otherwise how else can you get information? Go general with outsiders and drill deep with your team. You might need to tie up your team members with NDA’s as well, just in case somebody leaks.
14. Evaluate how the IP might be further developed. Before you acquire IP, think how it can be further developed. Is your R&D department positive that it is full of potential? Does the market show an appreciation for the product the IP covers?

The following links may be of interest to you. They are all about checklists when you want to acquire IP.

1. IP due diligence issues in M&A transactions checklist.
2. Creating a practical and useful due diligence checklist.
3. Checklist – Intellectual Property due diligence.
4. A guide to conducting IP due diligence in M&A.

Thanks for reading.