In the business of buying and selling businesses, the tangible elements involved are the first items that come to mind. Most brokers, agents, and business owners remember the basics such as financial statements, deeds, and contracts. However, there are key elements of businesses that are often never taken into consideration during the selling process, specifically intellectual property.
Intellectual property is often perceived as hard for the average buyer or seller to accurately describe. For this reason, it can present the biggest nightmare during the sale due to the lack of information. For example:
A few years ago, I was contacted by a client and asked to prepare and file an assignment for some patents and trademarks. The patents and trademarks had been included in the sale of the company a few years previous, but no one had ever drafted the assignments and filed them with the United States Patent and Trademark Office (USPTO). The process took me much longer than normal because the official who had signed on behalf of the seller had suffered a stroke and was no longer competent to sign any documents. I had to locate the court appointed guardian and explain to him what I needed. In the end, everything was properly signed and filed but I did not understand why no one had made sure all assignments were completed and filed with the USPTO at the time the sales agreement was completed.
Prior to the sale of a business, the owner should identify all IP assets that belong to the company. The owner should have a complete list of IP items such as:
- Copyright registrations.
- Patent registrations.
- Trade secrets.
- Domain names.
The owner should be able to provide proof of ownership of all IP assets. If there are any assignments the buyer should be made aware of the assignments and receive copies.
TRADEMARKS, COPYRIGHTS, PATENTS
The owners should reveal whether or not there are any licensing agreements for the trademarks and patents, and be able to provide copies of the licensing agreements to the buyer. The buyer should have a clear understanding of what claims the patent registrations cover and if the patents pertain to the current products that are being sold by the company.
The buyer should review all trademark, copyright and patent registrations the seller claims to own. Then verify ownership, validity and if the registrations are current or expired. Sometimes, small business owners register trademarks and patents in their individual names instead of the company name because they want to maintain individual ownership of the asset. There should be a frank discussion as to whether or not the individual owner of the IP asset is going to include the asset with the sale of the company.
One of the most common items forgotten or not covered during a sale is confidentiality agreements and non-compete agreements. These Agreements usually address trade secrets of the business (i.e., recipes, formulas, unique methods). The buyer should verify that the seller intends to turn over the trade secrets as part of the sale of the company. If the trade secrets are included in the sale of the business the buyer needs to know what steps were taken to maintain the confidentiality of the trade secret (i.e., locked in a safe, labeled as confidential, training provided to employees).
All domain names and websites owned by the company or used by the company should be listed as assets of the company. The buyer should verify that all domains names used by the company are included in the sale. If these items are not included or covered the buyer could be walking into a hairy situation … for example:
I was contacted by a person who purchased a hair salon but did not include the company website and domain name in the sales agreement. Getty Images accused the new owner of the business of copyright infringement because the website contained Getty Images that had not been properly obtained prior to the sale of the hair salon. The buyer and seller of the business fought for months over who was responsible.
If the sale or purchase of a business is done correctly, all of the IP assets of the company are identified, verified as valid, inventoried, and included in the sales agreement. Assignments should be signed at the same time the sales agreement is signed and filed with the government entity that issued certificates of registration (i.e., USPTO, State of Florida Division of Corporations) and copies provided to all parties.
A good IP lawyer can help buyers and sellers’ save time and money by conducting a due diligence search and review of all intellectual property assets prior to the sale to ensure the process doesn’t become an IP nightmare for both parties.