To buy or not to buy?

Article  \  11 Nov 2013

Buying or selling a retail business involves more than location, stock and turnover. The deal should also cover intangible assets such as the brand, reputation, business methods and customer lists. Without including these, and all other intellectual property (IP) assets of the business, you may end up buying or selling a lemon.

Retail businesses are regularly bought and sold. Sometimes the deal involves buying and selling the business as a going concern. Other times, the buyer buys the shares in a company that owns the business. In either case, overlooking the IP assets of a business can lead to downstream problems.

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This is critical. Be clear about what information you need. Once you have gathered the information, you should work out what it is telling you. This can sometimes be a challenge. It takes time to assess the assets of a business. Make sure enough time is given to this part of the deal. Haste can lead to hassles.

Things to consider when assessing an IP portfolio

While IP may comprise only a sliver of the whole deal, don't underestimate its value.

The IP portfolio of a business is often the most valuable asset bought and sold. Each deal is different, but, in every case, professional advice is needed to assess the value of the IP, conduct due diligence and ensure the IP is transferred properly.

Regardless of the value of the deal, some effort should be put into due diligence.

As a starting point, consider the following.

1. Identify what IP is being transferred.

Consider whether the proposed transfer structure is right. For example, the sale and purchase of company shares may be preferable to a sale and purchase of business assets if the seller is restricted or prevented under a contract from assigning the IP rights. Be wary of 'change of control' clauses in contracts that suggest a sale of shares to be an assignment.

2. Identify and list the IP to be transferred.

Think about trade marks and patents-but don't forget about other IP rights like unregistered trade marks, copyright, registered designs, trade secrets, confidential information and domain names. An audit may be needed to identify all IP. Key IP in retail businesses often centres on trade marks, associated copyright, get-up and domain names and customer lists.

3. Classify each type of IP.

Different steps and documents are needed to transfer different IP rights. Separate documents will need to be prepared if the IP rights being transferred are not all owned by one party.

4. Explore title to the IP.

A seller should be able to prove title to what they are selling. A buyer should compare what the seller says they own and are selling against the official registers and other available documents.

5. Check the seller is not prevented or restricted from transferring the IP.

In some cases, another person's consent may be needed to complete a transfer. Be aware that this investigation, and the investigation mentioned in section four, may not prove clear title. As part of the sale and purchase deal, it may be necessary for the seller to correct defects in title or to get third-party consent. If this needs to happen, as the buyer you should ensure this duty on the seller is properly documented and a timeframe set to tidy up these issues.

6. As a buyer, make sure the IP you are buying will allow you to benefit from the deal in the way you expect.

For example, if your company is buying a business to use its trade mark, the business may be less valuable if the trade mark is not registered. Equally so, if the registration does not cover the goods or services the business offers or if the trade mark is not registered in all markets the business trades in. If the trade mark you are buying includes a graphic, make sure that all associated copyright is assigned to you.

A business with several patents may not be as attractive if the key product made is not patented or if the key product infringes another person's patent.

Lapsed or expired patents, designs, or trade marks are of no value either, so check renewals are up to date and the rights you are buying are current.

7. Review all documents about the business which deal with IP.

If IP is created by others like employees, contractors and branding agencies, both parties should check those documents for the relevant IP clauses. These documents may include licences, assignments, employment contracts, joint ventures, consultancy, commissioning, supply, services, sponsorship and confidentiality agreements.

8. Explore threats or litigation about the IP.

The value of IP could be considerably lessened if a legal issue threatens to diminish the scope of the rights.

9. Record the transfers.

Do not assume that a clause in the agreement for sale and purchase saying something like 'the seller agrees to assign on completion' will act as a legal assignment of the IP. The parties will need to enter a separate deed of assignment to assign IP on completion. The deed of assignment will need to be filed against the rights transferred to record the change in ownership.

10. Consider indemnities and warranties.

Don't treat indemnities and warranties as trivial and standard. Tailor-made indemnities and warranties specific to the deal should be considered.

Retail businesses are bought and sold every day-and, every day, issues arise because basic checks are not made. Make sure that your deal is hassle-free. Get advice from an IP expert to ensure that all IP involved in the business being bought and sold is correctly identified and transferred.

An edited version of this article appeared in the November 2013 issue of NZ Retail.