Michael D. Moberly May 23, 2012
With such significant percentages of deal – transaction value now evolving from a targets’ intangible assets, due diligence must be much more than a cursory or confirmatory review of the assets’ presence, absence, or positioning.
Too, a due diligence report must provide decision makers with much more than a subjective, snap-shot-in-time estimate of asset value. Instead, due diligence must provide unequivocal clarity to decision makers. This includes, among other things, an assessment of the assets’ fragility, stability, defensibility, longevity, and perhaps most importantly, its collective contributory value throughout an enterprise. Key, revenue producing (intangible) assets will also be a focal point relative to their ability to be strategically utilized as ‘building blocks’ for future growth and sustainability.
The strategic and contributory value of intangible assets must not be overlooked, but, cannot be accurately demonstrated either solely by calculating asset value in snap-shot-in-time contexts. This of course is why it’s important to factor other asset characteristics such as fragility, stability, defensibility, risk, longevity, and contributory value. Understanding how these characteristics can, and frequently do, adversely impact asset control, use, ownership, and materiality or serve as preludes to legal challenges is certainly information decision makers should have at the ready.
When these characteristics materialize, as they do with increasing frequency in today’s globally competitive and predatorial business transaction environment, asset value and usefulness can erode, be undermined, and become vulnerable to compromise and/or misappropriation very rapidly.
By the same token, it’s important for those structuring business transactions, when intangible assets are in play and/or part of a deal, as they inevitably are, to recognize that conventional forms of intellectual property enforcement (i.e., patents, copyrights, trademarks) are not applicable to safeguarding other forms of intangible assets, i.e., reputation, goodwill, structural, intellectual, and relationship capital, etc. Thus, having due diligence – transaction management teams in place with expertise in intangible assets is a necessity which will produce much needed insights, clarity, and benefits.
Another reason why it’s important to fully factor these and other (intangible) asset characteristics in a due diligence strategy, is that the time frame when holders, buyers, and/or sellers of intangible assets can extract the most value (from them) is being continually compressed. That’s due, in no small part, in my view, to the persistent, increasingly sophisticated, and globally predatorial business/competitor intelligence and data mining operations that can, when successful, ‘get out front’ of a transaction and a company’s competitive advantages to affect a transaction’s outcome, usually adversely, depending of course, whose side one is on.
Below are some additional, but, just as important areas which I encourage due diligence management teams to direct attention, e.g., is there evidence of…
- a company culture that recognizes the value of the core revenue – value producing intangible assets?
- consistent stewardship, oversight, and management of the targets’ intangible assets?
- consistency in the representation of intangibles to reflect Sarbanes-Oxley, FASB, and even ISO mandates, etc., wherein risks, value, materiality, and financial performance are accounted for?
- business continuity-contingency (organizational resilience) plans that ensure that specifically address intangible assets?
- ell executed and monitored strategic planning designed to achieve the fullest utilization of the targets’ intangible assets?
Effectively conducted due diligence that finds affirmative evidence that each (many) of the above are being practiced by a target firm, should be smiling, as they say, all the way to the bank!
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