Michael D. Moberly
Conducting intangible asset (pre-post) due diligence for most any business transaction is essential, in large part because the various transactions a company may consider – undertake, parties can be assured, intangible assets will be in play. Therefore risk to those assets’ status, stability, control, use, ownership, value, and competitive advantage can adversely affect any transactions’ outcome.
Intangible asset due diligence is not an exercise that is useful only after a company suspects or experiences the materialization of a risk, i.e., misappropriation, infringement, etc., or is notified they are a defendant to a lawsuit!
Equally important, intangible asset due diligence, given the complexities involved, should not be a mere confirmatory review that certain intangibles are present using a generic, one-size-fits-all checklist.
Intangible asset due diligence is obliged to provide decision makers with…
- actionable recommendations for making sound business decisions about preserving, managing, positioning, and extracting value from the assets in play.
- an objective sense of the targeted assets’ fragility, stability, defensibility, and value insofar as projections of deliverable revenue and competitive advantages.
When conducting intangible asset due diligence, a first responsibility is to understand the target company by becoming familiar with its intangibles, i.e., the underlying intellectual, structural, and relationship capital particularly.
When should companies conduct their intangible asset due diligence? In most circumstances, its best to engage in preliminary due diligence should be conducted as a prelude to any transaction in which specific, i.e., the sought after intangibles will be in play. Thus, intangible asset due diligence should be analogous to asset monitoring and conducted in both pre and post transaction contexts.
How will intangible asset due diligence benefit your company? In any business transaction in which intangible assets will be integral to the outcome, due diligence can enable and facilitate a more secure and profitable transaction (not impede it) by providing decision makers with clear and timely insights, i.e.,
- Identifying embedded – under-the-radar risks, vulnerabilities, and operational complexities that contribute to impairing or entangling knowledge-based assets and serve as preludes to costly and time consuming disputes and challenges…
- Identifying and unraveling internal centers, chains, or clusters of intangibles and competitive advantages and assess the adequacy of safeguards.
- Bringing operational – economic clarity to the target company’s intangible assets, intellectual property, know how, brand, and competitive advantages, etc.
- Identifying efficient – effective protection – value preservation measures that are aligned with a transactions’ objective and the company’s strategic business plan, i.e., projected returns, exit strategy, as well as the life – value cycle of the assets in play.
It’s prudent to assume then, for every business transaction, initiative, or operation a company and its management team elect to undertake – engage, there will always be IA’s in play. This makes it’s essential for parties to recognize, when contemplating, structuring, and executing a transaction, particularly the due diligence component, that sustaining control, use, and ownership of relevant IA’s, will play increasingly significant roles insofar as valuation, measuring asset performance and outcomes, and defining an exit strategy.
Too, respecting the ease which valuable-competitive IA’s (particularly intellectual, structural, and relationship capital) can be misappropriated, undermined, entangled, lost, or merely walk out the front door, the impulse to consummate a deal in a gratuitously hurried fashion, absent pre and post due diligence focused specifically on IA’s, it becomes probable that some manner-form of IA economic – competitive advantage hemorrhaging will occur. In other words, in today’s aggressive, interwoven, predatorial, and winner-take-all (global) business climate, the IA’s a party believes they are buying – acquiring ownership, may lose various percentages of their contributory value.
Having been actively engaged in safeguarding and mitigating risk to IA’s for many years, my counsel on the issue of IA (specific) due diligence is straightforward. Decision makers responsible for deal structuring have fiduciary responsibilities that include sustaining control, use, ownership, reputation, and monitoring value and materiality of the about-to-be-purchased (acquired) IA’s. The most effective way to mitigate risk to those assets is an effective pre and post due diligence, specific to the relevant IA’s. The key to this due diligence is knowing what IA’s are, how they evolve-develop within a company, and their contributory role and value.
For maximum benefit, the due diligence is best commenced at the point in which the deal/transaction is being contemplated so the locus of the relevant IA’s can be determined and due diligence planned accordingly. Again, it’s worth noting, 80+% of most company’s value, sources of revenue, and ‘building blocks’ for growth, profitability, and sustainability lie in – evolve directly from IA’s!
IA hemorrhaging (in deals and transactions) is frequently facilitated when two frequently held attitudes of decision makers converge, i.e.,
• unnecessarily high or unjustified sense of urgency attached to deal execution. (Urgency and speed often
mutate to become a dominant driver of a transaction which in turn can constrict – impede a thorough due
diligence, especially with respect to unraveling the origins, stability, sustainability, value,
and ‘mergability – transferability’ of the IA’s in play.)
• assumption that deals-transactions can be consummated and revenue streams commence before relevant IA’s fall
prey to depreciation or loss.
Mitigating asset vulnerability and probability to value – competitive advantage – reputation hemorrhaging, well in advance of the ink drying on a transaction agreement, is an essential contributor to achieving the desired (successful, profitable, sustainable) outcome.
Michael D. Moberly April 23, 2014 St. Louis email@example.com ‘A business intangible asset blog where attention span really matters’!