Routinely overlooked, but increasingly critical to achieving a desired outcome to a merger and/or acquisition is…conducting intangible asset due diligence in both pre, and post transaction contexts. The rationale for doing so is rooted in the indisputable economic fact that 80+% of most company’s value, sources of revenue, competitive advantage, and sustainability today lie in – emerge directly from intangible assets, and, by extension, transactions they may engage. Of course, the parties to – the target of an M&A assume, should they possess sufficient operational familiarity, can utilize – further exploit the intangibles they are about to acquire.
An equally important purpose for conducting pre-post (intangible asset) due diligence is to provide forward looking – sensing radar to detect – alert parties to the assets’ stability and/or risks which, if materialized, would variously adversely affect the intangible assets integral the M&A’s outcome. ensure the intangible assets sought will be provide parties to an M&A. My experience indicates that providing forehand knowledge that pre-post transaction due diligence is be conducted, with a focus on the essential – strategic intangible assets in play, serves as attractive assurances to boards, investors, and other equity sources to M&A’s.
Interestingly, forehand knowledge that pre-post transaction (intangible asset) due diligence will be conducted, does not go unnoticed by sellers – targets of an M&A. That is, there may be less inclination to inadvertently or purposefully undermine or destabilize a transaction by allowing valuable – competitive intangible assets, i.e., intellectual, structural, and/or relationship capital to dematerialize in advance of transaction execution, and therefore change the character – important components of a transaction, brand and reputation especially.
To not engage in pre-post transaction (intangible asset) due diligence is to assume the epitome of transaction risk, because, among other reasons, risk to intangibles can and frequently do materialize at keystroke speed, often under conventional business (risk) radar. And, to assume intangible assets are somehow irrelevant to the operational realities and sustainability of an M&A target and any other business transaction, for that matter, suggests the proverbial ‘tea leaves’ are, at minimum, being substantially misinterpreted, or worse, utterly ignored.
The risks I am referring to, for M&A’s specifically, is the potential – probability that valuable intangible assets most relevant to achieving a projected – desired near term and strategic outcome, can do so, primarily and/or only when-if they remain fully intact and stable, and, not experience, instead, some level of potentially irreversible erosion and/or undermining of their value as a continued source of revenue, competitive advantage, or projected synergy, etc. These are risk realities which can be mitigated, if not wholly avoided by…
• having operational level familiarity with the intangible assets in play.
• conducting pre-post (intangible asset) due diligence.
In today’s aggressive, predatorial, and winner-take-all business transaction environments…I strongly believe a party would be wholly remiss should they not objectively determine if the about-to-be-purchased (intangible) assets can – will sustain the objectives of a transaction. Therefore, negotiating ‘pre and post’ transaction covenants in advance, to function as entrées to…
- identifying and monitoring risks to key intangible assets which can – may materialize in the interim, and
- safeguard and preserve asset value, revenues, and competitive advantages.
It is for these reasons…it becomes necessary, today more previously, to design – negotiate – execute pre-post transaction covenants to not only assess, but, monitor vulnerabilities and risks that can adversely affect-impair the assets’ stability.
The intangible assets embedded in any merger – acquisition target…are presumably exploitable and variously liquid. These, and other similar characteristics routinely render valuable – competitive advantage intangible assets vulnerable to being outpaced and circumvented.
I am not suggesting M&A transaction due diligence should be wholly indifferent to…conventional intellectual property enforcements, i.e., patents, trademarks, copyrights, etc. However, transaction management teams are obliged to recognize conventional IP enforcements are largely reactive. It is true thought, premature or illegal intangible asset value erosion can, quite literally, sabotage M&A deals.
Examples of this include,, but certainly are not limited to…unabated misappropriation, infringement, product counterfeiting-piracy, poorly and/or un-monitored violations of non-compete and non-disclosure agreements, asset entanglements and ensnarements that routinely contribute to transaction friction, challenges, and disputes that stifle – undermine deal trust, momentum and finalization.
When these, and other risks materialize, (singularly or in multiples) prior to deal finalization…the value of the about-to-be purchased assets (intangibles) can quickly hemorrhage. Once known, the terms of the deal (as articulated in the initial covenants) should be renegotiated as basis to continue to sustain the buyers’ objectives.
Michael D. Moberly August 7, 2017 email@example.com ‘The Business Intangible Asset Blog’ where attention span and action really matter!