Archive for 'Intangible asset assessments/audits.'
Michael D. Moberly December 21, 2012
As stated here on numerous prior occasions, it’s absolutely essential for business decision makers to recognize that in a vast majority of transactions they either initiate or otherwise become engaged, correctly identifying and assessing intangible assets plays an increasingly significant role in achieving a desired, presumably profitable and sustainable, outcome!
The reason of course, is that steadily rising percentages, at least 65+% of most transactions’ value and potential resides exclusively in the effective stewardship, oversight, and management of the intangible assets in play, and, as noted above, critical to achieving a favorable transaction outcome. So, if a transaction management team overlooks or dismisses the intangible assets, it’s tantamount to excluding how and where deal/transaction value is created, revenue is generated, and further strategic planning will be executed.
This makes it all-the-more-important, and, according to many, rising to a level of fiduciary responsibility insofar as transaction management teams’ incorporating intangible assets in their task of strategic oversight. When executed effectively, a transactions’ intangible assets will be collectively addressed in due diligence, inventory, audit, and valuation contexts. On the otherhand, if transaction management teams are deaf to the intangibles underlying most any deal, i.e. by doing neither, it’s quite fair to say it’s time to either change transaction management teams or engage them in relevant training to elevate their operational familiarity with intangible assets, i.e., their ability to identify, unravel, make quantitative-qualitative judgments regarding their status, stability, fragility, contributory value cycle, and overall sustainability.
As readers know, there is an abundance of research that consistently paints a very convincing picture that if and/or when a merger, acquisition, strategic alliance, or other type of transaction ‘goes south’, evidence of impending problems and challenges will surface quite early and will very likely be determined to be rooted in mishandling or disregard for the relevance or contributory value of one or more intangible assets necessary for achieving sustained transaction success.
One technique to mitigate or even remedy the probability that the latter will occur is for decision makers to require (receive) a ‘heads up’ from their transaction management team in the form of what I broadly describe as a ‘before transaction consumation asset impact analysis’. As the phrase implies, this specialized analysis should bring greater (business) clarity, i.e., a more definitive picture of the stability and strategic contributory value of key assets, particularly should certain risk(s), reputation and others, materialize that carry a high probability for adversely affecting one or more of the intangible assets integral to achieving a favorable transaction outcome. The most usable analysis (report) will address
- the inter-relatedness of intangible assets’ contributory value and associated risks and threats as well as key assets identified as being impaired in some manner, or are found to be already misappropriated, infringed, and/or counterfeited.
- the probability that particular risks/threats will materialize to adversely affect the projected economics, competitive advantages, and/or synergies of a transaction
- strategies for mitigating and containing certain risks/threats relative to the resiliency and sustainability of the transactions’ key intangible assets.
The obvious rationale for incorporating a ‘before transaction consumation asset impact analysis’ is for decision makers to be apprised of circumstances and scenarios that should be revealed which can (may) influence decisions and outcomes.
I am a strong advocate of ‘before transaction consumation asset impact analysis’ because I believe the three, most challenging intangible assets to sustain and preserve their contributory value (pre/post transaction) are, (a.) intellectual, (b.) relationship, and (c.) structural capital because they are individually and collectively highly mobile and attitudinally based.
Too, a ‘before transaction consumation asset impact analysis’ can reveal other cautionary circumstances/scenarios while retaining the option to proceed with a (a.) plan for risk mitigation, or (b.) re-negotiate a deals’ terms in light of the risk(s) and/or asset impairment(s) that have been identified.
But, the objective remains the same, that is to facilitate a more secure and profitable transaction going forward, not impede it!
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Michael D. Moberly May 31, 2012
A requisite to conducting superior due diligence for today’s intangible asset dominated and driven businesses, is possessing a depth of experience, knowledge, and investigative skill sets. These are unique differentiators and essential requisites which collectively serve as starting points for achieving the necessary and insightful (due diligence) product that allows management teams to make informed decisions, i.e., proceed, don’t proceed, buy, don’t buy, or invest, don’t invest!
Respecting the economic fact that 65+% of most company’s and transaction’s value, sources of revenue, and foundations for growth and sustainability evolve directly from intangible assets, selecting not just the right, but, the absolute best individual or firm to conduct due diligence is critical.
For starters, a well-designed and executed due diligence plan must fully examine each of the target’s intangible assets. That’s because they will inevitably be in play in any transaction. Effective assessment and integration of intangibles serve increasingly significant role to a transaction’s success. On the other hand, with untold frequency, when intangible assets are not addressed or dismissed during due diligence, transaction failure can be imminent and materialize in a long, slow, and costly fashion, i.e., ‘failure by a thousand cuts’.
To increase the probability that certain projected transaction objectives or outcomes be realized, it’s imperative that the individual or firm contracted to conduct the due diligence can articulate the findings in objective business contexts and certainly not through a one-size-fits-all, snap-shot-in-time guesstimate oriented lens.
Key elements to superior due diligence in today’s intangible asset dominated and driven businesses, starts by possessing the experience, knowledge base, and investigative insight to…
- unravel (identify) how, where, and by whom the key (intangible) assets originated.
- determine and assess how or whether control, use, and ownership of the assets is or can be sustained.
- determine the assets’ contributory value and complimentary role(s) relative to current and future projects and initiatives, i.e., as potential sources of revenue and foundations for (future) growth and sustainability.
- recognize and differentiate the origins, motives, and asymmetric nature of global risks and threats to (intangible) assets that have become embedded in all transactions.
- understand how materialized risks can adversely affect asset value, a company’s competitive advantages, reputation, brand, and/or stifle project momentum and best practices to prevent or mitigate those risks.
- ensure asset control, use, ownership, and value are monitored for sustainability, especially in post-business transaction contexts.
- build a risk intelligent culture that renders a company more aware and resilient to significant and catastrophic risks, natural disasters, and/or business interruptions.
Anything less can produce an array of unwelcome challenges or worse, spell almost certain doom to the projected and desired outcomes of a transaction!
Michael D. Moberly April 10, 2012
It’s time prospective investor’s and VC’s get serious! In my judgment, an important, but all too often overlooked aspect to achieving favorable terms and outcomes to venture capital-backed projects, is balancing (a,) the understandable requisite for putting an experienced management team in place, with (b.) ensuring control, use, ownership, value and materiality of the about-to-be invested intangible assets are sustainable.
A starting point for achieving such a balance is conducting a comprehensive due diligence and assessment of the targeted intangible assets designed to provide prospective investors (VC’s) with an objective and over-the-horizon analysis of the assets’ status. A equally worthy product of the due diligence and assessment is that it can serve as the foundation for:
- making the all-important invest – don’t invest decision, or
- consummating a more secure, profitable, and sustainable outcome for investors.
This level of due diligence and asset assessment must extend well beyond the conventional ’snap-shot-in-time’ or amateurish ‘check the box’ approach. It must include…
- unraveling the assets to identify any/all under-the-radar risks and vulnerabilities that could…
- impair and/or entangle particular (intangible) assets and adversely affect investor’s ability to sustain their control, use, ownership, and value
- serve as preludes to costly, time consuming, and investment stifling legal disputes and challenges.
- identifying all centers of internal and/or stakeholder intangible asset generation, value, and revenue production beyond what is already publicly available.
- identifying – assessing existing (intangible) asset production, protection, and value preservation measures and determine if they are effectively aligned with the:
a. investors’ objectives
b. company’s strategic business plan, and
c. functional (life, value) cycle of the about-to-be invested assets.
Preferably, depending on the due diligence – asset assessment team’s operational familiarity with intangibles, they would determine if the identified risks can be prevented or mitigated to a (risk) tolerance level acceptable to the investing party so the transaction can proceed.
For start-ups and early stage firms, it is not uncommon for 75% to 90+% of their value, sustainability, projected sources of revenue, and building blocks for growth to directly evolve from intangible (IP-based) assets. This makes intangible asset due diligence and assessments all-the-more essential and potentially revelatory insofar as serving as a foundation, again for invest – don’t invest decisions, relative to distinguishing assets that are suspect, impaired, or have already been compromised.
In these circumstances, while it may not be necessary to wholly abandon a particular investment opportunity, it can prompt prospective investors to include specific (risk mitigation – transfer) covenants that are applicable on both the pre and post transaction side.
It’s unlikely, in my judgment, when an intangible asset due diligence – assessment revels significant risks, merely putting an experienced management team in place would, standing alone, be able to overcome or reverse such transgressions absent costly, time consuming, and momentum stifling legal challenges! Therefore, having experienced and sophisticated intangible asset specialists conduct the due diligence will reap strategic returns for prospective investors.
Michael D. Moberly April 3, 2012
It’s important that those responsible for the management, stewardship, and oversight of a company’s intangible assets recognize that financial – competitive advantage hemorrhaging of those assets can commence before the ink dries on a transaction agreement.
The kind of (intangible) asset hemorrhaging I’m referring to is that which is attributed to theft, misappropriation, infringement, counterfeiting and piracy, etc., anyone of which can undermine the assets’ contributory value and competitive advantages.
In todays’ globally competitive, predatorial, and winner-take-all business transaction arena, this sort of (intangible) asset hemorrhaging is facilitated by two general attitudes, i.e., an
- unnecessarily high sense of urgency relative attached to deal execution. Urgency and speed often mutate as the dominant driver of a transaction which in turn can constrict – impede the time allotted for and the thoroughness of the due diligence, especially with respect to the intangible assets in play.
- assumption that deals-transactions can be consummated and revenue streams commence before the (intangible) assets in play will fall prey to theft, misappropriation, or simply walk out the front door as intellectual capital (know how) with departing employees.
Thorough (intangible) asset due diligence if obviously crucial to transaction success and profitability today, particularly when 65+% of most company’s value, sources of revenue, and building blocks for growth and sustainability evolve directly from intangibles. This is why it’s essential for asset buyers in a transaction ‘get out front’ by (a.) acknowledging, and (b.) preventing and/or mitigating those adverse attitudes.
If, on the other hand, a company’s decision makers and/or counsel conveyed dismissiveness about the potentially adverse outcomes such attitudes would produce, presumably they would have to know precisely:..
- the opportune time when acts of (intangible asset) misappropriation, theft, infringement, misappropriation will occur, and,
- the time required for an adversary to integrate the misappropriated – stolen (intangible) assets into their products and/or services as enhancements, efficiencies, and competitive advantages.
The virtual head start and competitive advantages the victim company presumably had achieved would begin to narrow and/or be undermined quite rapidly, along with its reputation, image, and goodwill Exacerbating such increasingly probable events is the rarity that an (intangible) asset buyer will have the necessary asset) value – competitive advantage safeguards and monitoring capabilities in place to alert would be buyers, in sufficient time to stabilize – recover the compromised assets before substantial and many times irrevocable asset hemorrhaging commences.
An adversary’s (market space, competitive advantage) ‘head start’ following their illicit acquisition – use of the intangible assets remains subjective, but it’s prudent to measure it in hours and days, not weeks, months, or quarters. Unfortunately, there are numerous actual and would-be (intangible) asset buyers that I would characterize as being ‘permissively neglectful’ about managing, safeguarding, and about-to-be purchased intangible assets by erroneously assuming:
- any economic and/or competitive advantages an adversary may glean from the (intangible) assets they compromise – acquire will be short-lived and/or outpaced by rapid changes in consumer – market demands which only the legitimate originator will be able to deliver, and,
- intangible assets are (readily) renewable resources.
Respecting the narrowness of (profit) margins today, I encourage management teams and counsel to re-consider both assumptions!
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Economic – Industrial Espionage: It’s The Intangible Assets They’re After, Not Just The Intellectual Property!
Michael D. Moberly March 21, 2012
I routinely hear presumed experts on various media, C-SPAN in particular, but broadcast and cable news programs as well, describe how intellectual property is being targeted and stolen, via industrial – economic espionage and/or cyber-attacks. These experts usually make compelling cases, further suggesting IP theft is occurring at rates that equates to multiple trillions of dollar losses annually to U.S. held IP.
Many of these experts self identify as current or former employees of agencies within the U.S. intelligence community, federal law enforcement and/or Washington-based ‘think tanks’.
A significant difference I, and I presume many other advocates of protecting IP rights have noticed, is that these experts are more comfortable today, than in years past, in naming the presumed culprits and/or countries where a significant percentage of the attacks – thefts originate. In a growing number of instances, these experts freely cite either state sponsored or independent operators as the origin of the problems, often citing China, Russia, Brazil, India, eastern Europe and various other legacy free player countries as the primary culprits (recipients and/or beneficiaries) of the stolen IP.
Naming the culprit countries in open source carries some potential benefits, i.e., the adverse publicity can, in some instances:
- bring political – diplomatic pressure on some of the named country’s legislative and enforcement bodies to be more aggressive and consistent in their pursuit of infringers.
- prompt holders of valuable intangible (IP) assets to strengthen their business transaction due diligence and reduce asset vulnerability by putting in place practices and procedures to sustain control, use, ownership, and monitor the value and materiality of all of the (intangible) assets in play in both pre and post transaction contexts.
It’s worthy to note that much of this information has been available for many years through the U.S. Trade Representatives’ Section 301 list as well as the Department of States’ Overseas Security Advisory Council.
While I don’t dispute these expert’s positions about the significance of the problem, I do find reason to dispute their consistent characterization of it solely as an ‘IP problem’. Intellectual property is comprised of patents, trademarks, copyrights, and trade secrets. In today’s increasingly competitive, predatorial, and winner-take-all global business transaction environment it’s rapidly becoming a given that company’s intellectual properties are not merely vulnerable, rather the probability that theft, misappropriation, or infringement will occur at some point during the assets’ life-value-functionality cycle is highly likely. Just how likely, remains somewhat subjective and carries many variables, i.e., asset demand, attractivity, effectiveness of safeguards, etc.
I do hold however, a somewhat different view about what most of the economic and competitive advantage adversaries are targeting and it’s not solely a company’s IP. I have worked, studied, and conducted much research on intangible assets and economic espionage over the past 25+ years. A cursory understanding of the adversaries (referenced by the experts) social, political, economic, and legal history suggests most are just now commencing the early stages of a second generation of individuals who possess the capability to create large scale manufacturing facilities to produce the various products and/or services that sometimes emanate from infringed – stolen – misappropriated IP.
What’s missing in my judgment, from the experts’ economic espionage and cyber-attack equation is the adversary’s ability to understand and/or replicate the intangible assets, i.e., the intellectual and structural capital and know how that’s embedded in any (misappropriated – stolen) IP. Intangible assets today comprise 65+% of most company’s value, sources of revenue, and building blocks for growth and sustainability. It’s quite correct then to say intangible assets are absolutely essential in the global economy to building product/service quality, securing supply chains, and creating efficiencies in distribution, etc. Be assured, those engaged in using stolen IP have, in most instances, an equally strong desire to compete globally and in the same market space as the IP’s rightful holder-owner.
Know how (intellectual capital) can, to be sure, be classified as trade secrets (providing the holder consistently meets the six requisites of trade secrecy) or proprietary. Either way, I can confidently report that companies would be well served if they identified and safeguarded the contributory value of the intangible assets that underlie all IP, because that’s what the adversaries need most.
Michael D. Moberly March 9, 2012
Conventional IP Audits Are No Longer Sufficient
In today’s knowledge (intangible asset) based economy, conventional snap-shots-in-time, one-size-fits-all, check-the-box types of IP – intangible asset audits, assessments, and/or due diligence are no longer sufficient to provide company management teams and boards with the necessary strategic information and business insight necessary to meet the needs of the increasingly aggressive, competitive, and predatorial global business transaction environment.
Before proceeding further though, I want to respectfully advise the reader this is certainly not a circumstance in which I am ‘mixing apples and oranges’. Rather, I am suggesting there are indeed commonalities of purpose, overlap, and even duplication whether a task is referred to as an IP audit, assessment, or due diligence. A primary distinguishing factor however is the context or circumstance in which one or the other is being applied, i.e., a merger, acquisition, liquidation, strategic alliance, partnership, etc. For simplicity, I will use the term audit as encompassing assessments and due diligence unless otherwise specified.
Intellectual property (IP) audits were initially designed to ascertain, often through hand-me-down templates or check-lists, the (legal) status and defensibility of a company’s IP. And, if an auditor, usually an attorney, is sufficiently experienced and so inclined, their work may also include looking for evidence of misappropriation, infringement, compromise, de-valuation or undermining-erosion of asset value and competitive advantages.
Most conventional approaches to conducting IP audits tend to be, in my view, snap-shots-in-time descriptions of a specific IP’s status. But, in today’s increasingly competitive, predatorial, legacy free, and ‘winner-take-all’ global business transaction environment, the status (stability, value, defensibility, competitive advantage) of certain IP and its contributory intangible assets can fluctuate or erode often very rapidly.
This means the conventional time bound approaches to IP audits (assessments, due diligence) tend not to reflect or project the assets’ vulnerability and increasingly real possibility they will experience adverse changes in their:
- value, stability, and sustainability at some point during the life, value, and functionality cycle of the asset, and/or
- economic – competitive advantage contributions to other (current, future) projects, R&D, or relevance to a company’s strategic planning, and supply chain, etc.,
It’s important to recognize anyone of the above may occur in either pre or post transaction contexts.
IP Audits – Rationale and Methodology
I frame the rationale and methodology for conducting IP audits through a somewhat different lens, and often with different objectives. I want IP audits (assessments, due diligence) to be relevant, actionable, and bring strategic insights to management teams, boards, and other business decision makers about their intangible (IP) assets. This higher level of insight, that includes risks, value, and due diligence brings absolutely essential information to business decision makers. Information and insight of this caliber should be readily available in board rooms, particularly in companies that are increasingly dominated by intangible (IP) assets.
Key objectives of the information brought to light by an audit, is for companies to be better:
- positioned to utilize their IP (and other intangible assets) as effectively, efficiently, and profitably as possible.
- informed about current and horizonal risks specific to their business environment and types of transactions their company routinely engages in which intangibles and IP are almost in play.
- better informed not just about its registered IP, but the intangible assets that contributed to cultivating the IP.
In short, the conventional snap-shot-in-time and IP only audits (assessments, due diligence) are, in most instances, ill-suited for today’s increasingly hyper business climate.
Too, the notion that one can sustain control, use, ownership, and value of their IP with absolute certainty as if it were a bank ‘certificate of deposit’ may be a business reality, but only for the naïve and high risk takers.
Sustaining Control Of IP Not For The Lifetime Of A Company, Rather For The Value And Functionality Cycle Of The Asset
Some would correctly argue, as I, that trying to sustain control, use, ownership, and value of IP for the lifetime of the company vs. the life (value, functionality) cycle of the asset may actually increase its vulnerability to compromise, infringement, circumvention, becoming ‘boxed in’, being at the mercy of ‘trolls’, or simply becoming irrelevant. Any one of these calamities, should they materialize, can significantly undermine-erode the value, demand, and attractivity of IP, particularly in the eyes of would-be investors, buyers, and/or strategic alliance partners.
Too, it is an extraordinarily costly and lengthy undertaking to initiate legal action to defend one’s IP. IP holders would be well advised to ensure their ‘house is in good order’ with respect to having IP protection practices and procedures firmly in place in advance before initiating legal action. Otherwise, the odds of being on the losing end of any litigation are not favorable.
As a holder of IP, it will always serve a company’s interests to demonstrate that an assets (IP) value and demand in the marketplace remains consistent and sustainable. It’s makes good business sense to re-frame conventional IP audits (assessments, due diligence) to:
- focus more on sustaining control, use, ownership, value and materiality
- identify key intangible assets that underlie the IP
- provide all parties with a more objective and strategic perspective regarding the sustainability of the IP and its contributory (attendant) intangible assets.
A key benefit of this approach is that management teams and boards would achieve a higher level of confidence about the status of the intangible (IP) assets their company produces and possesses which would facilitate better strategic planning and significantly mitigate risk. .
This comprehensive approach to conducting IP – intangible asset audits merged with attributes of assessments and due diligence is necessary. Otherwise, an un-initiated practitioner can literally jeopardize a transaction’s potentially favorable outcome in which IP and intangible assets are in play.
Need For Speed
I respect the need for speed in executing business transactions in which intangible assets and IP are in play. However, the time has come for parties to be less concerned about speed and more concerned with ensuring the IP and contributory intangible assets are intact, have not been compromised, and remain sustainable relative to their value and revenue producing capabilities.
To achieve this, I advocate the inclusion of routine – on-going IP and intangible asset audits (assessments, due diligence). This includes inserting practices/procedures to monitor fluctuations in asset value and materiality. By doing this, prospective investors, buyers, and alliance partners would have available timely insight about the assets being considered for purchase or investment and adjust (leverage) their decisions accordingly, should it become necessary. Such limited transparency would also deliver very favorable goodwill, reputation, and trust, and quite possible higher values of the IP and intangibles.
Too, today’s aggressive, globally competitive, and predatorial business environment should prompt audit (assessment, due diligence) teams to literally re-phrase key questions posed in conventional audit approaches. For example, precede the proverbial ‘is the intellectual property protected’ question with the question ‘has the know how and intellectual capital on which the IP value and use is premised, been adequately safeguarded and managed from its inception’? Not only is the answer subject to verification, the answer will provide the team with sound clues to pursue further insofar as assessing the IP’s real status, value, and usefulness.
To fully appreciate the relevance of re-phrasing some of the key and traditional ’IP audit questions’, it’s important to recognize that holders of patents, trademarks, and copyrights should not assume such protections carry any viable deterrent effect to would-be infringers and/or those inclined to engage in misappropriation. Experience clearly suggests that in most instances today, conventional IP protections are routinely disregarded, outpaced, and/or circumvented by a growing global body of sophisticated entities, some of whom are state sponsored while others are independent and legacy free players which I call economic and competitive advantage adversaries.
Patent Value And Competitive Advantages Are Increasingly About Due Diligence, Asset Monitoring, And Deterrence
Michael D. Moberly March 8, 2012
For starters, management teams, boards, and other business decision makers must recognize the economic fact that 65+% of most company’s value, sources of revenue, and building blocks for growth today evolve directly from intangible assets of which intellectual property is one.
It’s certainly correct to assume then, in most business transactions, e.g., mergers, acquisitions, strategic alliances, and venture capital initiatives, etc., intangible assets and IP will not only be in play, they will be very much a part of any subsequent deal and can have a significant influence on a deals’ outcome.
Transaction due diligence therefore should be ‘laser focused’ on achieving two key objectives:
- identify, unravel, and assess the status, stability, fragility, and defensibility of the targeted IP plus the underlying and contributory intangible assets
- ensure control, use, ownership, and value of those assets is sustainable and equally important, have the capability to monitor any/all fluctuations in asset value and competitive advantages in both pre and post transaction contexts.
Patents can obviously be significant sources of competitive advantage, value, serve as potent (defensive – offensive) weapons, and/or be leveraged in a relevant market space. This makes intangible asset and IP monitoring an essential component to any due diligence process. That’s because the (monitoring) findings can have a bearing, as noted above, on a transactions’ outcome in terms of how it may influence the relevant parties decision, i.e., invest – don’t invest, buy – don’t buy, etc.
Patents are widely presumed, sometimes naively so, to be the strongest form of IP protection because they:
- grant legal standing to exclude all others from making, using, selling, offering for sale, or importing the issued IP for a period of years.
- are assumed to deter bad actors from infringing, stealing, or misappropriating the patented subject matter.
With respect to the latter, there are global business realities that are routinely overlooked or dismissed regarding the real deterrent effect of issued patents. By definition, deterrence means inhibiting the behavior/conduct of others. That said, there are two types (levels) of deterrence.
The first one is referred to as general deterrence which, in the case of an issued patent, means that a vast majority of us, perhaps 95+%, would respect an issued patent and thereby be deterred from engaging in infringement, misappropriation, or theft of that IP.
The second one is referred to as specific deterrence, which again in the case of an issued patent, translates more as a question, i.e., what would deter the growing global cadre of infringers and legacy free players from continuing to engage in IP infringement, misappropriation, theft, product piracy-counterfeiting, etc.?
Unfortunately, seldom are either of these deterrence factors (realities) addressed in conventional, snap-shots-in-time, one-size-fits-all, check-the-box types of IP – intangible asset due diligence. The truth is, all forms of intangible assets (IP) are vulnerable and subject to being compromised, stolen, misappropriated, counterfeited, infringed, or have their competitive advantages illicitly undermined. The culprits, in addition to rising numbers of wily insiders, emanate from highly predatorial, sophisticated, and organized independent and/or state sponsored actors.
Today, it is prudent to assume the risks and vulnerabilities to any company’s intangible assets and IP to global economic – competitive advantage adversaries is persistent, asymmetric, and unfortunately, generally successful.
So, in today’s globally aggressive business (transaction) environment, relying solely on one of the several (common) formulas for calculating patent value must include, in my view, a very big ‘it depends’! If the calculation doesn’t incorporate this important caveat, it’s prudent to seek another, and perhaps more experienced valuator. In other words, correctly arriving at the value of a patent starts by finding competent practitioners well versed in not just IP, but intangible assets and the persistent and asymmetric risks and threats to those assets’ value and usefulness.
Absent the necessary currency of knowledge in not just the array of global risks to intangibles, but a comprehensive understanding how such risks will materialize, how such risks adversely affect (intangible) assets, and what additional safeguards are necessary to combat, counter, and/or mitigate those risks, it can be embarrassingly imprudent to assume asset value and competitive advantages will meet even the most gloomy projections.
Michael D. Moberly January 18, 2012
Intangible assets are increasingly valuable commodities that can be leveraged to allow management teams and boards to pursue a broader range of business transactions and/or alliances. Too, intangibles will almost certainly be integral to negotiating a deal in terms of pricing and the fact they can be bought, sold, transferred, traded, assimilated, or licensed.
Why? Because 65+% of most company’s value, sources of revenue, and building blocks for growth lie in – evolve directly from intangible assets!
Experience tells us that if there was a scale for transferability, replication, and/or imitation of intangible assets they would surely score high on all counts. This is, intangible assets, in most instances are vulnerable to value erosion, undermining and competitive advantage hemorrhaging. In other words, they can become impaired in some manner relative to their ability to produce/- deliver the projected value, competitive advantages, and revenue streams after the deal has been closed.
This makes it all-the-more essential for transaction management teams to be alert to the potential for, if not the probability that, at some level, asset hemorrhaging will (can) occur in either pre or post transaction contexts. In some instances, asset hemorrhaging can literally commence before the ink dries on a transaction contract.
A key starting point to prevent or at least mitigate any such asset hemorrhaging is to avoid permitting an unwarranted sense of urgency and/or speed to affect the thoroughness of the transaction management teams’ responsibilities. When management teams view a transaction primarily through a lens of urgency and speed, a frequent consequence is that critical due diligence, particularly intangible asset assessments, become hurried and follow an ill-conceived or old ‘check the box’ approach that does not consider ways in which the assets can be adversely affected in both pre and post transaction contexts, as they should.
Of course, in today’s hyper-competitive and predatorial global business transaction environment, it is likely there will be multiple and simultaneous suitors or players to a transaction which often drives, unduly in many instances, a sense of urgency and speed to consummating the deal.
Today, transaction management teams are obliged, in my view, to structure their role, particularly how due diligence and intangible asset assessments are conducted in a manner that:
- recognizes the necessity to retain control, use, ownership, and monitor the value and materiality of the assets as being essential to negotiating a profitable and sustainable transaction outcome
- secures approval to integrate intangible asset protection and monitoring commencing at the earliest stage and throughout the transaction negotiation process
- reduces the probability of and be promptly alerted to internal-external acts or materialization of risks that can
– undermine asset value, competitive advantages and the assets’ ability to continue to produce revenue
– trigger costly and time consuming legal disputes and challenges that can disrupt the momentum of and/or jeopardize an otherwise viable transaction.
While the goal of a transaction management team remains the same; to facilitate stronger, more secure, and profitable transactions, it’s now prudent to include an intangible asset specialist on the team, who can, among other things, identify, unravel, and assess the value, risks, defensibility, and sustainability of the intangible assets that are actually in play.
Michael D. Moberly December 22, 2011
It is not uncommon for 75% to 90+% of start-up – early stage firms’ value, projected sources of revenue, and ‘building blocks’ for growth lie in – are directly linked to the invention’s IP and intangible assets.
We’ve come to know that investments in early stage companies and/or university spin-off’s, VC’s will require, quite correctly, putting in place management teams with experienced and strong (intangible asset and intellectual property) oversight, stewardship, and licensing credentials.
Among other essential responsibilities, the management team and the inventor absolutely must ensure that control, use, ownership and value and materiality of the invested IP and intangible assets is being monitored. Unfortunately, many merely rely on patent issuances as being a sufficient stand alone deterrent to infringement.
The path to achieving that essential objective commences with the genuine recognition that a well-designed and thorough (IP, intangible asset) assessment and due diligence process must be conducted to provide investors (VC’s) with current and objective pre/post transaction insights and perspectives about the fragility, stability, defensibility, and marketability of the invested assets. The assessment – due diligence findings will serve as a foundation for facilitating (consummating) a more secure, profitable, and sustainable transaction.
Investors need and want relevant, insightful, objective, and forward looking (over-the-horizon) perspectives that extend well beyond the conventional ’snap-shot-in-time’ assessment – due diligence that does not take into account – address asset volatility or the ever growing possibility that the invested assets have already been compromised in some manner.
Thus, the intangible asset – IP assessment and due diligence must, among other things…
- identify any embedded, under-the-radar risks, vulnerabilities, and operational – usage complexities that can impair and/or entangle the assets and become preludes to costly and time consuming legal disputes or challenges.
- unravel the invention’s development and identify any additional clusters of value and potentially revenue producing (intangible) assets and competitive advantages, aside from the registered IP and beyond what was espoused in the inventor’s initial pitch.
- determine if asset safeguards and (asset) value preservation and monitoring measures were in place and aligned with (a.) the investors’ objective, (b.) the company’s strategic business plan, and (c.) the functional (life, value) cycle of the invested assets, and of course (d.) the all important exit strategy.
If an assessment-due diligence reveals that any of the key assets are suspect, impaired, or may have already been compromised, the investment transaction may warrant reconsideration or inclusion of specific (risk mitigation – transfer) covenants before going forward. Under such circumstances, it’s unlikely that a management team alone, regardless of their experience and skill, can effectively manipulate the assets to overcome or reverse such transgressions without requiring costly, time consuming, and possibly momentum stifling legal action.
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Michael D. Moberly November 29, 2011
“If it can’t be measured, it can’t be managed”, an adage attributed to Peter Drucker that, in my view, carries more relevance today than when it was initially uttered. That’s because increasing percentages (65+%) of company’s value, sources of revenue, and foundations for growth evolve directly from intangible assets including intellectual properties, proprietary know how, brand, goodwill, etc.
In fact, there is no other time in company governance history when measuring and managing the value of knowledge-based assets (intangibles) is more necessary to a company’s growth and profitability.
By consistently monitoring – assessing the value of a company’s intangibles, management teams can be positioned to recognize, in a timely manner any:
- erosion – undermining of asset value and competitive advantages through misappropriation, infringement, and counterfeiting
- materiality changes in assets relative to Sarbanes-Oxley and FASB
- asset obsolescence
Asset valuation must constitute much more than periodic snap-shots-in-time however. Rather, it behooves management teams today to have on-going asset valuation processes because (asset market and company relevance) value and materiality can fluctuate relative to the assets’ vulnerability – attractivity to internal and external influences such as theft, misappropriation, infringement, etc.
When such adverse events occur, an assets’ value and competitive advantage deliverance, i.e., stability, defensibility, and fragility can be significantly impaired hence, a company’s (project’s) anticipated profitability and sustainability can rapidly be undermined or stifled altogether.
Again, by being able to consistently monitor and measure the value of key assets, companies and their management teams can be more responsive to:
- the inevitable challenges, disputes, and external targeting that routinely occurs
- meeting their ever expanding fiduciary responsibilities insofar as protecting, preserving, strengthening, and managing their intangibles.
- allocating – directing asset protection resources more efficiently and effectively commensurate with an assets’ life and contributory value cycle.