Archive for 'Due Diligence and Risk Assessments'

Intangible Asset Due Diligence: Selecting The Absolute Best Individual or Firm Is Critical

May 31st, 2012. Published under Due Diligence and Risk Assessments, Intangible asset assessments/audits., Sustainability of intangible assets.. No Comments.

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…

  1. unravel (identify) how, where, and by whom the key (intangible) assets originated.
  2. determine and assess how or whether control, use, and ownership of the assets is or can be sustained.
  3. 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.
  4. recognize and differentiate the origins, motives, and asymmetric nature of global risks and threats to (intangible) assets that have become embedded in all transactions.
  5. 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.
  6. ensure asset control, use, ownership, and value are monitored for sustainability, especially in post-business transaction contexts.
  7. 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!

Intangible Asset Monitoring During Due Diligence: A Necessary, But Often Overlooked Requisite!

May 24th, 2012. Published under Due Diligence and Risk Assessments, Intangible asset protection, Mergers and Acquisitions. No Comments.

Michael D. Moberly   May 24, 2012

It’s important for management teams, c-suites, and boards to recognize that merely because a deal or transaction has progressed to the due diligence stage, there is absolutely no guarantee the projected values, synergies, and competitive advantages the targeted assets are projected to bring, an increasing percentage of which will be intangible, will sustain those projections.

In today’s globally competitive, aggressive, and predatorial business transaction environment, it is quite naïve in my view, to assume the full control, use, ownership, value, and materiality, etc., of the targeted assets will remain fixed throughout the transaction period without close monitoring and risk mitigation in both pre and post transaction (due diligence) contexts.

In large part, that’s because a potential, but, I might add, an increasingly routine by-product of business transactions is that they produce uncertainty at all employee levels as well as among stakeholders and investors.  Uncertainty, individually or collectively can, influence individuals to assume demeanors, exhibit behaviors, or engage in acts that otherwise are considerably less likely if/when uncertainty is not present.

Put bluntly, uncertainty can manifest itself in many ways, some of which are adverse when change (i.e., a business transaction) is pending or eminent.  Too, in business transactions and the uncertainty it frequently sparks, can manifest as asset compromises, misappropriation, and/or undermining of competitive advantages.  Perhaps more so when due diligence teams are dismissive, unaware, or conclude the monitoring necessary to prevent or mitigate such circumstances is beyond (beneath) their mandate.  That’s irrespective of evidence that suggests asset vulnerability elevates during periods of (company, employee) uncertainty.  To be sure, commencement of due diligence is well-recognized as an indicator that change (and uncertainty) within a company and/or business unit are fully under consideration or eminent.

What’s more, uncertainty, and the various ways/contexts it manifests, can occur in rapid-fire order and cascade throughout a company.  Due diligence team ‘radar’ should surely recognize any adversity and modify the way due diligence will be structured and executed.  This is especially relevant if the transactions’ envisioned (projected – desired) economic and competitive advantage benefits decline.

Admittedly, I am not an advocate of using the uninitiated or inexperienced to conduct due diligence.  It is far too important.  Neither do I subscribe to the view that there is a one-size-fits-all template (for efficiency sake) to conduct due diligence.

So, for those, and other considerations, some of which are described below, I have identified various issues that should definitely be on the radar of every due diligence team.  Any one of the following for example can be a signal that a higher probability exists that a transaction will be successful, i.e., is there evidence of:

1. a broad company culture that genuinely recognizes the value of the core (revenue – value producing) intangible assets?

2. consistent stewardship, oversight, and management of those assets?

3. consistency in the representation of those assets, ala Sarbanes-Oxley, FASB, etc., in which (asset) risk, value, materiality, and financial performance are measured and accounted for?

4. business continuity-contingency (organizational resilience) planning that includes the due diligence targets’ core intangible assets?

5. strategic – internal planning and execution that achieves recognition and utilization of  intangible assets as source of value, revenue, and ‘building blocks’ for growth and sustainability?

While visiting  my blog, you are respectfully encouraged to browse other topics/subjects (left column, below photograph) .  Should you find particular topics of interest or relevant to your circumstance,  I would welcome your inquiry or comment at  314-440-3593 or m.moberly@kpstrat.com

 

Intangible Asset Due Diligence: Must be much more than a cursory or confirmatory review!

May 23rd, 2012. Published under Due Diligence and Risk Assessments, Intangible Asset Value, Intangibles as strategic assets. No Comments.

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!

While visiting  my blog, you are respectfully encouraged to browse other topics/subjects (left column, below photograph) .  Should you find particular topics of interest or relevant to your circumstance,  I would welcome your inquiry at  314-440-3593 or m.moberly@kpstrat.com

Elevate Investor Confidence By Ensuring Your Intangible (IP) Asset House Is In Order!

May 17th, 2012. Published under Analysis and commentary, Due Diligence and Risk Assessments, Investing in intangible assets.. 1 Comment.

Michael D. Moberly    May 17, 2012

Want to elevate investor confidence?  Start by ensuring your intangible (IP) asset house is in order!  One consequence of management teams, c-suites, and boards of emerging growth firms not recognizing and exploiting the intangible assets their company produces and possesses is that it will have a bearing, usually adverse, relative to prospective investor’s ‘invest, don’t invest’ decision criteria.

The conventional assumption that investors are, by their nature, more accepting of risk is, in my view, much overplayed.  I have yet to meet an investor who does not have a fully developed internal ‘smell test’ to gauge a prospective transaction’s risk and return potential.  Too, I see increasing numbers of seasoned investors…

  • requiring a target’s intangible asset and IP house be in order as a requisite to investment consideration.
  • recognizing intangible assets are crucial contributors to a target’s profit potential, share price, market position, and competitive advantage.
  • assigning more weight to differentiating intangible assets from tangible (physical) assets.
  • recognizing that transaction due diligence must include pre and post components for monitoring any fluctuations in asset value, control, or ownership.

To emphasize these realities, I refer to a previous ‘Howery Survey of Investor Attitudes on IP Protection’  in which a significant number of respondents reported that companies which lack an effective IP (intangible asset) strategy has a detrimental effect on company performance.  In fact, one in four of the Howery Survey respondents reported they had actually turned down investment opportunities due to the target company’s inadequate approach to IP and other intangible assets.

Fully 95% of the Howery survey respondents report that it is no longer sufficient, in the context of their investment decision, for a target company to merely own IP with no (aligned, integrated) protection, managerial, or competitive advantage peripherals.

So, in my view, the proverbial bottom line (in conjunction with the Howery Survey’s findings) is this:

companies that presume conventional IP issuances and enforcement protections are sufficient, standing alone, to attract investors are finding instead that an increasingly important requisite to attracting and satisfying the demands of serious investors relative to their invest – don’t invest decision criteria, is the existence of comprehensive plans, practices, and procedures which…

  • demonstrate the about-to-be-purchased/invested assets, have effectively safeguarded from their inception.
  • reflect today’s increasingly aggressive, predatorial, and winner-take-all business transaction environment.
  • are seamlessly aligned with – integrated into a viable and strategically competitive business strategy that encompasses (intangible) asset development, acquisition and utilization, and exploitation.

(Adapted by Michael D. Moberly from the work of Howery, Simon, Arnold & White’s Survey Of Investor Attitudes on IP Protection)

Intangible Asset Intensive Companies: Attracting Investors

April 16th, 2012. Published under Due Diligence and Risk Assessments, Intangible asset protection, Intangible asset strategy. No Comments.

Michael D. Moberly    April 16, 2012

Many, if not most companies want to attract investors.  For intangible asset intensive companies there are particular strategies that company management teams should consider to elevate investor curiosity and render them more attractive investments. 

I encourage management teams, c-suites, and boards to read intangible asset and IP-related surveys and studies, particularly one’s previously produced by Howery which, among other things, found prospective  investors are more likely to have more than a passing interest in companies that have practices in place to identify, assess, monitor,  safeguard, and (e.) fully utilize their intangible assets as effectively as possible.

Two key reasons why experienced (prospective) investors are focusing more attention on intangible assets are:

  • their correlation to a company’s attitude for recognizing and consistently monitoring the value of intangible assets, IP, competitive advantages, and sustainability.
  • they obviously understand that intangible assets comprise 65+% of most investment’s value, projected sources of revenue, and ‘building blocks’ for growth and overall sustainability. 

Therefore, investing in companies that have either no, ineffective, or inconsistently applied procedures – practices to identify, assess, and sustain control, use, ownership, and monitor the value and materiality of about-to-be-invested intangible assets presents, at minimum, a cautionary yellow flag insofar as an invest – don’t invest decision is concerned. 

Too, when asset management and oversight (of intangibles and IP) are deemed lax, non-existant, or when management teams exhibit indifference or trivialize the prudence, or worse, don’t recognize the necessity to safeguard their (intangible) assets, it would be quite proper to presume risks and vulnerabilities (to those assets) will elevate and probably materialize.  When, not necessarily, if those risks materialize, asset contributory value will almost assuredly erode.  For prospective investors and stakeholders then, circumstances like this can, quite literally push an investment initiative and/or strategic alliance beyond acceptable (risk) thresholds.

It warrants being said again, that in today’s globally competitive, increasingly predatorial, and ‘legacy free’ business (transaction) environment, the mere fact that a company has been issued a patent, is standing alone, not likely to negate the aforementioned risks or produce much additional investor confidence as it did in previous decades.  

Unfortunately however, many management teams, naively in my view, remain inclined to assume conventional IP enforcements, i.e., patents, trademarks, and copyrights are applicable to other forms of intangible assets and therefore suffice as an intangible asset protection strategy.

More aggressive and targeted due diligence can mitigate, if not alleviate, a good portion of risk.  Due diligence questions should, among other things, determine whether the IP and the underlying intangible assets been adequately safeguarded:

  •  from inception, and
  • in pre and post transaction-investment contexts?

If so, this generally translates as greater assurance that asset value and utilization remain intact.  Its worthy to remember though, in this globally competitive and predatorial business environment, neither can be assured solely because a patent has been issued.

On a positive note, increasing numbers of prospective investors – stakeholders are experienced enough to recognize that conventional IP protections do not supplant a comprehensive set of policies, practices, and procedures to safeguard and monitor valuable (intangible) assets.  But, when management teams proceed indifferent to the risks,  prospective investors should exercise their options to:

  • abandon the investment altogether, or 
  • ratchet-up the due diligence and asset assessment process to identify and leverage the (pre – post) risks for better terms. 

The result often is, in the absence of managerial oversight on these increasingly critical aspects noted above,  investments are increasingly likely to manifest themselves as frustrating experiences that fail to meet the projected (desired) outcomes.

Intangible Asset Due Diligence

April 10th, 2012. Published under Due Diligence and Risk Assessments, Intangible asset assessments/audits., Investing in intangible assets.. No Comments.

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…

  1. unraveling the assets to identify any/all under-the-radar risks and vulnerabilities that could…
  2. impair and/or entangle particular (intangible) assets and adversely affect investor’s ability to sustain their control, use, ownership, and value
  3. serve as preludes to costly, time consuming, and investment stifling legal disputes and challenges.
  4. identifying all centers of internal and/or stakeholder intangible asset generation, value, and revenue production beyond what is already publicly available.
  5. 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.

Intangible Asset Transactions: What Negotiators Need To Know

April 4th, 2012. Published under Business Transactions, Due Diligence and Risk Assessments, Managing intangible assets. No Comments.

Michael D. Moberly    April 4, 2012

In most every business transaction today, valuable and competitive advantage driving intangible assets, such as IP and proprietary know how, etc., will be in play.  This makes it all-the-more essential that prospective buyers – recipients of those assets, i.e., those assuming fiduciary responsibility for the assets’ stewardship, oversight, management, and use, recognize the risks and challenges associated with achieving a favorable and uncontested transaction outcome.

Anecdotal experiences from victim companies coupled with numerous and prominent studies collectively find a significant percentage of (intangible) asset risks and challenges emanate from a global culture and industry that’s increasingly dependent on and engaged in information (intangible) asset theft, infringement, and misappropriation. Today, it’s quite proper for management and/or transaction management teams to demonstrate prudence by acknowledging  and trying to prevent, or at least mitigate, such risks, particularly during negotiations, and certainly before finalizing any business transaction in which intangibles are in play and ultimately part of the transaction.

Seldom is it in the (reputational) interest of victim companies to go public with their inability to safeguard their most valuable assets unless so mandated by law.  Consequently the value of intangible asset losses attributed to theft, infringement, misappropriation, counterfeiting, and/or product piracy, etc., still largely remain well intentioned estimates. That’s why it’s absolutely essential for transaction management, due diligence, and negotiation teams alert asset buyers – prospective asset recipients before finalizing a deal, that the deal’s projected value and benefits, particularly those evolving from intangibles, are highly dependent on conducting a thorough and effective due diligence.  The level of due diligence I am referring to must, at minimum include a comprehensive assessment of the (intangible) assets’ status, i.e., stability, defensibility, and value in both pre and post transaction contexts.

Also, if the transaction is global in scope, the transaction management, due diligence, and negotiation teams need to fully factor into their respective roles, the reality that in numerous countries (e.g., USTR, Section 301 countries particularly) substantial percentages of their GDP, sources of employment, personal income, and manufacturing base are strongly linked to perpetuating the supply of products stolen, infringed, misappropriate, and/or pirated from their rightful owners.

It’s quite correct then for prospective buyers of transacted products and intangible assets to conclude that these adverse – illegal acts have moved well beyond the realm of merely being annoying probabilities of experiencing minimal (intangible asset) losses which companies have grown accustomed to be part of any business transaction, to becoming extraordinarily costly and potentially lethal inevitabilities if left unchecked or un-considered.

To further this point, prudent transaction negotiators must recognize there are few, and in many instances, no impediments for existing, would-be, or future (asset) infringers, thieves,, counterfeiters, and product pirates to stop engaging in such acts. In large part, that’s because…

  • start-up costs are minimal for infringers and their manufacturing counterparts
  • such illegal acts can be executed with increasing anonymity
  • cyber-attacks are playing more consistent roles in the theft of intangible (IP) assets
  • deterrents’, legal or enforcement, are generally lax and inconsistent which permits the potential for long periods of quick and substantial profiteering
  • the extraordinary speed in which infringement, counterfeiting, and product piracy can materialize and adversely affect a company

The following are important questions intended to influence thoroughness and prudence when engaging in (negotiating) transactions in which intangible assets are integral components, i.e., what is the…

  • company’s loss tolerance threshold or ‘tipping point’ insofar as economic, competitive advantage, market share, reputation, goodwill, consumer confidence, and/or project momentum stifling, etc…?
  • probability that such losses and/or compromises when – if the occur, will be irreversible and permanent,,.?
  • value of the victim company’s competitive advantages and reputation losses…?
  • does the victim company have a recovery and/or remediation plan in place, how rapidly can it be implemented, how much will it cost to execute, and what’s the probability a favorable outcome will be achieved…?
  • degree of global universality of the company’s products and/or services, and are there any (potential) dual-use components or applications embedded in those assets…?
  • cultural (business, legal, government) receptivity to (climate for) infringement, counterfeiting, and product piracy in the host country-region where the transaction will be executed…?

The above represents only a few (but key) considerations company transaction, due diligence, and negotiation teams should consider.  But, I especially urge companies to not dismiss these issues/questions solely for transaction expediency.

It’s especially important to recognize that asset hemorrhaging (caused by infringement, theft, misappropriation and/or product piracy and counterfeiting) can occur well before the ink dries on a transaction contract.  Too, it’s an unfortunate reality that some transaction management – negotiation teams (still) assume they can consummate deals and create revenue streams from acquired – purchased (intangible) assets before those assets will succumb to any adverse or illegal acts.

In the ultra-competitive, aggressive, predatorial, and winner-take-all global business transaction environment, a management team’s dismissive attitude toward such probabilities, if not inevitabilities, in my view, could quite accurately be characterized as permissive neglect!

(Adapted by Michael D. Moberly and inspired by Pat Choate’s  ‘Hot Property’, The Stealing of Ideas In An Age Of Globalization and the more current work of Dr. Joel Brenner in his book appropriately titled ‘America the Vulnerable: Inside the New Threat Matrix of Digital Espionage, Crime, and Warfare’.)

Intangible Asset Hemorrhaging: Deal Expediency and Short Term Thinking

April 3rd, 2012. Published under Due Diligence and Risk Assessments, Fiduciary Responsibility, Intangible asset assessments/audits., Intangible Asset Value. No Comments.

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!

While visiting  my blog, you are respectfully encouraged to browse other topics/subjects (left column, below photograph) .  Should you find particular topics of interest or relevant to your circumstance,  I would welcome your inquiry at  314-440-3593 or m.moberly@kpstrat.com

 

 

Intangible Asset Due Diligence: Pre – Post Transaction

March 29th, 2012. Published under Due Diligence and Risk Assessments, Intangible Asset Value. No Comments.

Michael D. Moberly    March 29, 2012

Identifying and distinguishing intangible assets and recognizing their contributory value should be routine components to any transaction due diligence process today.  An increasingly critical aspect of intangible asset (transaction) due diligence is assessing the assets’ status to ensure their control, use, ownership, value, defensibility, and materiality is sustainable in both pre and post transaction contexts. Unfortunately, a significant percentage of due diligence teams have yet to include – address a target’s intangible assets.

Including – addressing intangible assets in all (business) transaction due diligence is essential because…

  • 65+% of most company’s value, sources of revenue, and building blocks for growth and sustainability today evolve directly from intangible assets.
  • intangibles are increasing valuable assets and consistently in play as requisites to a transaction’s projected returns and achieving the anticipated competitive advantages, synergies, efficiencies, and enhancing value following deal consummation.
  • the value and materiality of intangibles are seldom static, instead they can fluctuate, sometimes very rapidly in today’s globally competitive, aggressive, and predatorial, business transaction environment.

Intangible assets (i.e., intellectual property, proprietary know how, intellectual – relationship capital, brand, reputation, goodwill, etc.) unlike tangible/physical assets, can advance a company economically – competitively only so long as the assets’ control, use, ownership, value, and materiality are sustained and monitored for (value, competitive advantage) erosion, compromise, undermining, etc.

Effective starting points to achieve this is for transaction (due diligence) teams to have codicils in place (upfront) to facilitate/enable…

  • verification of the (targeted) assets’ status, stability, defensibility, and mapping their contributory value
  • monitoring the (targeted) assets’ value and materiality for a specified period of time after a transaction has been executed relative to the assets’ risk-threat-vulnerability assessment.

In most instances, a company’s portfolio of intangible assets, particularly its proprietary knowhow, IP, and intellectual capital are seldom the product of spontaneous acts or even resource dedicated initiatives rather they evolve over time within a company.

Regardless, transaction due diligence teams must now possess, in their repertoire of competence, the ability to identify, unravel, and preliminarily assess any and all, but particularly, the targeted intangible assets.  An informed due diligence team must also be alert to uncovering newly developed or variants of existing intangible assets which can produce valuable competitive advantages.  These competencies are also useful for identifying asset risks and developing risk mitigation initiatives in advance of a deal’s closing.

Like most intangible assets, left unidentified, unprotected, and/or unmonitored (pre and post transaction) valuable and competitive advantage delivering features can become compromised, impaired, or entangled in costly and time consuming legal disputes that stifle transaction momentum or even nullify many projected benefits.  Under these circumstances the result, all too frequently, is that asset value and competitive advantages can quickly go to zero!

Lastly, when engaging in any business transaction in which intangibles are being bought, sold, transferred, licensed, or shared, it’s essential to recognize

  • the production of intangible assets is a dynamic and on-going process within a company
  • due diligence must as good on the front end (pre transaction) as it is on the back end (post transaction)
  • due diligence must not succumb to a faux sense of urgency, and
  • conventional templates or ‘check the box’ types of due diligence are generally insufficient because 65+% of a transactions’ value (success, profitability, etc.) lie in intangible assets, thus the ability of the buyer to sustain control, use, ownership, and value of those assets, through on-site interviews and assessments is essential.

The over-arching objectives for an intangible asset inclusive – focused due diligence process, as conveyed above, is to:

  • elevate the probability that the buyer can use the (intangible) assets being purchase with minimal risk, impairments, and/or value – competitive advantage erosion.
  • bring greater surety to the buyer they will be able to capture and exploit the assets’ value, functionality, synergies, efficiencies, and competitive advantages uncontested.

In my view, this approach to (business) transaction due diligence is absolutely essential today with virtually no room for negotiation!

While visiting  my blog, you are respectfully encouraged to browse other topics/subjects (left column, below photograph) .  Should you find particular topics of interest or relevant to your circumstance,  I would welcome your inquiry at  314-440-3593 or m.moberly@kpstrat.com

Economic – Industrial Espionage: It’s The Intangible Assets They’re After, Not Just The Intellectual Property!

March 21st, 2012. Published under Due Diligence and Risk Assessments, Economic Espionage, Intangible asset assessments/audits., Intangible asset protection. No Comments.

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.