Michael D. Moberly July 27, 2016 ‘A blog about business and intangible assets’!
By now there should be no question among company management teams that the global business transaction environment is increasingly competitive, aggressive, predatorial, and generally, winner-take-all.
A contributing factor to these circumstances is that growing percentages (80+) of most company’s value, sources of revenue, and ‘building blocks’ for wealth creation and competitive advantage reside in – emanate from intangible (non-physical) assets, not tangible (physical) assets. It would make sense then, due diligence – audit activities that dismiss or omit IA’s (intangible assets) from their purview will not provide decision makers with insightful and essential information. Dismissiveness and prejudiced insight are the foundations of transaction grief, frustration, and disappointment in terms of IA performance.
IA’s will always be in play. So it is, business transactions involve the valuation, buying, selling, development, and commercialization of IA’s. It’s prudent then, for parties to business transactions, i.e., IA buyers primarily, recognize the importance of ‘getting out front’ by acknowledging and mitigating risks that will adversely influence how a transaction will be valued, structured, and ultimately executed.
Business persons who remain unconvinced and trivialize the contributory value and role IA’s play in transaction outcomes are encouraged to consider when risks materialize, i.e., acts of misappropriation, infringement, and/or compromise how long will it take the adversary to integrate those assets into their products and/or services? The answer of course is, a matter of days or weeks, seldom months or years. Again, dismissing these realities all-to-frequently manifest as devaluation of reputation and minimal, if any, gains. To do otherwise, decision makers would need to possess prognosticative psychic powers which I am reluctant to attach much, if any, validity.
Exacerbating these increasingly probable risk events is the rarity that transaction initiator’s due diligence plan-strategy will include IA value and competitive advantage monitoring components designed to alert, stop, or stabilize asset hemorrhaging, or recover compromised assets before substantial, and many times irrevocable asset value, loss, and/or reputation risk materialize.
Transactions in which key IA’s have already been compromised (in one form or another) actually constitute a ‘head start’ for the adversary, i.e., parties or party engaged in the illicit acquisition and use of another’s IA’s. While actual IA losses in these circumstances, i.e., value, competitive advantage, reputation, image, goodwill, structural capital, etc., may appear somewhat subjective, it’s pragmatic, in my view, to measure losses – compromises less in (conventional) dollar value contexts, and more in terms of the speed which such adverse acts occur and their irrevocability. So, is a well-constructed, thorough, and IA-specific due diligence warranted, you bet!
Unfortunately, there remain many IA buyers (business transaction, M&A’s, etc., which I characterize as engaging in ‘permissive neglect’ with respect to identifying, monitoring, and safeguarding about-to-be purchased IA’s. That is, they repeatedly and erroneously assume…
• any economic and/or competitive advantage a competitor or adversary may glean from compromised IA’s will be
short-lived and/or outpaced by the rapidity of changes in consumer and market demands which only the
legitimate (asset) originator will be able to deliver.
• IA’s are (readily) renewable resources.
Respecting the narrowness of (profit) margins today, in any business transaction, management teams, legal counsel, c-suites, and boards alike, would be prudent to re-consider both of the above assumptions.