Michael D. Moberly
Identifying and distinguishing intangible assets and recognizing their contributory role and 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…
- 80+% of most company’s value, sources of revenue, and building blocks for growth and sustainability today evolve directly from intangible assets.
- intangibles are increasingly 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, 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 should now possess, in their repertoire of competencies, 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.
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!
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 80+% 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 due diligence are 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!
Michael D. Moberly March 29, 2012 St. Louis [email protected] ‘A business intangible asset blog where attention span really matters’.