IP and Thinking About Your Exit Strategy

Whether you’re a brand owner or a future brand owner, you start to do a gut check this time of year. The soon-to-be brand owner? She starts her engines and gears up to launch her business. The existing brand owner? He does a review; thinking through how the previous year went. What to both types of entrepreneurs have in common? They must be thinking about an exit strategy. (Spoiler alert: taking proactive steps to protect your IP now will add value to your business, no matter the exit strategy you choose.)

Want to sell or merge with an existing conglomerate? Keep the business and grow your empire? These are all exit strategies that may cross your mind. And, IP protection plays a role in each and every one. Below, a breakdown of three common exit strategies and how proactive IP protection plays a role in adding to the value of your business.

Exit Strategy 1: Merger/Acquisition

What it is: Your business could be very attractive to someone who wants to buy you out and combine your business with theirs, either to 1) eliminate the competition, or 2) grow into an area where your business excels.

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The Process: Lots of due diligence and exchanging of information. When you buy a car, you do some research, right? (I did.) Safety ratings, history of crashes, maintenance, all of that jazz. You can only imagine the research that goes into buying an entire company. That’s what happens prior to a merger or acquisition.

The Benefits of Proactive IP Protection: More money and fewer problems. Nobody wants to buy into a lawsuit. What does that mean? It means that the due diligence process might reveal legal risks that could result in a lawsuit down the line — for example, a trademark search was never performed or an attorney was never consulted. If that’s the case, the purchaser might lower the offer, she might have 100 questions (which you’ll need to answer to move the ball forward), or the purchaser could walk away. On the other hand, a clean intellectual property portfolio — showing each piece of intellectual property, the date it was registered, etc. — speaks volumes. Nothing says “my business is legit” like documented IP ownership.

Exit Strategy 2: IPO

What it is: Uncommon for a startup, but the goal of many. IPO is short for “initial public offering.”

The Process: An IPO drastically changes a company’s risk profile. The New York Stock Exchanged published this handy IPO guide, if you want to dig into the nitty gritty. Again, there’s due diligence involved. In the IPO context, it exists to identify potential roadblocks, and often means:

  1. Discussions with company personnel about the company’s legal affairs; and
  2. Document review by the company’s and the underwriter’s counsel, including review of:
    • Material contracts;
    • Corporate charter documents;
    • Materials relating to litigation (pending or ongoing); and
    • Materials relating to intellectual property, including licenses, patents, and trademarks.

Benefits of Proactive IP Protection: Never ran a trademark search? Just like with the merger/acquisition process, that could be a red flag that’s pulled during the legal due diligence phase. Could someone else be out there using a similar brand name in connection with a similar product offering? Never registered your trademarks with the Trademark Office or registered copyrightable materials with the Copyright Office? These are potential legal risks that could slow the IPO process. Thus, lack of IP planning = slow down and potential decrease in the value of your stock.

Exit Strategy 3: Grow, Baby, Grow

What it is: You’ve worked hard and grown your business, and you’re not giving it up for anything.

The Process: What started from reading The E-Myth and deciding to start a business, expanded into a full-blown LLC with your systems and processes in place. Your business is yours, for keeps.

The Benefits of Proactive IP Protection:  How does proactive IP protection add value to your growing business? Let’s break it down by two common types of IP.

  • Copyright: Say your business turns on your website content — graphic designs, code, the works. Registering those materials with the Copyright Office prior to infringement entitles you to ask the infringer for your attorneys’ fees in enforcing your rights, along with statutory damages. Almost always, litigation costs big bucks. An infringer is more likely to come to the table if you can show your creative works are registered. (You can imagine the thought; “Oh God, we might be on the hook for attorneys’ fees? Let’s try and work something out.”)
  • Trademark: If trademark infringement occurs and you’ve registered your trademark with the USPTO, certain “presumptions” are in place. For example, you will not have to prove that your mark is valid, or that you have the exclusive rights to the mark — the other side will have to prove that the mark is not valid, or that you do not have exclusive rights to the term. In other words, it puts the burden of proving these things on the other side, not on you. This is a benefit that you just don’t get if your marks are not federally registered. Furthermore, registered trademarks are entitled to “nationwide priority,” meaning that they are not restricted to certain states.

Consequently, these things add value to your business in the form of ammo in your arsenal that will make conflicts much easier to dispose of.

The Point: In conclusion, whether you’re planning to roll out a new business, grow a business, or sell a business in the new year, you’ve got to be thinking about your exit strategy and how proactive IP protection fits in.

 

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