Gaining a thorough understanding of what your business is worth is a tricky process. Regardless of past investments and future potential, ultimately it will only be worth what somebody is (currently) willing to pay for it. Too often however, in formulating a sale price, many business owners will neglect to take proper account of (or superficially appraise) the intellectual property (IP) owned by the business which will pass to the new owner as part of a sale.
Apart from the obvious items such as registered trademarks, patents and business names, sellers should also turn their mind to business systems, processes, designs and configuration of specialist equipment as well as goodwill and reputation the business enjoys.
A good starting point in valuing such items is often to ask: what would the purchaser have to undertake or pay in order to obtain or develop those items on its own without purchasing my business? Whilst it is often difficult to just tack on an equivalent figure to the purchase price, highlighting such items to a potential purchaser in the process of negotiation can often bear fruit in coming to an advantageous purchase price.
Of course, a well-crafted confidentiality agreement may be useful before discussing the intricacies of your businesses’ IP (as explained in our separate blog post here).
Having a clear a clear grasp on what IP is owned by your business (and what it’s worth) is an indispensable tool in preparing to sell. It can also lead to the realisation that the IP may be worth more if sold or licenced separately rather than bundled with the business as part of a sale. For example, hanging on to ownership of certain IP and licensing it back to the purchaser post sale may provide for an upfront saving to the purchaser and a possible ongoing income stream for the departing owner.
On the other hand, not having a thorough understanding of the valuable intangible resources owned by a business can result in selling oneself short of the full realisable value. Worse still, in some instances, sellers can overlook the issue of some valuable IP altogether and find out later that they have inadvertently transferred something of great value to the buyer without really intending to do so. A key illustration of this point is to be found in the recent legal stoush between Bega and Kraft* over who owns the right to exploit the famous yellow lids on peanut butter- a valuable piece of IP which appears not to have been clearly accounted for when Bega acquired the spread business.
Sound financial and legal advice is integral to properly valuing and documenting the transfer of IP in a business sale.
If you require some commercial guidance in the sale of your business and legal expertise with documenting the transfer of IP correctly, get in touch with Rankin for on-point, practical advice.
Joseph Carneli, Senior Associate
*Source: ABC News website