We purchased what?
It is estimated that 70% of a modern company’s value lies in its intellectual assets. As discussed in detail in a recent article by one of our editors, Richard Isaacs, in Mergers and Acquisitions Magazine, a merger can be a very leaky time for information, with disgruntled employees offering information along with their bodies when approaching new employers, people outright selling information, or simply people just being more careless than usual.
M&A is the time for the buyer to go through the acquisition candidate’s assets, both physical and intellectual, and make sure they are all still in place. Then a significant effort needs to be made to insure that the intellectual property assets have not been compromised through theft, disclosure, or sloth. The theft of intellectual property can occur from many locations and in many ways. Thus it is prudent, as part of the initial review of the company, that the Letter of Intent cover the continuing integrity of the acquisition target’s intellectual property, clearly spelling out the duties and responsibilities of the target, and what they need to do to secure the property.
As part of the due diligence process, verify that there is an OPSEC program in place, as required by Sarbanes-Oxley. If no such program is in place – and it won’t be – tests to see if the IP can or has leaked should be devised and used. As a last resort the acquiring company should put a portion of the acquisition funds into a “claw back” escrow so that if theft, misrepresentation, or loss of IP has occurred, it can be dealt with through the escrowed funds, as opposed to chasing down a seller to get funds back. The “claw back” escrow is also an effective means to deal with the no-compete clauses many sellers also face.
Thus, in the purchase of a business, you need to:
• Identify the intellectual property
• Ensure it is titled correctly
• Check on the protections before and during the assessment phase
• Protect against undiscovered losses through transaction management.