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Buying or Selling

05 Jun 2007

Buying or selling a retail business involves more than location, stock, and turnover. The deal should also cover intangible assets like the brand, reputation, business methods, and customer lists. Without including these and all other intellectual property (IP) assets of the business, you may end up buying or selling a lemon.

Retail businesses are regularly bought and sold. Sometimes the deal involves buying and selling the business and its assets as a going concern. Other times the purchaser buys the shares in a company that owns and operates the business. In either case, overlooking the IP features can lead to downstream problems.

IP portfolios

While IP may comprise only a sliver of the whole deal don’t underestimate its importance.

The IP portfolio of a business is often the most valuable asset bought and sold.   Each deal is different.  But in every case, professional advice is needed to assess the value of the IP, conduct due diligence, and ensure the IP is transferred properly.  How much time and effort is put into due diligence will often be determined by how much the deal is worth:  but overlooking due diligence entirely borders on negligence.

Get advice

Getting advice early is critical.  If several specialists are involved in advising on the deal, this can lead to challenges with integrating the information.  The key driver should be to present relevant information to the buyer or seller so they can use it and understand how it affects the deal.

Be clear about what information you seek, whether you are the buyer or seller.  And be aware that working out what the information gathered is telling you can be a challenge. 

It takes times to assess the assets of a business.  Make sure enough time is given to this part of the deal.  Haste can lead to hassles.
 
For a seller undertaking due diligence before the business is put on the market, can ensure the best price is achievable.  Any defects or weak links in the business can be corrected to increase the value of the business when it is offered for sale.

Several IP considerations arise when buying and selling a business.  These include:

1. Considering what IP is being transferred.  This should lead to a review of whether the proposed transfer structure is right.  For example, the sale and purchase of company shares may be preferable to a sale and purchase of business assets if the seller is restricted or prevented under a contract from assigning the IP rights.  Be wary of ‘change of control’ clauses in contracts that suggest a sale of shares to be an assignment.

2. Identifying and listing the IP to be transferred.  Think about trade marks and patents but don’t forget about IP rights like unregistered trade marks, copyright, registered designs, trade secrets, confidential information and domain names.  An audit may be needed to identify all IP.  Key IP in retail businesses often centres on trade marks, associated copyright, get-up and domain names.  For a retail business, customer lists can be important.  Are you able to identify all the IP in your retail business now?  Have you protected all the IP integral to your retail business?

3. Classify each type of IP.  Different steps and documents are needed to transfer different IP rights.  Separate documents will need to be prepared if the party identified as owner of the IP right is not the same across all IP rights being transferred.  It is not unusual, for example, for domain names to be held in the names of your IT personnel and not by the business.

4. Always explore title to the IP.  A seller should always be sure they can prove title to what they are selling.  A buyer should compare what the seller says it owns and is selling against the official registers and other available documents.  You will be surprised at how often IP assets are purportedly sold by ‘owners’ who have no clear title to those assets.

5. Check also the seller is not prevented or restricted from transferring the IP, or if another persons’ consent is needed to a transfer. 

6. The investigations mentioned in paragraphs 4 and 5 may not prove clear title.  As part of the sale and purchase deal it may be necessary for the seller to correct defects in title or to get third-party consents.  If this needs to happen, as the buyer you should ensure this duty on the seller is properly documented and a time frame set to tidy up these issues. 

7. If you are the buyer of the business, make sure the IP you are buying will allow it to benefit from the deal in the way you expect.  For example, if your company is buying a business to use its trade mark, the business may be less valuable if the trade mark is not registered.  Equally so if the registration does not cover the goods or services the business offers or if the trade mark is not registered in all markets the business trades in. If the trade mark you are buying includes a graphic, make sure that all associated copyright is also assigned to you.

Similarly, a business with several patents may not be as attractive if the key product made is not patented or if the key product infringes another person’s patent.  

Lapsed or expired patents, designs, or trade marks are of no value either, so check renewals are up-to-date and the rights you are buying are current.

A trade mark can be attacked for non use if it is not used for three years while registered as a trade mark. Ask:  are the trade marks you are buying in use?

8. Review all documents about the business which deal with IP.  If IP is created by others like employees, contractors, branding agencies or others associated in some way with the business, a check of those documents for the relevant IP clauses should be made.  These documents may include licences, assignments, employment contacts, joint venture, consultancy, commissioning, supply, services, sponsorship and confidentiality agreements.

9. All key IP of the business being sold and bought should be analysed to assess strengths and weaknesses.  This will aid in deciding the true value of the business.

10. You should also explore threatened or litigation about the IP.  You should find out if such litigation may adversely impact on the business.

11. If you are the buyer, you should ensure that on completion of the deal the seller transfers to you the necessary IP.  Steps need to be taken to record the transfers.  Do not assume that a clause in the agreement for sale and purchase saying something like ‘the seller agrees to assign on completion’ will act as a legal assignment of the IP.  The parties will need to enter a separate deed of assignment to assign IP on completion.  The deed of assignment will need to be filed against the rights transferred to record the change in ownership.

12. Indemnities and warranties are part of the ‘bread-and-butter’ of commercial deals.  But both buyer and seller need to know what they are and what is being committed to. Don’t treat indemnities and warranties as trivial and standard.  Tailor-made indemnities and warranties specific to the circumstances of the deal should be considered.

Retail businesses are bought and sold everyday.  And everyday issues arise because basic checks are not made.  Make sure that your deal is hassle free: instruct an IP specialist to ensure that all IP involved in the business being bought and sold is identified and transferred correctly.

Corinne Blumsky
Partner, A J Park Wellington
corinne.blumsky@ajpark.com
DDI +64 4 498 3445

An edited version of this article was published in New Zealand Retail magazine June 2007