Why Due Diligence? Part II

October 4th, 2010

 

More than ever, every business deal counts; the stakes are high.  A company depends on making profitable alliances whenever it embarks on a new partnership or licensing venture, or acquires another enterprise or extends credit.  In any business transaction that involves IP, a company is relying on the worth of that IP to substantiate the financial success of the transaction.  That IP is an asset so long as the company has factored all precautionary examinations into its true merit.  An IP due diligence investigation is both a preventative measure against disappointment and calamity and an activist effort to make the most of every transaction.  This investigation will advance a company in:

  •  Understanding the IP rights and valuation:
    • Identifying the true ownership and control rights  of what the company  is buying, licensing or financing
    • Understanding the economic significance of what the company is buying, licensing or financing
    • Determining the scope of the IP rights (e.g., the scope of patent claims)
    • Determining the validity of the IP rights
    • Identifying the value of the IP rights
    • Maximizing licensing and other business exploitation and development prospects
    • Plugging acquired IP assets into new and emerging markets

 

  •  Determining Potential Restrictions, Liabilities or Infringements
    • Safeguarding against buyer’s remorse
    • Knowing that the history of the IP rights bought or financed is “clear”
    • Understanding the obligations the company may be undertaking toward any third parties
    • Determining any litigation or financial encumbrances on the IP bought or financed
    • Ascertaining any usage restrictions of the IP rights bought or financed
    • Ascertaining expiration dates of IP grants, registrations, licenses, and renewals
  •  Determining Potential Restrictions, Liabilities or Infringements
    • Safeguarding against buyer’s remorse
    • Knowing that the history of the IP rights bought or financed is “clear”
    • Understanding the obligations the company may be undertaking toward any third parties
    • Determining any litigation or financial encumbrances on the IP bought or financed
    • Ascertaining any usage restrictions of the IP rights bought or financed
    • Ascertaining expiration dates of IP grants, registrations, licenses, and renewals

These series of articles are written by two of our industry expert attorneys, Laurie Hughes and Suzanne Kessler.

Next article:  Due Diligence Part III

BACKGROUND:  Typical Company Scenarios

Why an IP Due Diligence Investigation?

August 27th, 2010

 

Are you concerned about a perceived or real threat of litigation or is your client a defendant in a pending lawsuit as an alleged infringer?  Are you interested in knowing more about the IP rights held by another for any other reason?  Who is the true, legal owner of the IP?  Have the IP ownership rights expired?  In a merger or acquisition, do all such rights actually transfer?  Are the IP rights encumbered by litigation?  A due diligence investigation will answer these questions and more, saving the company financial pain down the road. 

In the next few weeks we will be explaining the following:

 

Purpose:       IP Due Diligence Investigation to Determine the IP Rights Held by Another to Maximize IP Investment Value and Minimize Investment Risk and Liability

 

Purpose:       IP Due Diligence Investigation to Improve Management of a Company’s Assets, Including Identification of Possible Targets for Sale or License

 

Purpose:       IP Due Diligence Investigation to Assist in Your Management of an Allegation of IP Infringement 

Objectives:

 

  • Preempt distress and disaster by pro-actively evaluating the details of IP rights
  • Know exactly what IP assets your company is realizing from the transaction
  • Mitigate liability and negligence charges resulting from the failure to investigate
  • Maximize corporate strategic planning and profits

 

This series of articles are written by two of our industry expert attorneys, Laurie Hughes and Suzanne Kessler.

What is IP DUE DILIGENCE?

August 19th, 2010

 Prior to the buying, selling, or licensing of intellectual property (IP), your company must undertake an intellectual property due diligence investigation to ensure that it’s getting the perceived value out of the transaction.  Who is the true, legal owner of the IP?  Have the IP ownership rights expired?  In a merger or acquisition, do all such rights actually transfer?  Are the IP rights encumbered by litigation?  A due diligence investigation will answer these questions and more, saving your company from potential disaster down the road.  Unless your company definitively knows the answers to these questions, it may be a case of buyer’s regret – to the tune of thousands or millions of investment dollars.  There’s nothing worse than thinking that you’re purchasing a cache of jewels, then finding out later that they’re worthless.

In the upcoming weeks we will be addressing what IP Due Diligence is and the critical importance that the process plays in the investigation to maximize IP investment value and minimize investment risk and liability.

This series of articles are written by two of our industry expert attorneys, Laurie Hughes and Suzanne Kessler.

Education and Training in Business

July 14th, 2010

 

Education and Training in Business

The Futurist is a magazine that covers trends, forecasts and ideas about the future and is published by the World Future Society, a non-profit educational and scientific organization chartered in Washington, D.C.  Their website is www.wfs.org.

The Futurist May-June 2009 featured an article titled, Trends Shaping Tomorrow’s World/Forecasts and Implications for Business, written by Marvin J. Cetron and Owen Davies.  During the next few weeks we will be presenting segments of their article as they relate to businesses and business owners.

Education and training are expanding throughout society.

 

  • Of roughly 240 high-growth job categories identified by the U.S. Bureau of Labor Statistics, 86 require a college degree, while 70 more require at least some college education.  All the rest call for work experience in a relate field; on-the-job training, often for long periods; or a postsecondary vocational degree.
  • Knowledge turnover in the professions is a growing challenge that will require continuous retraining and lifelong learning.  The half-life of an engineer’s knowledge today is only five years; in 10 years, 90% of what an engineer knows will be available on the computer.  In electronics, fully half of what a student learns as a freshman is obsolete by his senior year.
  • Rapid changes in the job market wand work-related technologies will require increased training for almost every worker.
  • A substantial portion of the labor force will be in job retraining programs at any moment.   Much of this will be carried out by current employers, who have come to view employee training as a good investment.
  • In the United States, education is moving rapidly to the Interne, as small, rural grammar and high schools supplement their curricula with material from larger institutions, while universities increasingly market their programs to distant students.
  • In order to give those who cannot attend their classes a chance to educate themselves, the Massachusetts Institute of technology has put its entire curriculum on the Internet, including class notes, many texts, and sometimes videos of classroom lectures.  Other institutions are following suit.

 

Implications

 

                In knowledge-based economies, a region’s growth prospects depend on its ability to generate and innovation, giving cities and advantage over rural and suburban areas. 

            Skills are the most important factor in economic success today.  Unfortunately, the people who need them most, the poor and unemployed, cannot afford schooling and therefore are least able to obtain them.  Helping people overcome this disadvantage is an important task for companies as well as communities.

            Even small businesses must learn to see employee training as an investment, rather than an expense.  Motorola estimates that it reaps $30 in profits for each dollar it spends on training.

            Both business owners and employees must get used to the idea of lifelong learning.

            As the digital divide is erased and minority and low-income households buy computers and log onto the Internet, groups now disadvantaged will be increasingly able to educate and train themselves for high-tech careers.

 

 

The next Futurist article:  The Services Sector

LEGAL REVIEW CONSIDERATIONS in DUE DILENGE

June 29th, 2010

 

Last time we were talking about Financial Due Diligence and what it includes: Financing needs and terms, the Business Model and budgets and Compensation.  We will close with the legal review.

Legal Review—how is the company organized?  Is it a sole proprietorship or corporation? How much ownership is there above the 10% level? It is important to know how many key players you will need to consider. 

What kind of contracts are there and what is their duration?  This should cover both clients and employees.  Is there value in a long term contract with a client or is the contract about to expire?  How about employees?  Will there be a millstone with long term ramifications or are key players about to walk out the door?

The other side of the coin is the liabilities.  Is everything recorded?  Are there any potential landmines that have not officially been addressed?  Is there any pending litigation?

How is the company’s intellectual property valued and or protected?  This becomes a red flag if there hasn’t been any steps taken to recognize and further protect the value the intellectual property of the firm.  What type of documentation supports your findings of who owns what?  This is not an area to make assumptions.  This includes the ownership of the domain name. Are there any cease and desist letters or pending litigation?  Have there been settlements?  Those need to be reviewed.

 Finally, an accountant should render an opinion on the taxes.  Tax positions should be summarized for as federal, state and any foreign taxes.  Are there any carry forwards?  How is revenue recognized?  Are the taxes paid or are there liens?

Here is a link to an excellent article in Business Week:

http://www.businessweek.com/smallbiz/content/nov2007/sb2007115_311364.htm

If this seems daunting, it is; it should be.  The financial due diligence is the heart of due diligence. However, you are not finished.

Next time we will talk about the other parts of the due diligence process: Products, Customers, Marketing, Research and Competition and a few miscellaneous pieces.

By Mary Whetstine—financial analyst

Financial Due Diligence – Beyond the Dream to Reality

June 12th, 2010

 By Mary Whetstine

In our previous financial analysis article, Due Diligence/The Tool for Transparency, we discussed the necessity for due diligence for an investment or acquisition.  We are now going to examine the critical part of the process:

 

Financial Due Diligence

You now have made the decision to move forward with the strategic acquisition or selling of the company, the patent, the license, or the design that will take your current company to the next level.  This is where you go beyond the dream and the great idea. This is where we detach from the emotion and the energy and we ask” is there enough substance to last?”  Be prepared to do your research and know your company’s past, present and future,  because if you are to be successful with your capital requests, your private, closely held group will be turned inside out and inspected.

Financing needs and terms—why is the capital needed?  Will it be used for products or personnel?  A timeline needs to be established.  How does the funding need to flow, exactly how and when it will be consumed?  Is the company public or private?

Business Model and budgets—this may seem really basic, but know your cash flows.  What are your expenses and revenues and how they are affected by the capital? Prepare a balance sheet and detail liabilities.   Do you plan to hire people or buy equipment?  What is the burn rate?  Have your goals and objectives mapped out, short and long term?  How will the capital be used upon receipt and what is a one year milestone?  What will the company look like a year from now?  Prepare projections detailing scenarios for best, worst and most likely, include the dates and when you estimate you will break even.  Finally, what are your future funding needs and who do you see as a possible source for that capital?  What are the milestones that will have been achieved that will enhance your receiving that next round of funding?  Do not fall into the trap that by acquiring the funding you have just hit the lottery.  Demonstrate that the money will be used for solid enhancement of the business and not perks.

            Compensation—if stock options are used, know the vesting schedule as to how the plan dilutes stock.  If there are restricted shares, what are the details of the restrictions?  Determine how the founders, board and key employees are compensated and if there is a vesting schedule.

Without being able to answers these questions, there is no going forward because you don’t even know what you have, nor a justifiable value of what you are seeking to acquire or sell.  Without that full understanding of value, it will likely be a futile attempt to convince an investor that your company, the patent, the license, the design is a great investment.

Dear Reader: Can you share a financial due diligence experience that had either positive or negative results in the acquisition or selling of a company or intellectual property?

 

Next time we’ll finish financial due diligence by exploring some of the legal elements to review.  Then move on to the competition and marketing components.

Advanced Communications Technologies

June 4th, 2010

 

The Futurist is a magazine that covers trends, forecasts and ideas about the future and is published by the World Future Society, a non-profit educational and scientific organization chartered in Washington, D.C.  Their website is www.wfs.org.

The Futurist May-June 2009 featured an article titled, Trends Shaping Tomorrow’s World/Forecasts and Implications for Business, written by Marvin J. Cetron and Owen Davies.  During the next few weeks we will be presenting segments of their article as they relate to businesses and business owners.

Advanced communications technologies are changing the way we live and work.

  • Web 2.0 services are building communities nearly as complex and involving as those existing wholly in the real world
  • MySpace and Facebook have a total of more than 180 million members who form communities of friends, most of whom have never met except on the Internet.
  • However, the millennial generation has already abandoned e-mail for most purposes other than communicating with “clueless” parents and grandparents.  Most have adopted instant messaging and social network Web sites to communicate with their peers.
  • Telecommuting is growing rapidly, thanks largely to ever-advancing communication technologies.  About 80% of companies worldwide now have employees who work at home, up from 54% in 2003.  The number of telecommuters in the United States reached an estimated 20 million in 2006.
  • At&T says that 90% of its employees do some work away from the office, while 41% work at home one or two days per week.  This saves the company a reported $180 million a year.

Implications

E-mail promised to speed business.  Instead, it absorbs more time than busy executives can afford to lose.  Expect the nascent reaction against e-mail to grow as many people eliminate mailing lists, demand precise e-communications rather than open-ended conversation, and schedule only brief periods for dealing with mail.

Instant messaging is likely to be even more destructive of time for the under-30 set.   However, e-mail is a major contributor to globalization and outsourcing, because it  eliminates many of the obstacles of doing business across long distances and many time  zones.

Unfortunately, e-mail and other modern communications techniques also have  made possible a variety of crimes, from online fraud to some forms of identity theft.

The next Futurist article: Specialization

THERE ARE TIMES YOU JUST HAVE TO TAKE YOUR MEDICINE

May 21st, 2010

There are areas of mediation and conflict resolution that are all too often ignored by even the largest of companies. If I had to characterize the omission, it would be close to not having automobile insurance, not taking fire precautions, not locking your car door in a city or not taking preventive medication.

A positive case in point that may illustrate the type of problem that arises is a story of a large fortune 100 company, whose financial division included a marketing department and the CIO’s (Chief Investment Officer) department.

These two groupings employed well over 1,400 people. The “powers that be” decided that it would be worthwhile, due to the departure of the executive in charge of marketing, for the CIO to take over and combine the functions of both of these departments. The problems that arose from this combination were many and yet, when we investigated, it was in large measure due to the perceptions that each department held of the other.

According to Marketing: “The CIO department sits in an ivory tower and makes (word altered here) “stuff” up that has no application in the real world and expects us to make it palatable”.

According to the CIO group: “Marketing doesn’t really do anything anyway. They throw parties and put names on hats and golf balls”.

The challenge here was not the mechanical or functional merge between these diverse portions of the same organization, but rather the cultural merger. Could the perceptions that each held of the other be changed? What were the factors and blocks that stood in the way? Would the organization take an active structural role through a shift in the way it rewarded the employees so that cross group and team function was a portion of the bonus structure? Was it possible for the individuals at the top of this grouping to genuinely attribute value to their interaction with the other department and model that for the whole group?

In this case, perceptions were changed and structures were shifted through the application of mediation and conflict resolution approaches. After a year of our input we found that a natural synergy had been developed, that project managers for the CIO service would always request participation by the Marketing department in the earliest stages of development and the reverse was also true. These departments became intertwined, and the group leaders requested that the leadership structure be moved into the same suite of offices so that they could cooperate more easily. Through the wisdom and sensitivity of leadership, mediation help was asked for at the right time and the results were excellent.

By contrast if we look at the rise and fall of the Daimler-Chrysler merger, we can see that they believed a tremendous amount was to be gained by the merger of technical expertise and manufacturing capability. Indeed, the technical levels of both organizations were raised considerably. The final results only a few years later were characterized as deception and betrayal. The short lifespan of this merger was due to the lack of will to invest in making a conscious cultural merger. This might have been be carried out by consultants who had a wide range of communications, mediation and conflict resolution skills being brought in during the initial merger talks and not left as an afterthought to the financial or just to chance.

Sometimes it seems that even large companies with billions at stake don’t want to take their medicine. The use of the professional services of cultural mediators early on can be the “Spoonful of sugar that makes the medicine go down”.

Richard Dash

DUE DILIGENCE/THE TOOL FOR TRANSPARENCY

May 10th, 2010

By Mary Whetstine 

Do you know what you don’t know when investing in or purchasing a business or Intellectual Property (IP)?  Few of us have walked the path of life when we have not made some type of investment or purchase in which we “assumed” we knew what we were getting, only to be sorely disappointed? Perhaps assuming because the higher price of the product or entity we were getting exceptional quality, or of the evil assumption twin, of “getting a deal” because we were paying “below market value”? John Ruskin, the 19th century English poet and social thinker was attributed to saying: 

There is scarcely anything in the world that some man cannot make a little worse, and sell a little more cheaply. The person who buys on price alone is this man’s lawful prey.” 

The research needing to be done is the due diligence.  When we are making significant investments (in these times what investments are not significant?), the dire need of examining the multiple layers of the deal or the IP product is critical. There are pitfalls of Due Diligence that can become a door or a window.  Does it impede or facilitate the outcome? You and your team need to know what you intend to purchase and why.  The real question becomes, ‘Is what you see, what you get?’   And how about what you don’t see on the surface?  What are the gems and landmines that need to be uncovered?   Is the value and the cost for the venture merited? 

That is the essence of due diligence.  Value and risk, the balance determines if and how much to invest.  Whether an individual, venture capitalist or investment banker, the questions need to be answered before capital is invested. 

Make the ‘No’ or ‘Go’ decision before too much time or money is spent.  Most deals do not make it beyond this exploratory stage. 

To the reader:  Can you share an experience where solid, Due Diligence has guided you and your team to a great decision, that might otherwise been catastrophic? 

 Over the next few weeks, we will be discussing the components of the audit process.

The next article in this series will be: — Financial Due Diligence 

 By Mary Whetstine, Financial Analyst

The First Step in Finding the IP Business that is Right for You

April 19th, 2010

The First Step in Finding the Business that is Right for You 

“Each journey begins with a single step….” 

The first step in finding the “right business” is usually the most critical.  In acquisition consulting we find that even those who have been highly successful in previous careers get stuck in the mire of the paralysis of analysis, often to the point that they begin to doubt their dream to own their own company or business.  Let’s talk about the process on how to gain a focus in identifying specific paths/industries of interest.  Listed below are some of the top internet resources for general business searches:  www.Bizbuysell.com ; www.Bizquest.com ; www.businessmart.net

Here are your 2 initial tasks:

1. First, go to these sites as if you were in search of a job or of a new IP, a position which you need soon, to make a living.  As you search, select 5 (or more) listings that represent jobs/industries that you absolutely want nothing to do with. 

Print out the listings and write your thoughts and what you do not like about the job/industry.   Understanding what you don’t want to do is often the most important thing to know.

2.  The second task is to now select 5 listings that appeal to you, both professionally and financially.  These listings don’t necessarily have to be in the city or state you live in.  You just want to get a feel for the types of businesses that your instincts drive you towards. Print out these listings and then ask these questions of yourself:

  • Can I see myself doing this business on a daily basis?  Why or why not?
  • From a professional/working perspective, how do I want my family see me? 
  • Will they see me happy in this endeavor? 
  • How will I see myself in this business? 
  • Can I get excited about this business?

 

 Write down your results next to each listing.  You are now ready to perform a brief analysis and to start discussing the positive and negative aspects of that particular listing. As you move along in this approach you will see in the larger vision of what your task is:

  • Create clarity in your personal values.
  • Identify your feelings about your work.
  • Understand that you have choices on your path life. 
  • Recognize that these choices and options for being a business owner can be consistent with your values and who you are.

Finding the business that is right for you is a formidable task.  However it is out there for you; it takes patience, timing and perseverance.  By doing the simple tasks above you are taking the action to start your journey – the first step. 

 We wish you success! 

                                                                “A journey of a thousand miles begins with a single step.”

Lao-tzu, The Way of Lao-tzu
Chinese philosopher (604 BC – 531 BC)