Archive for the ‘IP Financial Analysis’ Category

Why an IP Due Diligence Investigation?

Friday, 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.

LEGAL REVIEW CONSIDERATIONS in DUE DILENGE

Tuesday, 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

Saturday, 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.

DUE DILIGENCE/THE TOOL FOR TRANSPARENCY

Monday, 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

IP Interest Based Negotiations

Monday, March 8th, 2010

In a previous article we discussed Positional Bargaining Negotiating as a rather rigid position that a person takes on an issue – very linear, one-dimensional. It is most often very personal and thus filled with strong emotions. With Interest Based Negotiations the process is built around collaborative flexibility, with future relationship considerations. Through open dialogue, the negotiator will help the parties identify their specific, individual values, needs, desires, which most often are what has likely caused each party’s position. By understanding one’s needs as well as the other’s, mutual openness to bridges and paths are built between the persons of conflict.

Interest Based Negotiations

To illustrate Interest Based Negotiations, here is a recent case study. Dennis, after several years of building and growing a highly successful IT company made the decision to sell. The business had a strong documented cash flow history, strong growth opportunities in a solid industry, and was in a most favorable California life style location; thus, the seller was able to justify a higher multiple and asking price. In a rather short period of time Dan, a buyer from Ohio, decided to make an offer through Dennis’ broker to purchase; he was financially qualified, with good IT operational experience and skills to run the business, and Dan always wanted to live in this part of California. From the time the owner and the buyer met, there was an established trust and good chemistry. The owner accepted an offer that included an agreement for the seller to carry 10% of the financing. The buyer was able to acquire funding and a closing date was set. Then an unforeseeable event took place – a national lending crisis; the funding source changed their criteria for this acquisition and Dan no longer qualified. Dennis was upset that the buyer was no longer qualified to purchase the business. He was not about to lower the price of the business – this was his retirement. Now, after several months of tedious negotiations it was time to start looking for a new buyer. Dan was irked that Dennis would not even consider lowering his already “overpriced” business. Dan was equally frustrated with the funding source and was watching his dream of owning the business evaporate. The negotiator/mediator was able to ascertain that both men valued collaboration and wanted to see if the business relationship and deal could be saved.

Dennis’ Position: Get lending and pay me what I am asking or the deal is over

Dan’s Position: Lower the price so that I can qualify for a loan or I will find another business to purchase

 Dennis’ Interest: I want to retire; I wants to work with a buyer that I like and trust; I am willing to work collaboratively

 Dan’s Interest: I want to own this business/I want to live in California; I want to be able to afford the business; I am willing to work collaboratively

 Notice how the positions do not allow for negotiation or compromise, but when we examine the interests, both men have several interests in common. In this case they were able to agree that they wanted to work collaboratively and get a deal done. In a relatively short period of time,  Dennis was able to understand Dan’s sense of loss and frustration and Dan was able to understand Dennis’ retirement fears and needs. An agreement was reached where Dennis would carry a 25% note for Dan. Dan was then able to obtain funding from the same source with the new criteria and Dennis received his asking price. The transaction was completed and both the business and the relationship flourish.

 “So when you are listening to somebody, completely, attentively, then you are listening not only to the words, but also to the feeling of what is being conveyed, to the whole of it, not part of it.” Krishnamurti (Indian philosopher)

Alternative Dispute Resolution (ADR): Positional Bargaining Negotiation

Tuesday, February 23rd, 2010

In a previous article we discussed the concept of negotiation and defined it as a process in which the parties involved communicate with one another through a facilitator to resolve a dispute, consummate a transaction, or simply to reach agreement in order to create balance or clarity.  There are two primary styles that we are going to address, Positional Bargaining Negotiation and Interest Based Negotiation.   Today we will discuss Positional Bargaining Negotiation.

Positional Bargaining

To illustrate positional bargaining, consider an actual situation in which a partnership was ending.  In 1996 two young, bright and close friends Jason and Matt founded a software internet based company.  However, within months of the launch, it became apparent that their business and people skills, as well as their business philosophies were in most ways on opposite ends of the spectrum.  The business took off extremely well and they put their put their differences aside and took positions of simply accepting these differences.  Soon the business flourished and they enjoyed making the type of money that neither had ever even dreamt of.  Going into their fourth year, the day-to-day operations of the business became highly stressful for both Jason and Matt.  It was now reaching a point where it was having an effect on their personal production.  With professional guidance, both became cognizant of the dysfunctional nature of their partnership and how it was manifesting itself not only in their business, but also in their personal lives; it was at that point both agreed that it was time to end their partnership. Jason asked to be bought out so that he could start another technology company and Matt was in agreement.

Fortunately, aside from being savvy technology entrepreneurs, they also were also forward thinking when they started their partnership.  They had created a partnership agreement with their attorney, an agreement with an exit strategy.  As with many such agreements there was a buy-sell provision that arranges a buy-out; if one partner leaves the business, the other partner must buy him out.  This provision included a buy-out based upon a prenegotiated percentage of the business value.

The Bargaining

This was a 3 step negotiation.  First, was agreeing on a mutually acceptable non-compete agreement. Second, was agreeing on what firm would perform the objective Third Party Valuation.  The standard process for the valuation is for a qualified industry valuation expert to analyze the financials, market trends, industry trends and comparables of similar businesses in their segment of the technology industry.  A key component of the process was an IP assessment of their IT intellectual property for licensing, trademarks, copyright and a pending patent. The due diligence process was a main ingredient to forming a positive closure of Jason’s and Matt’s business relationship; a third party performed an objective valuation on their IP, which otherwise might have been an emotionally volatile situation. The final business valuation provided a specific range of value on what their business could likely be sold for in the current market place.   

In the first 2 steps, there were basic pragmatic decisions that were easily agreed upon.  The third step was the primary focus of this mediation.  In this type of negotiation, parties will often examine their strengths and weaknesses to establish maximum and minimum figures before going into negotiation.  During the course of the negotiation, both Jason and Matt went strategically back and forth on price, based upon their perceived value.  With outside, objective professional guidance, they both moved incrementally towards each other’s negotiated numbers to arrive at a mutually accepted figure. 

With the monies from the buyout, Jason was able to jumpstart his new endeavor and it has taken off nicely. One of the lessons that he learned from his business experience with Matt was the importance of creating a clear, consistent vision of who his company is and where he wants it to be.  With such awareness he was able to become a more effective and dynamic leader.

Matt continues to grow his business to new levels of successes.  He has been able to build an organization around a group of individuals who share a similar business philosophy and mind set.   He continues to make a very comfortable income and is having fun doing it.

Keys

The keys to effective and appropriate positional bargaining are:

  • An objectively defined sum or task that is being considered
  • Emotions and a continuing relationship are not important
  • No other underlying interests or outcomes other than money
  • Trust and flexibility are not likely or even possible

Summary

Positional bargaining is a very useful and effective tool in mediation when individuals have either prepared or anticipated for such mediation, or in situations where one party might be in a particularly strong position and simply wants to draw a close to the business relationship.  Most often, the preferred style is the interest base negotiation where parties are moved from rigid positions to a more flexible one, where both parties win. 

Reader, please share how you have utilized this method of negotiation to resolve business conflict and create your win-win solution.

“Everything should be made as simple as possible, but not one bit simpler.”

                                                                                                            Albert Einstein

 

Reader, what does the above quote mean to you in regards to negotiating conflict?

Next week: Interest Based Negotiations.