Metro Dallas patent attorney Chris Cauble penned an article for the Dallas Business Journal in which he shares his knowledge and insights about intellectual property and how it can be either a benefit or a risk for private equity investors.
Cauble covers the basic categories of IP — patents, trademarks, copyrights and trade secrets — and moves to the more complex undertaking of determining the valuation of an IP portfolio. The due diligence involved in valuations should include a formal review of each patent, with specific attention to maintenance fees, time remaining on patent terms, and formal documentation. Similar steps should be taken for trademarks and copyrights, but a valuation of trade secrets may require an investigation into a company’s confidentially programs, agreements and policies.
While an evaluation of this nature can take significant time and money, Cauble says that these processes may reveal hidden gems and untapped assets that can increase the value of a company’s eventual sale or be used in a leveraged acquisition. “Patents in particular are a good asset to leverage against,” Cauble says, “as they are easily identifiable and can be more readily evaluated for the value they bring to the company’s business.”
Cauble concludes with a series of five questions that provide a framework for understanding how the target company uses IP and if it is likely to provide any strategic advantages for the investor. Two questions that the potential investor can focus on include:
- Does that research and development complement any other company that is already in the private equity portfolio?
- Has the target company invested in obtaining the appropriate intellectual property assets to protect those research and development dollars? If so, are those assets ready to be sold, licensed, or spun off into another entity?
By addressing these concerns and considering the many ways the IP can affect business and investments, the savvy investor will be better able to differentiate between companies that are worth the investment and those that are “overhyped duds.”