Intellectual property, and especially the lack of it, can sometimes be a bummer in negotiations between a selling party and a potential buyer. In general, companies that own their own IP are stronger and more valuable companies than companies that own little or no IP.
Intellectual property (also called intellectual property rights) is a bit of a separate thing. Anyone who has made an invention can apply for a patent or sometimes several patents for it. This means that the invention is officially attributed to the inventor.
Made to order
It is not so simple with intellectual property. There are forms of IP that can be registered via a trademark agency – such as a logo, a slogan or even an artist name. This can be done both nationally and internationally. Usually, however, IP is not captured. But that doesn't mean IP isn't an issue. Anyone who has written a text owns that text, even if that text was commissioned. Only by waiving that right (for example in a contract) does that change.
Also with software companies plays this. The software author owns the software unless otherwise agreed. This subject is addressed in two ways in takeover processes. The first of these occurs mainly in start-ups. The situation is then: young entrepreneur, brash, has a great idea for an app but is unable to develop it himself. He takes the idea to Ukrainian or Estonian software developers. They make a top app, and lo and behold, success.
Problem with sales
However, if the young entrepreneur subsequently wants to sell the app, there is a high risk that it is not his app at all. Because if that is not properly contractually laid down, the app is in the possession of the maker, and that is the developers. At that moment you as an entrepreneur are at the mercy of the goodwill from your developers.
In general, if your business plan is based on a piece of software, try to develop that software yourself. And if that is not possible - because it is too expensive, for example - make sure that software is developed under your supervision and that the IP is contractually with you.
Use of tech libraries
The second situation is encountered in somewhat larger companies. Many online software companies use pieces of software from third parties, the so-called tech libraries. The reason for doing so is simple enough: with a good tech library you don't have to develop anything yourself. For a fraction of the amount you can have a well-functioning piece of software. Moreover, you do not lose time developing your own software – so that you as an entrepreneur can focus on growth!
In itself, the use of tech libraries does not have to be a problem, but if you do, it is important to contractually stipulate that your company has access to the source code of the software. It is also very important that there are no nasty change of controlclause in the contracts. It sometimes happens that administrators of a tech library hope for a sale (process). The moment the sale is realized, the rate for using the library is suddenly increased considerably. For an acquiring party, such a change of control clause is therefore a significant risk (with all the consequences that entails for the valuation of the company).
Own IP is valuable
In any case, it is valuable to develop your own IP. At No Monkey Business we always advise: brace yourself, and just do it! There are two reasons. The first is financial. Suppose you run a managed service provider (MSP) that sells and implements packages from Microsoft and Salesforce. If you do it right, you can achieve a margin of up to 20 percent on such a product. But you are sensitive to the pricing policies of the two tech giants. If they increase the price, your margin goes down. This sensitivity is of course not available with your own IP. There your margin is 100 percent.
The second reason is that your own IP makes your company stronger, and therefore more valuable. Take the example of the MSP again. From 2020 to 2022, No Monkey Business guided Microsoft reseller ABC E Business towards a sale. The great thing about ABC E Business is that the company is much more than a reseller. The company has built templates for various industries and packaged them into products so that their customers can make much better use of the resold products. That's a good way to deal with IP.
Finally, some practical considerations that often come up in a takeover process.
- We ask every customer we work with at No Monkey Business: “What software have you purchased and what contracts come with it?” In particular, we check whether the IP is owned, whether there are any change of control clauses and whether you have access to the source code of (important) software.
- A buyer often demands extra securities. To prevent that he is suddenly confronted with the nasty consequences of (for example) the lack of IP after closing the deal, our customers often have to sign guarantees and indemnities.
- We said it above: IP is a bit of a special case. Many customers do not realize that they have IP. So far in this article we have focused on software, but IP can be completely different things too. Suppose you are a supplier of a somewhat complex product, and you have developed a method over the years with which your customers can implement that product very quickly. IP is then not only in the product, but also in the method you developed for the go-live of that product!
- This is related: IP is only IP if you give the animal a name. Do not call this method a step-by-step plan, but rather Fast Track Implementation.
- Too often it happens that customers have not registered their trademark or logo, neither internationally nor in the Netherlands. That is a risk for a buyer.
- Finally: it is wise to place IP in your own BV, with a BV that handles the operational affairs (together under a holding company). Suppose your company has carefully built IP for years, and suddenly the company ends up in a life-threatening lawsuit. If the IP is in the BV, you run the risk of losing it forever.
Thinking carefully about IP is both a matter of hedging risks and creating opportunities!