Almost every M&A transaction involves some type of intellectual property (IP), which is generally the most valuable asset that a company can own. By making informed, strategic decisions regarding your intellectual property assets during a merger or acquisition, you can avoid potential audits, penalties, and even litigation down the road.
In this article, we provide a quick overview on intellectual property and helpful tips on how to manage it effectively in the event of a company merger or acquisition.
Defining Intellectual Property: A Quick Overview
Intellectual property is defined as a category of non-physical assets that are protected by law from unauthorized use. Patents, trademarks, copyrights, and licenses are all examples of legal protection for IP, which can be everything from company brand names and logos to product formulas, business concepts, and processes.
While effective IP management has always been important, it has become even more critical with the proliferation of technology. Because intellectual property is defined as a company’s non-physical assets, software, software as a service (SaaS), and other emerging technologies are all considered IP. (Tweet this!) As such, it’s important to be proactive about IP management in M&A to protect both parties from unnecessary risks and avoid potential liability.
Managing Intellectual Property During M&A
Below are areas that require special attention during M&A transactions.
Doing Due Diligence Before An Acquisition
Due diligence is critical before a company merger or acquisition to protect both parties from unnecessary risks.
In relation to IP, the goal of the due diligence stage is to take inventory of a company’s intangible assets, and to determine whether there are outstanding transfer pricing and tax risks associated with the intangibles. Specific documentation is necessary to properly assess the ownership of IP, which requires advisors to trace each asset back to its source to determine who owns it and whether it’s legally protected IP (e.g. patents) or economically owned IP (e.g. goodwill).
Based on this documentation, the combined company can assess what transfer pricing risks may exist and make critical go-forward determinations. Have IP-owners been properly compensated in the past? an ownership of the IP be transferred? Should it be? How does current ownership line up with the IP-ownership goals after the acquisition?
Details like these should be addressed before an acquisition is finalized. Companies should consider consulting an intellectual property attorney to review IP inventories and intercompany contracts during the due diligence phase.
Determining The Value Of Intellectual Property
When evaluating intellectual property assets in mergers and acquisitions, don’t rely on your accounting valuation alone to determine value for tax or other purposes. It can serve as a guide point, but often accounting valuations can produce vastly different values when compared with tax valuations. Companies can either do their own valuation or engage an external advisor like Valentiam; however, it’s important to keep in mind that there are two different methods for valuing intangibles, and they are fundamentally different in nature.
Accounting valuations, or purchase price allocations, are generally used to determine an asset’s value in the event of a merger or acquisition. These are inherently different from transfer pricing valuations, which are completed for tax purposes.
Using the wrong method could result in under- or overvaluing your assets, leading to incorrect tax payments (which could inadvertently attract the attention of tax authorities). In general, accounting valuations are done on a post-tax basis based on fair market value, whereas transfer pricing valuations are performed on a pre-tax basis and follow the arm's length principle instead of fair market value. (This article goes into more detail on the different valuation methods and the intersection of transfer pricing and valuation.)
Learn how to manage transfer pricing policy integration and ensure compliance with regulatory guidelines during a merger or acquisition.
Simplifying The Ownership Structure
It can be particularly challenging to manage intangibles when an acquisition leads to legal ownership in multiple tax jurisdictions. For example, the acquiring company might house its IP in Ireland, while the company being sold might house theirs in Switzerland. Companies should review the operational structure of the combined business and consider consolidating IP to a centralized location in order to simplify the ownership structure. Moving forward, the development of new intellectual property should reflect the strategy of the combined company.
Protect Intellectual Property During An Acquisition
Even with these tips in mind, there are still so many details to get right to protect intellectual property rights in mergers and acquisitions. Many of the world’s leading corporations trust Valentiam for valuation of intangible assets, and for support in navigating the M&A process effectively where IP and transfer pricing is concerned.
Whether you’re still in the early discussion phases of a merger or acquisition or your company is in the middle of one, we can help. Get in touch today to discuss your company’s unique challenges and how we can partner with you to resolve them.