Importance of Intellectual Property When Buying or Selling a Business


Intellectual Property (or IP as it is more commonly called) can sneak up on some businesses as it may start from a “good idea” that helps the business survive and then gradually become an integral part of the business and become a critical part of its existence. Interestingly, IP also comes in many shapes and sizes. A business owner therefore needs to recognize these different shapes and sizes so if they choose to sell their business, they have the right legal protection in place that protects an intellectual property asset and therefore rightly earns the owner the amount it is worth.

So what are the different types of intellectual property? The IRS recognizes the following when they are part of a business transaction.

• Patents

• Computer Software

• Trademarks

• Recipes

• Engineering Designs

• Copyright resale

• Trade Secrets

• Architectural Designs

The bottom line is that intellectual property carries both legal and tax implications. An attorney is the expert to engage to understand and obtain the necessary legal protection. Not all attorneys have the necessary knowledge, so if this is an important component of your business, you may want help from an attorney who understands and specializes in intellectual property law. Similarly, the tax treatment of intellectual property when a business is being bought or sold requires research to arrive at the right position and this is best provided by a CPA or similar tax professional. That is, the tax treatment for a patent may be different for a copyright which may be different for computer software etc.

The other professional help you may need is an appraised value of your intellectual property. If there is a dispute about the value of the IP it requires an expert with experience with that piece of intellectual property to prepare a report to explain and defend the value.

IP can form an enormous part of the value of a business. Like anything with value it requires protection. I recently met a business owner who lost two employees and found out they went to work with a competitor. Before these employees left the business they allegedly downloaded a full list of the customers and stole other information commercially sensitive information. They then proceeded to work at the competition and call the customers to say that the previous business where they used to work was closing down and they could provide the service. When the business owner found out what was happening he filed court papers and tried to control the damage, but in the end he was forced to sue the competitor as they did not stop the employees continuing to contact the other business.

IP requires protection and putting good systems in place to ensure it’s protected and that the protections work.

Andrew is a 5-time business owner that helps entrepreneurs exit or enter business ownership. His services include helping owners sell and/or buyers purchase an existing business or consult on purchasing a franchise. He also provides certified machinery and equipment appraisals and business valuations.