If you’ve checked the financials, but haven’t checked the trademarks, you don’t know the full story.
When it comes to buying someone else's business, everybody knows you need to check the financials. But what does that really mean? You already know about cash flow statements, balance sheets, and profit and loss. You’ve (hopefully) considered the amount of debt your potential purchase has and whether you have secured sufficient funding to see the deal through. But if that is where you’ve stopped, you’re missing a huge piece of the financial picture.
That missing piece is intellectual property. The question is not whether the business you are about to buy has any intellectual property - every business has intellectual property. The question is: “what condition is that intellectual property in?” Imagine you were in the market to buy a used Mercedes Benz. No one says “I want to buy a used car, and I don't care what condition it's in.” Why? Because there is a big difference between a car that has been meticulously cared for and a car that has been neglected. While every Mercedes has some inherent worth, the way it has been maintained significantly impacts its value.
Intellectual property is the same way. How IP has been maintained will significantly impact any plans to expand and continue to monetize the brand you are about to buy. If I was going to buy someone else’s business, I would want to know at least three things about their trademarks:
Have they trademarked?
If they haven't trademarked, what is the untold story? Did they try and fail? If that's true, maybe they were blocked by another company who already owns the trademark - definitely a red flag. Alternatively, maybe they never tried to trademark, and therefore no one has ever vetted the business name to see if it is trademarkable. This could set you up for a nasty surprise (hello cease and desist letter) in the future.
Have they had any trademark issues or disputes?
Have they ever gotten a trademark strike or complaint? Have they had any disputes or lawsuits? If so, how did those resolve? An IP dispute can be as small as a spat on social media, but even small disputes often result in a settlement agreement. If the business you are about to buy has ever signed a settlement agreement, this is a crucial detail.
Settlement Agreements are almost always binding on new owners and can have very severe restrictions on how the company can expand. For example, imagine you are buying a clothing brand that is currently operating on the East Coast. You plan to take the brand national, but it turns out they signed a settlement agreement that prohibits them from expanding into Chicago, Seattle, or Los Angeles. If you don’t find this out until after purchase, you just bought an investment with little (or no) growth opportunity.
Have they maintained their trademarks well?
Let’s say they have valid federal registrations from the USPTO and they’ve never had any conflicts or disputes. The next thing I’d want to know is how well those trademarks are being maintained. For example, do they have any renewal filings coming up? If so, those renewal fees might be a point of negotiation (especially if they are significant). Another area of concern is licensing; if the trademarks have been licensed, how well were those agreements policed? Are license holders engaged in free-for-all use (and abuse) of the brand, or does the business have good controls to keep licensees reigned in?
You want to buy a business, not a problem. Whether the company you are about to buy owns any intellectual property is a given. Whether they have maintained it in a way that is profitable and scalable is a complicated, but crucial, question to answer.
Thanks for reading the Bevel Law Blog! While this information is hopefully helpful to you, nothing in this blog is intended to be legal advice. Always consult a lawyer before making any legal decisions based on topics in this blog. Ready to secure your intellectual property? Book a call today at bevellaw.com/call.