By Stephen D. Wilson | November 7, 2018
The value of intangible assets including intellectual property (IP) is rising steeply in the U.S. and globally. Businesses and their advisors need to understand and leverage a company’s portfolio of IP assets to maximize present and future value. An IP audit may help.
Tangible and Intangible Business Value
In years past, the strength and value of a business was often measured by its tangible assets such as land, buildings, equipment, and inventory. Today, however, most of the strength and value of a business typically arises from its intangible assets such as IP. Although a typical company’s assets a generation ago were 80% tangible and 20% intangible, the numbers have reversed. One study reported that the market value of intangible assets of the S&P 500 (representing 75% of the American equity market by capitalization) climbed to 84% of total value by 2015, representing 67% growth over four decades since 1975. IP and other intangible assets are currently the leading asset class.
Ignorance Is Not Bliss
IP assets represent most of the value and market strength of many businesses by a wide margin, and help secure a competitive advantage in a crowded market. However, due to the complexity of IP laws and non-physical nature of IP, business owners, business leaders, employees, accountants, marketing professionals, and other business advisors often do not have a clear picture of a company’s IP portfolio, do not understand the degree to which a company’s present and future value are dependent upon its IP assets, and fail to take steps to protect valuable IP assets and avoid costly pitfalls for the unwary that could jeopardize a business.
What Is An IP Audit?
An IP audit is a systematic, thorough, and solution-focused review of IP that a business owns, uses, or acquires, in order to identify IP assets, assess their legal status, value, and risks, and ascertain options to protect and capitalize on the IP assets. An IP audit can be tailored to a company’s specific needs (for example, in anticipation of a sale, merger, or acquisition), and frequently serves two general purposes: (1) identify and evaluate IP assets; and (2) anticipate and manage risks related to a company’s IP portfolio.
Do I Need An IP Audit?
It can be challenging for businesses and their advisors who are not experienced IP attorneys to properly identify and utilize intangible IP assets as a tool to reach their objectives, carve out a market niche, and maximize the value, growth, and success of a company, while navigating complex IP laws and avoiding traps for the unwary. An IP audit can help achieve important business goals, including:
- better identify and monitor a company’s entire portfolio of IP assets
- better secure the company’s IP assets and maximize current and potential value
- identify IP-related strengths, weaknesses, opportunities, and threats
- more effectively exploit IP assets
- set up an effective IP administrative structure
- assess the existing and potential future value of IP assets
- anticipate and manage potential future risks
- reduce costs
- identify and correct IP chain-of-title defects
- nurture creativity and innovation
- create a strategy to secure protection in key markets
- develop a strategy to maximize the value of IP assets in anticipation of a potential sale, merger, acquisition, expansion, financing, capitalization, or liquidity event
Are There Different Types Of IP Audits?
An IP audit is tailored to the specific needs and objectives of a company, so there is no “one size fits all” approach, but IP audits can generally be broken down into two categories: (1) general IP audits; and (2) specific IP audits. A general IP audit focuses more on a comprehensive view of the company’s IP assets, to identify and review its IP portfolio as a whole and review or develop the company’s IP management approach. A specific IP audit, sometimes referred to as IP due diligence, may have a narrower scope and focus on identifying and evaluating IP assets that are relevant to a specific objective of the audit. IP due diligence may be important and useful in many contexts, including:
- maximizing the value of a business in anticipation of a future sale
- mergers and acquisitions (M&A)
- IP assignments and licensing
- launching a product or service
- marketing strategies
- joint ventures
- employee hires or layoffs
- growth or downsizing
- company restructuring
- formation of an IP holding company, operating company, subsidiary, or affiliate
- litigation or threatened litigation
Who Conducts IP Audits?
An IP audit is teamwork involving experienced IP legal counsel and one or more key members of a business (based on the business and the nature and scope of the audit). Larger businesses may prefer the IP audit team to include key members from all IP-intensive departments, including management, research and development (R&D), production, sales, marketing, and human resources. For a smaller company, a single point of contact who can work with IP counsel may suffice.
An IP audit is a useful tool to systematically review the IP assets that a business owns, uses, or acquires in order to assess and manage risk, remedy problems, and implement best practices in IP asset management to preserve and maximize current and future value.
The Beggs & Lane Intellectual Property Group assists clients worldwide with IP audits, valuations, due diligence, and global portfolio management. We work collaboratively with client teams of decision-makers and trusted advisors (including tax, accounting, and insurance professionals, valuation and appraisal experts, business brokers, financial advisors, marketing professionals, and foreign associates) to identify, preserve, and maximize the value of IP assets.