Almost all transactions related to Mergers & Acquisitions involve some type of Intellectual Property. Generally, this is the most valuable asset that a company own. Why is it important to learn about this? Making informed decision about IP assets during an operation will help you avoid potential issues related to audits, penalties and litigation in the future.
How to manage IP assets during a Merger or Acquisition
Intellectual property is defined as a category of non-physical assets that are protected by law from unauthorised use. It can be anything, from company brand names and logos to product formulas, business concepts, and processes. With developments in technology, it has become increasingly important to manage IP effectively. Since it is defined as a company’s non-physical asset, software, software as a service (SaaS) and other emerging systems are considered to be IP. Below are some areas that must be looked over during M&A transactions so that both parties can are protected.
- Due Diligence before an acquisition
Due diligence is critical before a company merger or acquisition. With regards to IP, the goal of this process is to have a record of a company’s intangible assets. It will determine whether there are outstanding transfer pricing and tax risks associated with the intangibles. Advisors have to trace each asset back to its source to find out who is the owner and whether it’s legally protected IP (e.g. patents) or economically owned IP (e.g. goodwill). This will allow the company to obtain documentation that will help them assess what transfer pricing risks may exist and make critical go-forward determinations.
- Determine the value of Intellectual Property
It is important to evaluate intellectual property assets in mergers and acquisitions. However, you should not just rely on your accounting team to do so. The latter’s evaluation can serve as a great guiding point. Nonetheless, you will find out that accounting valuations can produce vastly different values when compared with tax valuations. The former is generally used to determine an asset’s value in the event of a merger or acquisition and the latter, also known as transfer pricing valuations, are completed for tax purposes. While companies can work on these estimations themselves, it is recommended to consult an advisor because using the wrong method might lead to you over, or under, evaluating your assets which might result in issues with tax authorities. In general, transfer pricing valuations are performed on a pre-tax basis and follow the arm’s length principle instead of fair market value.
- Simplifying The Ownership Structure
Managing intangibles such as intellectual property during M&A transactions can be pretty challenging, especially if the acquisition leads to legal ownership in multiple tax jurisdictions. As such, when merging, companies must review the operational structure of the combined business and consider consolidating IP to a centralised location. This is going to simplify the ownership structure. Moreover, moving further down the road, the development of new intellectual property should reflect the strategy of the combined company.
While these steps might seem complicated, our firm can help you manage and protect your Intellectual Property in the way that will most benefit you during a M&A transaction!