Taking Time to “Date” Before Pursuing an IP Acquisition “Marriage”
Lately many of my technology clients have been negotiating deals involving the purchase or sale intellectual property, so this Forbes story on choosing the right acquisition partner caught my attention. The author carried an interesting analogy about dating through the piece, and listed a number of considerations that a business should have before pursuing either side of an acquisition. I am in complete agreement with the author that parties should be cautious in pursuing these kinds of transactions before they decide to seriously engage in talks to close an IP deal. It has been my experience that parties are always extremely eager to close a deal while it is still “hot,” and they aren’t necessarily prepared for the issues that arise in the negotiation itself–and even less prepared for what comes afterwards.
Taking the marriage analogy one step further, one issue I have seen come up multiple times is simply the issue of cold feet. When you talk to the proposed partner, how committed does that party really seem to be about doing the deal? In the software/internet/technology space, it’s not unusual to see deals on the table with a company that is still being managed entirely by the original founder, where that founder has spent years of his life developing and growing precisely what the prospective partner is looking to acquire. While this founder may want at some level to “cash out,” is he or she really ready to give up control over what he or she has built? If the prospective partner starts calling the negotiations off, making take it or leave it demands, and engaging in other behavior suggesting that he or she might not be easy to close a deal with, you may very well have a situation where the party on the other side of the table is simply experiencing cold feet. Contrary to what many clients think, we attorneys cannot force anyone to close a transaction, or to be cooperative after the deal is closed. If your prospective partner is not ready to take the next step, it may be time to move on to the next candidate.
Another issue to consider is the quality of the intellectual property that is under consideration for purchase and the quality of the extent that the seller was truly prepared to do the deal. Is the seller truly prepared to do the transaction? It’s not unusual for clients to tell me as IP transactions counsel that they want to “keep it simple” and do minimal due diligence, but it’s not unusual at all to find if appropriate due diligence is conducted that the intellectual property at the heart of the deal being considered has not been properly protected–or even acquired. The copyrights may very well still be owned by the original developer rather than the company you are buying them from, the trademarks may never have been registered or a search even conducted, the patents may not have been filed by competent patent counsel, and the past agreements relating to the IP may have been drafted and negotiated by someone with minimal IP transactions legal expertise. So, it’s important to fully consider whether or not the IP is truly ready to be acquired, or if the seller needs to have some time to do some clean-up with the help of one or more IP lawyers? Is the buyer okay with purchasing assets that require significant clean-up and may have enforcement issues? Or is the buyer looking for a partner whose assets are in perfect shape?
Another issue: the financial considerations that go along with walking down the aisle, so to speak. You may have agreed to the price of the wedding, but are you really and truly in agreement on when and how the price will be paid? More often than not, serious disagreement arises over the structuring of whatever consideration has been agreed on. Sometimes this is because the prospective “suitor” really doesn’t have the cash necessary to pay the consideration agreed on, sometimes this is because the acquirer has particular tax requirements for the deal, and sometimes this is because the acquirer wants to procure certain services or other performance out of the founder before paying the bulk of the consideration. In a recent deal, there was even an issue with the non-cash consideration actually being transferable as agreed upon. Obviously, for both parties to walk away happy, they need to be walking away with what they are expecting to get out of the deal.
In my Silicon Valley industry niche, there is generally an expectation that the key IP developers are going to continue on with the acquirer after the big wedding date. In my experience, while the parties are almost always adamant before the deal closes that this type of ongoing relationship will go smoothly, it rarely does. In fact, in many cases the ink on the paper barely dries before the fighting and legal threats start. These problems are often foreseeable. If your visions for the business diverge and are in no way compatible, or if you have a strong aversion to one another or problems communicating before the deal closes, is it really going to work so smoothly after the money has been exchanged? Or are bigger headaches, stress, and tension in the partners’ future? Partners are rarely honest about their plans and expectations in the negotiation stage, which doesn’t do much to head off problems after the deal is closed.
The bottom line is that before you rush into closing an IP deal with a potential partner, it does make sense to conduct your due diligence on the partner just like you would do before rushing into making any other major life decision, so that you can make sure that it is really going to be the right fit, and to seriously consider the red flags that your IP deal counsel communicates to you before the deal is closed. I have seen my share of clients who regretted the “marriage” almost immediately after they walked down the aisle, which is never a good point from which to start a new “life” with a partner. The dating and marriage analogy are absolutely good frameworks by which to consider the compatibility of any two parties for moving forward.