Business Exit Strategies for Patent-Heavy Companies

Rich Goldstein

Founder & Principal Patent Attorney

Exiting a business is a pretty extensive process; undoubtedly, having patents in the mix can make it even more complicated. Does this mean it’s impossible? No. With the right strategies, things can go smoothly. If you’re currently in this situation, take a look at these business exit strategies for patent-heavy companies. 

Business Exit Strategies for Patent-Heavy Companies 

As you explore the sale or transfer of your patent-heavy company, grasping the role of your patent portfolio in shaping your exit strategy is vital. It influences your company’s market value and can determine the sustainability and growth of the acquiring entity post-acquisition. 

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The America Invents Act (AIA) and the Patent Act (35 U.S.C.) provide the legal framework for patent protection and enforcement. Specific sections like 35 U.S.C. § 101 (patentable subject matter), § 102 (novelty), and § 103 (non-obviousness) are critical in evaluating patent validity during due diligence.

Here are the options you can explore when you want to exit:

  • Management or employee buyout
  • Taking the company public 
  • Family succession
  • Merger and acquisition deal 
  • Licensing
  • Liquidation

Management or Employee Buyout

When you’ve built, say, a software company to the point of exit readiness, you might consider a management or employee buyout (MBO or EBO) as a viable strategy. This path allows you to hand over the reins to those who understand your company’s intricacies aka your dedicated management team or employees.

An MBO involves selling your company to your current management team. These individuals know your business operations intimately and can seamlessly continue its legacy. An EBO takes a similar approach, extending the opportunity to purchase the business to a broader range of employees.

By choosing an MBO or EBO, you’re empowering those who have grown with your business to carry forward the vision and hard work you’ve invested. Careful planning and consideration help make this transition smooth, preserving the well-being of your company and ensuring its longevity.

Taking the Company Public

When your business has a heavy patent portfolio, choosing to take it public through an initial public offering (IPO) is a significant stride toward liquidity and growth. Going public allows your company to access capital from a wider pool of investors, which can be vital for funding further innovation or expansion.

Be mindful of the obligations that come with an IPO, such as the need to disclose financials and business activities to the Securities and Exchange Commission (SEC) and shareholders. It can be challenging, however, the benefits of public capital can empower your business’s growth and innovation potential.

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Family Succession

When it’s time to consider exiting your patent-heavy company, family succession could be an option that feels closer to home. Handing over the reins to a family member can assure that the business’s legacy remains intact and that the values you’ve built into your company continue to be upheld.

For instance, if you run a software company, its value often lies in intellectual property rather than tangible assets. So, the successor must understand software development, industry-specific knowledge, and business acumen if the company focuses on vertical market solutions.

Remember, succession planning is a strategic undertaking that requires thorough preparation and the right fit in terms of skills and vision for your company. Each step taken towards preparing your chosen family member for leadership is a step towards maintaining the successful trajectory of your company.

Merger and Acquisition Deal

When considering selling your patent-heavy company, a merger or acquisition (M&A) deal is a strategic option to explore. Going down this route allows you to negotiate with another business looking to expand its reach, diversify its portfolio, or directly benefit from your company’s intellectual property.

During an M&A deal, you significantly influence the terms and pricing during negotiations. There’s a good chance that the acquirer could integrate your patented technology to enhance their market position, giving you leverage. 

As you navigate an M&A deal, remember it’s more than just a transaction—it’s a strategic move ensuring your innovations’ legacy continues under a new banner.

Licensing

Licensing utility patents to other companies can provide a steady revenue stream while retaining IP ownership. This strategy can be attractive for business owners looking to exit while maintaining involvement or interest in the company’s future success.

Legal considerations include drafting robust licensing agreements that protect the licensor’s interests, defining the scope of the license, and establishing clear terms for royalties and enforcement, which is essential. IP attorneys are crucial in negotiating and drafting these agreements.

Relevant provisions, such as licensing agreements, are governed by contract law principles, and relevant provisions in the Patent Act, such as 35 U.S.C. § 261 (ownership and assignment of patents) and § 271 (infringement), are important in guiding licensing.

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Liquidation

When considering an exit strategy for your patent-heavy company, liquidation is a definitive choice. It involves closing the business and selling off assets. This may be an approach to consider if other exit strategies are not viable or if a swift and absolute end to the business is necessary.

Remember, if your company is rich in patents and intellectual property, these assets may still bring significant value during liquidation. Ensure you accurately assess and value these intangible assets to maximize the proceeds from the sale.

Managing Intellectual Property During Transition

When your business is in flux, handling your intellectual property (IP) carefully is vital. It preserves your competitive edge and enables you to leverage the full value of your innovations.

Leveraging IP for Competitive Advantage

Your patents are more than just legal documents; they reflect your company’s innovative prowess. You can maintain a competitive advantage even during transition periods by strategically utilizing your IP. 

Consider collaborations with other entities that might benefit from your patented technologies. This can add a new revenue stream and increase the influence of your technological advances in the market. Remember, patents encapsulate your unique knowledge and can be key in securing favorable partnerships.

IP Valuation Methods

Accurate IP valuation is central to making informed decisions during business exits. There are various methods to determine the monetary worth of your patents and other IP assets. The cost approach looks at the historical expense of creating the IP, while the income approach estimates the future income that the IP may generate, discounted to its present value. 

Additionally, the market approach gauges value based on sales of comparable IP assets. Each method has its nuances, and a multifaceted approach is often necessary to capture the true value of your intellectual property. This valuation is more than a number; it’s a strategic tool that significantly impacts your transition strategy.

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Legal and Financial Considerations

When planning to exit a company with a significant portfolio of patents, it’s vital to understand how the intersection of intellectual property law and financial planning affects your decisions. This section will guide you through the intricate legal grounds, the strategies of asset valuation, and the tax factors you’ll face.

Navigating IP Law

Intellectual property (IP) law is a primary concern when exiting a patent-heavy business. Your patents are likely a substantial part of your company’s value, so you must make sure they’re legally transferable. Go through your patent rights and legal documentation to confirm they’re in order, as any lapse could jeopardize the sale or transfer. 

The safety of the proprietary information during this change should be considered to prevent IP theft or leakage.

Asset Valuation and Sale Structures

When determining your company’s worth, valuing your patent assets is complex, yet important. You must assess the current market value and the potential for future earnings. Incorporating cash flow analyses and considering different sale structures, such as outright sale or licensing, can impact your financial return. 

Thoughtfully structuring the deal is vital for maintaining credit health and optimizing the financial outcome.

Tax Implications and Credits

Understanding the tax implications of your business exit strategy can lead to significant savings. You should know potential tax credits for patent-heavy companies and how they influence your bottom line. Also, consider the tax consequences of your chosen sale structure; a stock or asset sale can have different tax liabilities. 

Consult with a tax professional to examine potential tax savings and assure compliance with law and regulation.

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Related Questions

What Are Business Exit Strategies?

Business exit strategies are plans you develop to exit a patent-heavy company effectively. They assure you maximize the company’s value and guide the transfer of ownership. For instance, selling your patent portfolio can be a strategy that adds considerable value to the exit package. Deciding and working towards a strategy early is important for a seamless process. 

Why Is Having an Exit Strategy Important?

A well-planned exit strategy is vital because it facilitates a smooth transition of ownership and management. It is your blueprint to secure your financial interests, particularly if your company holds valuable patents. Furthermore, it can guide decisions on maintaining legal and patent rights. 

What Are Common Mistakes to Avoid in Business Exit Planning?

A common mistake in exit planning is underestimating the value of patents or failing to document them properly. Another is not preparing for the exit early enough, which can result in rushed decisions. Finally, do not ignore legal considerations since they can define how patents are transferred or monetized during the exit.

Conclusion

Your company’s exit strategy can make or break a deal while navigating the patent landscape. If executed strategically, business exit planning can guide your company towards achieving long-term objectives and assure a seamless transition through leadership change or a shift in direction. A well-thought-out exit strategy is important for facilitating a smooth change in ownership and maintaining operational consistency.

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