Managing intellectual property – a tactical approach

“The importance of ‘cue ball control’ when managing intellectual property (IP) assets tactically – how thinking from the point of view of one transaction only, (e.g. in the context of M&A, or optimising a transfer pricing position) can create disadvantages for you in the wider game.”

It’s your shot. You are at the table. The competition is sitting in the corner waiting, powerless. You are in control. You must view the table strategically – it’s your battleground. Each shot is critical but you must think ahead. You must think strategically and think about the bigger picture. You need to control the cue ball to gain position for the next. Failure to think ahead can leave you out of position and unable to complete the next shot or perhaps worse, snookered behind an obstacle of your own making. It sounds like a game, but it’s not. It is IP management.

Typically, acquisitions are measured in terms of multiples of revenue, EBITDA, EBIT, operating profit, or net brand contribution of the acquired entity. Irrespective of how they are analysed, most acquisitions aim to secure a stream of cash flow and the relative multiple reflects a number of factors such as potential synergies, economies of scale on integration, strategic opportunities and so on. But what drives cash flows? Typically it is the entity’s IP and intangible assets. Intellectual property includes the patents that protect products, the designs that define style and product image, the trademarks that are distinctive and unique in conveying brand values to consumers, and copyright that protects creative work.

Other intangible assets include trade secrets, customer relationships, and business reputation. Collectively, IP and intangible assets are the core components of brands which retain consumer loyalty and encourage product trial and adoption. It is no wonder that IP and intangible assets typically possess a significant proportion of the enterprise value. Despite the fact that the IP assets are the key drivers of future cash flow, they are not always understood or managed properly.

They are frequently managed by legal departments in silos which are remote from commercial strategists. This often results in IP rights being used defensively to protect markets and profit margins from competition, rather than proactively to secure revenue streams from competitors and general market growth. As critical business assets, IP management should be in harmony with long-term commercial strategy.

If you would like further information on managing intellectual property or our services, please contact John Illsley.

Look out for the next article of the series: managing intellectual property – due diligence matters.

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