Nearly all mergers and acquisitions (M&A) transactions involve some intellectual property (IP), the most significant asset an enterprise can own. IP refers to intangible assets that the law protects from unauthorised use. The most common examples of legal protection for IP include trademarks, patents, copyrights, and licenses. They can cover almost anything, from logos and company branding to business concepts and product formulas.
As technology becomes increasingly prominent these days, the need for companies to effectively manage their IP has become more necessary. This is especially true in the event of an M&A, which usually affects a variety of areas, such as assets management, employee shares option services, and more. Read on to find out some of the most valuable tips on the effective management of IP, particularly during a company merger or acquisition.
Conduct Due Diligence Before Acquisition
Before a company M&A, due diligence is crucial to protect both parties from unnecessary risks. In connection to IP, the objective of the due diligence phase is to take inventory of the company’s intangible assets and identify whether there is outstanding tax and transfer pricing risks that come with the intangibles.
Here, specific documentation is needed to assess IP ownership properly. It usually requires advisors to track down every asset back to its source to determine who owns it and whether it is economically owned or legally protected. Using this documentation as the basis, the integrated company can examine what potential risks may arise and develop essential go-forward determinations.
Was there proper compensation for the IP owners in the past? Is it possible to transfer the IP ownership? How does present ownership align with the IP-ownership objectives following the acquisition? These kinds of details must be addressed first before an acquisition becomes finalised.
Identify the Intellectual Property’s Value
When assessing IP assets in M&A, companies should not rely solely on their accounting valuation to identify value for tax or other purposes. While it can serve as a guide, accounting valuations often generate different values than tax valuations.
Companies can either conduct their own valuation or hire the services of an external advisor. Still, they should remember that there are two varying methods of intangible valuation, which are essentially different. Accounting valuations are used to determine an asset’s value during a merger or acquisition. On the other hand, transfer pricing valuations are usually completed for tax purposes.
Generally, accounting valuations are performed based on fair market value and a post-tax basis. Meanwhile, transfer pricing valuations follow the arm’s length principle and are conducted on a pre-tax basis. By using the incorrect method, a company can either undervalue or overvalue its assets, leading to erroneous tax payments and inadvertently catching the attention of tax authorities.
Have the Ownership Structure Simplified
Managing intangibles can be particularly difficult when an acquisition results in legal ownership in numerous tax jurisdictions. For instance, the acquiring company might store its IP in Japan, while the company being sold might store theirs in China.
In this case, having a simplified ownership structure is called for. The companies must evaluate the operational structure of the combined enterprise and consider combining IP to a centralised location. The development of new IP needs to reflect the strategy of the combined enterprise moving forward.
Conclusion
IP is a significant and complex aspect of business that requires effective management and protection. However, even with the abovementioned tips in mind, there are still many details companies must get right to protect IP rights, especially in mergers and acquisitions. In such cases, hiring a professional intangible asset valuation and transfer pricing firm is a great solution to consider.
At Max Lewis, we provide a wide variety of reliable corporate services, including asset valuation and transfer pricing, local and international tax planning, GST Assisted Self Help Kit (“GST ASK”), and employee shares option services in Singapore. With the help of our efficient and expert services, you can surely achieve the results you expect and desire from all your transactions. Feel free to contact us anytime to learn more about our services.
*The above represent our views and opinions and does not necessarily reflect the position of any entities mentioned.