The Business Divorce Law Report
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Intangible assets are typically the most valuable possession of a closely held business, but often are poorly protected.
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Risk mitigation through a business bulletproofing process can protect those assets from being misappropriated.
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Intangible assets include customer relationships and intellectual property.
I sometimes ask closely held business owners if they lock the doors to their business when they leave. The answer is ‘of course.’ I may push further. Do you have an alarm system? What about at home?
No surprises here. Everyone locks the door. Most have alarms. My follow-up question is ‘for what?’ The answer, again, is obvious. We lock doors to prevent thieves from stealing our stuff. Then why do so many of us do nothing to stop thieves from stealing what is commonly the most valuable asset of our businesses?
Bulletproofed Businesses are Protected Against Theft of Intangible Assets
So many closely held business owners protect themselves against the theft of office equipment, but leave the doors wide open and invite thieves to help themselves to their most valuable property—those intangible assets that drive sales and efficiency.
The value of these assets is rarely reflected on our company’s balance sheet. Instead, the value is found in the knowledge and skills of our employees, the relationships we have with customers, and the reputation we have built in the market.
I am a lawyer, a certified valuation analyst, and a certified exit and succession planner. I have worked with the owners of closely held businesses throughout my career.
Contact me if you have questions about valuing your business, developing an exit plan, or implementing the legal bulletproofing necessary to protect your investment.
Many closely held business owners have no clear idea of the value of their intangible assets and are badly misinformed about what can be protected and how that is done. I am surprised how often my clients think they there is nothing they can do, and how little importance they give to writing down what they have.
Identifying the Intangible Assets
Let’s examine what intangible assets are and discuss some of the basic strategies for protecting them. An intangible asset is property that has value but cannot be seen or touched. Examples are our customer lists, the goodwill in our relationships with those we serve, our intellectual property like copyrights and trademarks, and our processes and procedures.
As a business owner, you should understand the concepts but also recognize that this generally is not DIY territory. Intellectual property law is counterintuitive at times, subject to different statutory schemes and state laws, and it has nuances.
The owners of bulletproofed businesses are those who have taken the time to inventory their intangible assets and understand the fundamental importance of protecting them. They sought competent legal advice and implemented a plan.
The point here is that unless you are an electrician, you probably shouldn’t install your own alarm system. The same applies for the doors and window locks. But knowing that you need them makes all the difference.
Taking an Inventory of Intangible Assets is Key
The bulletproofed business knows what it owns and, equally important, it knows what it does not own. It is surprisingly easy to inadvertently use someone else’s intangible asset, from making unauthorized use of a copyrighted photo to hiring away a key manager without finding out if they are under post-employment restrictions.
The penalties for these kinds of mistakes are severe, and you should try to avoid making them yourself. Infringement of another’s intellectual property rights can subject the infringer to injunctions, statutory damages, disgorgement of profits, and attorney’s fees. In the most egregious cases, criminal charges may also be filed.
And, in many cases, the owners of closely held businesses that knew about, directed, or approved an infringement find themselves subject to personal liability. The general shield of the limited liability or corporation is frequently ineffective to protect the owners of small and medium enterprises against infringement claims.
This is serious stuff. But, fortunately, these are also the same tools that the owner of a bulletproofed business is going to bring to bear when protecting their own intellectual property. You can use them to your advantage.
Intellectual Property Rights are Key Intangible Assets
The core of all of the rights is intellectual property law. IP law defines owner’s rights for trademarks, copyrights, patents, and trade secrets. These laws are closely intertwined with contract law and, in some cases, the law applicable to business torts. These include agreements not to compete, non-solicitation agreements, confidentiality agreements, and principles related to unfair competition.
The key here is not to try to learn all of the legal details yourself, but to have a competent lawyer look at the issue, implement a plan, and re-evaluate the plan from time to time. It’s part of your business, and you should be aware and knowledgeable, but this is an area where professional help is important.
Protect Your Customer Capital
The goodwill that you have built in your business, what we refer to as customer capital, is an equally important intangible that requires protection. It is essential to have the legal agreements in place to protect your customer capital, such as non-compete agreements to prevent employees from taking your customers with them if they leave.
Confidentiality agreements can also help ensure that sensitive information about your customers is not shared with competitors. However, the enforceability of these agreements varies from state to state, and, importantly, the Federal Trade Commission is seeking to prohibit the use of post employment restrictions against competition for most employees.
Here again, it is best practice to work with a lawyer to ensure that your business is protected and that you are taking necessary and enforceable steps to safeguard your customer base. Remember, your customer capital is a valuable asset that should be carefully guarded.
Recommendations on Buletproofing Your Closely Held Business
This is what I recommend to clients.
- Inventory your business for all of its intangible assets. These will commonly include goodwill, advertising, and brand, copyrights, trademarks, and trade secrets. Patents may sometimes be involved, but companies with patents usually have patent lawyers.
- Identify what can be protected and what cannot be protected. It is very difficult to protect ideas, but what your business does with its ideas can be the subject of valid and enforceable protections provided by intellectual property laws. It is critically important to understand the difference.
- Conduct a ‘negative’ inventory to eliminate your practices that put you and your business at risk. Consider your own operations to ensure that your company is not infringing anyone else’s intellectual property rights. Even innocent infringement has severe penalties.
- Develop a strategy. You may not be able to claim ownership of an idea, but there is a great deal that can be done to prevent others from knocking the way you deliver that idea.
- Look at your employment relationships. The traditional non-competition agreement is under attack and is becoming much more difficult to enforce. But a business can still protect itself nearly as effectively with policies and procedures that address ownership and confidentiality. If you have a sales team, non-solicitation and confidentiality agreements are imperative.
- Write it down. This is worth saying twice: Write it down. Many owners discover a theft of their intangible assets and then try to protect them after the fact. But it is tough to enforce those rights if the business did not take the time to write them down. It’s the proverbial frustration of trying to get the toothpaste back in the tube.
I work with owners of closely held businesses to help them bulletproof their company. Contact me if you have additional questions or would like to discuss how to inventory and protect your personal intangible assets.