How to analyse, protect and use your business’ intellectual assets

In Episode One of the Propelling Performance Podcast, Rob and Intellectual Property expert, Andrew Chalet discuss the ‘hidden’ value in your business, and how to protect it and use it to your advantage.

 “In business, people have to examine where their value is being created - protect it and use it and not waste it. That's the key.” - Andrew Chalet 

 Listen to discover:

1. Typical barriers to assessing Intellectual Property 
2. How to identify your Intellectual Property assets
3. Recognising the value in your business
4. The advantages of an external Intellectual Property Audit 
5. How an employee agreement can impact Intellectual Property
6. How an Intellectual Property Audit helped a company in crisis
7. The value of an Intellectual Property Audit during a company sale or strategic exit
8. How to get the most out of the Intellectual Property in your own business
9. Why you should look at your assets strategically with a view to commercialisation
10. When is the best time to do an Intellectual Property Audit on your business

Take Action

• Look at your business creatively. Really look at why it works. 
• Think critically about your processes, your people. Why do you think you're being successful? 
• What part of your business model is giving you the market edge? Are you doing all you can to protect and commercialise that in some way?
• Don't underestimate the level of intellectual assets, ideas and creativity you have in your business.

Transcript

Host:

Hello, and welcome to the Propelling Performance podcast. In each episode, we bring you an in-depth interview with business experts and leaders. They share their insights and experiences to help founders, owners and leaders drive the performance, growth and valuation of their mid-tier businesses. Now let's hear from our host, business coach, speaker and author, Rob Nankervis.

Rob:

Welcome to the Propelling Performance Podcast. I'm your host, Rob Nankervis and I'm grateful today to have Andrew Chalet with me. Andrew specialises in the commercialisation of intellectual property, technology transactions, intellectual property audits, registration enforcement, privacy, data protection, and information technology. Andrew is particularly focused on serving small and medium sized enterprises. He's a member of the Intellectual Property Society of Australia and New Zealand and the International Trademark Association. He's been recognised by his peers as one of the best lawyers in Australia for his expertise in commercial law, 2013 to 2020 and biotechnology law, 2014 to 2020. Andrew, thanks for joining me.

Andrew:

Thanks Rob, I'm very glad to be here.

Rob:

To help our listeners, tell us a little about the sort of market you're serving in your work.

Andrew:

So the market I serve are really those businesses that have ideas, have intellectual assets of some type, whether it's formal intellectual property or just their creativity, their ingenuity, their inventions, and help them get the most out of what they've created. It's often businesses that don't have layers of internal management who are on top of this. They're often businesses also that are still run by the original founders and have got a successful business model, but really need to analyse what it is they have in terms of those ideas, which ones are valuable, which ones are being commercialised, which ones could be commercialised, and are they doing it in the right way. So the market need as I see it is people who probably are not paying attention to what they're creating, but probably know deep down that they should be paying attention.

Rob:

It's interesting, isn't it? Because I sometimes think that ideas like intellectual property might be seen as the province of the top end of town - the big listed companies, the Facebooks and Googles and their brands and so on, and people will have that attribution of value to those sorts of organisations. But the reality is that small and mid-tier businesses often have ideas, processes, products, brands, and so on that equally should be protected.

Andrew:

Absolutely. And in some respects, they're more valuable to those businesses than to bigger businesses. But I think with the bigger businesses, they are attuned to what they create and it is part of their valuation - a valuation on the brands they use or the manufacturing processes they use. And they certainly have the wherewithal to employ people to manage that. But it is equally, if not more important for small to medium-sized enterprises to get on top of where the actual value is in their business. People often think of sales or physical assets, and it's not too difficult to analyse your own business and work out what you're doing. You just need to have time and somebody experienced to guide you through what it is you're looking for.

Rob:

Yeah look, I think that sounds very practical. I'm just wondering in practice though, what are the barriers? What sorts of things get in their road? Is it a lack of awareness? Is it fear of the costs? What are the barriers?

Andrew:

Yeah, cost is one thing. A lot of what we do is not particularly expensive at all, but I think people fear the worst when they start going down this path. They fear significant IP protection costs, for example. And they also fear that once they've recognised and protected their asset, if somebody else is infringing, they have to actually spend time and money protecting and enforcing their own rights. So I think there is a fear of starting on this journey because it leads them to potential further costs. But I think that's the benefit of doing what I call an IP Audit to begin with. And IP is only another phrase for intellectual assets. And saying, "Well, what do you have, what is the value and what needs to be protected?” So you can decide whether it's worth spending the money to protect something.

Rob:

I'd really like to explore that part because one of the interesting things, which came up with a client recently actually, they had some brand assets, trademarks and that sort of thing and weren't thinking widely enough about what their actual intellectual assets were. What do you see?

Andrew:

Absolutely. So obviously brands - when you go through a brand portfolio with a client, they may have no registered trademarks and they think of their company name. And then you can go through, look at their website, look at their correspondence and you can say, "Well, you're using that logo. That's not protected. What would you think if somebody else started using a similar logo in the similar industry?" And you can then look at process ideas, manufacturing ideas. So as an example, obviously a big company, but Toyota's manufacturing process is improved daily by ideas boxes throughout the manufacturing process. People working on the production line who think they can do something slightly better than the way they're doing it now- they record that and look at it and decide if they need to protect it.

Andrew:

So ideas about business improvement, process improvement, as well as ideas about the main thrust of the business, the creation of new products, creation of new brands. I think it's much broader than people think intellectual property is. I think they need to think about everything that they think is their ingenuity, their creativity, their inventiveness, and care less about what form of protection it has. I think they just need to think about what they're creating to begin with.

Rob:

I recall a case a couple of years ago with one of my clients where they had a really successful industrial business. And when we dug into their core capabilities, it was actually the design and their ideas around this specific component that was inside their core product. That was really where the guts of the value of their business lay. Not in the wider product itself and the manufacturing of that product and it was these characteristics that were actually really valuable for them. That sort of thing I imagine in other businesses, could in a sense, be taken for granted or missed.

Andrew:

Exactly. And if a business like that just continued using that central part of what they do for one purpose; manufacturing products, selling the products and hadn't thought "well, what else can we use that for? What other industries, what other sectors can we use that for?" Then once they've considered this, think about how they'd structure that to continue with the manufacturing business, but also have other manufacturing businesses or just licensing the IP for other sectors. They could really missing out on a lot of value.

Andrew:

So the advantage sometimes of an external party coming in and looking at these things is to just ask those questions. Say, "Well, okay, that's fantastic, but why is your product doing well? What's the heart of it. Can it be used for other sectors?" And I think it's quite amazing when you go through that with clients and you can see them thinking, "well, it's got this potential, but we don't use it for that." Well somebody else might be able to use it. So if you've protected your IP, you could probably license it to them so they can use it and get a royalty stream or some other revenue flow coming in.

Rob:

Even if you don't want to use it in your core business.

Andrew:

Correct. You can just be an IP licensor or you have an IP licensing business, which is quite common now. So you can focus on your core manufacturing business, for example, but in a non-competitive environment somewhere else, you could license someone else to use your ideas and get a second revenue flow coming in.

Rob:

The other thing too, that's interesting in this, Andrew, is as companies think about that, in a sense the whole business value creation cycle that they go through in generating outcomes for their own clients. It's almost like – “What's the business in a box? How do all these pieces fit together?” And using that as a bit of a proxy for saying, "How is value created and how do we lock some of that in?"

Andrew:

That's exactly right. And in business, people have to examine where their value is being created and use it. And protect it and use it and not waste it. I think that's the key to it. I think you often see really valuable intellectual assets, just not being utilised because people view it as being holistically one thing. We make this product, we provide this service, without really analysing exactly what they could use everything they have for.

Rob:

I'd imagine there is a risk piece to this too, where if you come in or look at a business with an acquirer's mindset and say, "Well, what am I actually buying here?" And the other question I imagine people would ask you is, "How protected is this and how easily replicated could it be?" Because I imagine that an acquirer, if they know something could easily be taken away, will be less inclined to pay full value for the acquired entity.

Andrew:

Absolutely. And it's investors and acquirers of businesses, depending on the form of the business and the IP they create, or the intellectual asset they create. If, for example, what they're creating could be patented and hasn't been, that would have a significant negative impact on the valuation of that business. So you have to think of yourself, investing in another business, and they've got all these great ideas, but they haven't been protected. For example, they haven't been protected by confidentiality. There's been no formal registration of IP. And therefore you're concerned that somebody else can just take those ideas and adopt them themselves. And therefore, what am I buying? What am I paying for when I buy that business? So even just the process of protecting valuable ideas in the first place can be significant in itself.

Rob:

It was the case with one of my clients in the last 12 months, where that was brought to bear in protecting their rights. That was a classic case of an international company trying to poach some intellectual property and making sure that all those protections were in place, the walls were up around their rights and so on, because significant value could have been stripped out of that organisation if somebody had just been able to walk away with that property.

Andrew:

Correct. And that's a combination, both of the process of looking at the value in the business and protecting it, but also then in terms of IP protection and contractual protection, making sure agreements with creators, distributors, everybody they do business with, achieve what they want to achieve as well as protecting themselves. So they're not left exposed to those people coming in, getting the benefit of the business, but then the next day competing with them or going off to their suppliers and directly dealing with them and really disrupting your own business supply. So it's hand-in-hand with an IP audit and any form of IP protection. You need to look at associated documentation, contracts, distribution contracts, supply grants, employment agreements. Do the employment agreements correctly deal with IP, for example? Then holistically look at a business so you can say from all angles of potential attack, that they're protected and valuing their assets.

Rob:

Well, the employment agreement matter is I imagine, not be well captured in many organisations. So for instance, if an employee is involved in being, say a key designer of something, does the employment agreement speak to who actually owns it? Is that owned by the company? Which one would presume it is, if they're being paid as their job as a designer. What happens if their employment agreement is silent as to those things?

Andrew:

In most forms of IP the default position is if something's created during the course of employment and within the job description of the employee, then yes, it probably will be owned by the employer if there's nothing in the contract to the contrary. But of course there have been cases where the argument is, you've thought about something outside the scope of your employment, it just happens to be remarkably similar, or you're a contractor. And often, when I look at businesses, I often say, “so how many employees do you have?” And it's five. “Well, how many contractors do you use?” And it’s 20. “Okay. Can I see the agreement with those contractors?” Because the default position with contractors is exactly the opposite, that they will retain any IP, unless there's a written assignment of it to your company.

Andrew:

So a contract is a particular risk if you engage people to write software for you for example, or you have a salesperson. You've really got to think about as an extension of the IP audit, you've got to make sure those types of contracts correctly deal with IP.

Rob:

Okay. That's a really interesting insight, particularly with the increasing gig economy and people outsourcing more. It's certainly one to watch out for. With work that comes through in this regard, Andrew, is it more likely to come as a result of a crisis rather than strategy?

Andrew:

Often. I mean, I don't know why it is, but people often don't like talking to lawyers. They'll come to us when they have to. So certainly it does happen that people come to us when they've got an issue and the problem, but also I think some come either because they know the value of IP or they're at that point on their growth; they've got a successful business model, but they've got to go to that next stage where they want to reflect on why they've done well and what they now need to do. And so it does come for different reasons, but certainly somebody writing to them saying, "Well, by the way, we've got that brand. You don't own it," jolts people into speaking to their lawyers on this issue.

Rob:

So it might be a good time to talk about perhaps a couple of case studies, maybe one where you've been able to help somebody out of a crisis situation, perhaps where you've been able to help in a more strategic sense, so people get an idea of how these engagements get handled through to a successful conclusion.

Andrew:

So on the strategic front, certainly we've looked at a retail business, both bricks and mortar and online, a creative business. It requires artists to create unique things which are valuable in the market and distinguish them in the market from more mass produced product. 

As with any business of this type, as soon as they become slightly successful, people think, "I know, that's a great idea. We'll do that." And can approach those artists directly and try and steal them away, or can try and change the distribution arrangements relating to them. By going through an IP audit for that client, we could identify a different profile of where their weak spots are, where their strengths are and what they should do in certain situations, what they should do when with bigger customers. And really put them in, I think, in a much better position now to withstand the pressure of success.

Andrew:

People are interested to rip you off when you are being successful. And you've got to make sure that you've got the strategy in place to withstand those tactics. So exclusivity arrangements in contracts, they're really important. They're obviously subject to some legal hurdles in a competition law sense, but exclusivity is really important in terms of, if you've created your business, you want to enjoy the benefits.

Rob:

It must be the case with something like that, too, that in one part, your maximum level of loss, aren't you, because you've done all the heavy lifting up to that point to get these arrangements, you've made the investments, built the relationships, got the production going and so on. And so, as you say, the proof is right at the end, when this is starting to succeed. And when you're effectively going to get your payback on it, and that's a high point of risk for somebody else, as you say, coming in and taking that idea away.

Andrew:

Absolutely. So that is the crisis point in some ways, you've got a successful business, people will be interested, they think they should have thought of it. They think they should have done it. And rather than doing their own thing, they'll just come and decide, "Well, let's look at that business and see if they've protected their IP. Have they registered their trademarks, can we create a trademark, a brand, that's similar, or if they haven't registered it, can we just start using their brand? And do we think they're going to do anything about it?" 

That is really the other one where they have faced the challenge and we've got them out of it is where they've been using a brand, but they haven't successfully protected it. They commissioned an external third party to create it, and didn't have the right documentation in place with them so that there's trademark rights in a logo, but there can also be copyright for example, in a logo that wasn't acquired. And therefore leaves themselves very open to attack.

Andrew:

And somebody else basically starts operating in a similar business using the same branding, very similar branding. And then you have to decide what to do about that. In that scenario, if you register your trademarks, acquire the copyright in your logo first, then it's pretty straightforward. You've got a very strong case. But in this particular case, there were plenty of holes in the protection that was afforded. Eventually we got them over the line, but it's a long and expensive hurdle. So it's always that pay off, that comparison between the initial cost of getting it right versus a much larger cost and the risk of failure if you don't.

Rob:

Yeah, indeed. And are there cases, so this is obviously one where there's a bit of a bail out, but are there any that relate to say, asset identification for sale and things like that, perhaps as part of an exit plan?

Andrew:

Yes, that's right. So well, plenty of times, we've looked at what is the valuable asset of a business and protected that. This is what people will be interested in and being able to restructure the business so that particular asset is available for purchase if you like, to some extent, but we've also restructured so that other related entities have licenses to that IP and can continue to operate. 

So we have two or multiple business arising out of it. And from there, you can create quite a few successful businesses.

Rob:

This is really a case then isn't it, of business owners and leaders being able to sit down and say, "Look, what chess pieces do I actually have on the board that I'm playing with in terms of our brand, our markets, our people, our relationships, our products we can..." And so on, and really come to grips with where the value is, and perhaps where the risks are obviously in their model.

Andrew:

Correct. And I've been involved in plenty of transactions where the asset that's been identified by the buyer as being valuable to them is not necessarily the one that was identified by the vendor to begin with as been valuable. 

But it just fits in to the business model of the purchaser, and is just an adjunct to what they're doing, either because it enhances what they're doing or it just takes a competitive product out of the market. 

So not only do you have to look at these assets in terms of valuable to you, but valuable to potential buyers for all the different reasons they might have either to use it, to shelve it, take it out of the market, to create something better by combining the two. 

So you do have to look at it from every potential angle, such as if we added this product to their range, that would be really good. That often is an analysis that's worth doing.

Rob:

So for my clients, several of them who've done what I call a strategic exit rather than a more basic - times earnings, commercial exit. And the numbers are significantly different when you can get these things lined up and you're tailoring a business so that it is extremely valuable, particularly in a niche. This tends to work really well, where that business can be articulated into some larger business or perhaps an industry roll-up that makes it a really valuable strategic acquisition. There's definitely a premium paid in those instances.

Andrew:

And that's why, when we would do an IP audit or an audit of their business generally, we need to know the business plan. We need to know what they are planning to do over the next five years. Is this a family business? Are they going to continue to operate it for the next 30 years? Or is there a trade sale in five years? What's their market likely to be? Who are the likely buyers? So you can aim towards that outcome. So we have to look up the assets in light of what they want to do with their business over the foreseeable future.

Rob:

So for the leaders and founders, owners who are listening to this, what are some of the things they need to start thinking about out the back of this conversation?

Andrew:

So really what they I'd like them to think about is what they really need in their business, what they use all the time and what if it was taken away, or if someone else was doing it, would hurt them. 

I think we need to think critically about their process, their people. And why do you think you're being successful? What part of his business model is giving me the market edge? 

I met a very successful venture capitalist a few years ago who's invested in two startups, both of which he then sold for billions. And just talking to him, I realised why he can see why one potential startup in a similar business is going to be successful and their competitors aren't going to be successful.

Andrew:

And it's that skill of being able to say, that's the market differentiator between this company and their competitors. That's going to make all the difference. And he obviously has been able to do that, but I think business people should be able to look at their own business and say, "What's our market differentiator and why are we being successful, as opposed to other people who've done similar businesses?" If they can do that, then we can really hone in, and say, “let's look at that and make sure, A, it's identified, B, it's protected." And then make sure you are doing all you can to commercialise that.

Rob:

And I think, with the shoe on the other foot, if are looking to acquire. And I suspect over the next few years, in what I expect will be a recovery market, there'll be lots of acquisition opportunities, baby boomers retiring and things like that. I expect, on the other side, they'll be having a lens into businesses on opportunities where perhaps inside the target business, perhaps there is a hidden asset, something that as an acquirer you could multiply the value of inside your own business.

Andrew:

Yes, that's exactly right.

Rob:

I suspect there's going to be business owners listening to this, who are looking to scale their business. So thinking about that, not only in your own business, but if you're looking at targets, are there assets that will become protected inside your business? Are there processes, products and brands that maybe you can buy in this transaction and you can protect? Perhaps they are inadequately covered with intellectual property inside the host business right now?

Andrew:

That's exactly right. So you need to look at all of these types of assets, very strategically with a view to not necessarily continuing your own business model as it is. You might think they are fine and you can just keep going, but also you should look at other things you can do and combine them with other people's assets. You could be utilising them, commercialising them in a different way and being as creative as you can, while making sure you're protected in what your core business is and what you want it to be.

Rob:

So thinking forward from here, what are the things that business owners and leaders should do to get some comfort? You've mentioned a couple of times that the audit seems to be a good starting point. What's the timing? What's a good trigger point for people to do these things?

Andrew:

Well, I think if you're going through a process of analysing your business and looking at its potential, that's obviously a great time to start the process. If you've been challenged in some way, that is obviously a time to not only deal with that particular issue, but try and think about, "Well, what other weaknesses and vulnerabilities might we have?" 

I think at all times, people should be protecting their IP because they could get caught out. I think in particular, if there's a trigger point, it really is when you're making your business plan for the next three to five years. You should, at that point say, "What are our intellectual assets that we want to protect and to commercialize? Do we feel vulnerable because we haven't done that?" 

And in light of the end result of that business plan, if it's a trade sale, or an investment opportunity, joint venture, whatever it might be, thinking, what does that look like? Because really you have to start now to get ourselves in shape for that particular moment. If you don't start now, it won't happen.

Rob:

Because with some of these things, obviously there can be quite a bit of work involved and time spent unpicking some of those things and setting them up properly.

Andrew:

That's right. I mean, in some ways it can be as long as the business wants it to be. I mean, I've done IP audits that can be a few hours on a simple business, and I've done those that can take months. So it really is as long as you want it to be. 

I think the critical point is to get started. Even if you spent a day or two looking at it and working through it. From a lawyer’s point of view, the lawyer has to understand your business to really give any useful advice about what to protect and how to protect it. So I'm very keen always to visit clients, to go and speak to them, see how they operate, see their factory or whatever it might be, because you come away with a sense of what the business is really about.

Andrew:

I think it's quite hard to give really useful advice unless you do that. If you're just in your office and you say, "We've got a brand issue, somebody is using a trademark," you can get very narrow advice on that issue. What I don't know in that case is well, how important is the brand to them? Should they be worried about it? Have they got other trademarks they can use? 

Having that business understanding is really important in this context and will drive how long, how expensive and what the results going to be.

Rob:

Look, really great insight. I appreciate you sharing those. Is there a last ‘flea in the ear’ for people to take away, something they really should be thinking about out the back of this conversation, to make sure they get the most out of the intellectual property in their own business?

Andrew:

What I would say is that people very quickly jump to the conclusion that they have no IP in their business that's useful. They look at the practical side of it, the assets, physical products, whatever it might be, or they think it's all in their heads. It moves around with people. I think people generally underestimate what they can do with all of those ideas, that experience, that know how, and tend to look to the hard forms of IP, the trademark registration for example. 

What I would encourage everybody to do is look at your business much more creatively than that, and really look at why it works. What's the market differentiator? Why are you better than your competitor? Then we can say, "Well, let's try and make sure that continues and protect and commercialise that in some way." 

So my message would be, don't underestimate the level of intellectual assets, ideas, creativity that you have in your business. Even if it's a process or know-how, that's really important.

Rob:

Andrew, really valuable insights you shared today. I appreciate you being on the podcast with me. Thank you.

Andrew:

No worries. Thanks Rob.

Host:

You've been listening to the Propelling Performance podcast, the show which helps you drive the performance, growth and valuation of your business. If you have enjoyed this episode, please leave a rating and a review and share your key takeaway. To get the show notes from today's episode, head to RobertNankervis.com/podcast. Remember to sign up to receive an email, to let you know when the next episode is released. Thanks for listening.