Almost five years ago I wrote that headline. Those who took the advice that month would be in negotiations for a transaction that closes early next year. Since I wrote that, we’ve been through several cycles of “Smart money is acquiring companies” and “Nobody is investing!” The lesson here is not to rely on the current climate to drive your optimism about selling your company in the years ahead. The key is to prepare now for the possibility that the right economy, the right buyer, and the right situation in your life might possibly arise at the right time in the years ahead. My job is to help you get your business ready for that event.
I also have colleagues who help sellers avoid the predatory buyers who will promise you that your company is worthless, and you’re lucky they’re taking it off your hands for five bucks. That happens more often than you might imagine, and if you follow the news and rumors that follow industry acquisitions, you know that some sellers get a sweet payday and other get the shaft. Don’t go it alone when selling your life’s creation. I had this conversation in the last year with one now-former client whose company was acquired in distress, and he knew exactly about what I meant about the predatory buyers.
Looking back to the SHOT Show almost five years ago, I had an interesting conversation with a client. It was very confidential, but I have so many clients in the industry, and no one would ever guess which one, so I can share the story here. If you think you have some insight, or can look at my client list for a hint: trust me, you’re wrong. I’ve had clients who are the occasional subject of such rumors, and this isn’t one of them.
The owner of the company took me aside, and walked me a good distance from his booth. He didn’t come right out and say it. He hemmed and hawed a bit about the future of his company. He talked about making his business more valuable. I finally figured out what he was asking: “So, you want to sell your company down the road, and do what you can now to maximize the selling price then, right?”
“Right!” He told me he’d been in the industry his whole adult life, loved the business, but was going to be ready to retire or move on to something else.
It’s probably common sense. If the boss lets the cat out of the bag that he’s thinking about selling, it can be very disruptive. A business is built in large part on many important relationships. And a future sale plan can be very threatening to these relationships.
Key employees and executives might fear that a future buyout means they’re out of a job. After all, the reason why a big company buys up a small one is that it believes it can run the small one more profitably than it’s being run. They might figure that the big company’s management can handle the management aspects, and perhaps even their technical talent can handle day-to-day production and product development chores.
If your key people feel like their jobs are at risk, they’ll be much more tempted by other offers, or may even start looking. “Sour grapes” psychology may even lead them to start telling themselves that the job isn’t that great, and they should look elsewhere. So if these key people get wind of a sale, you may find things falling apart so badly you can’t even focus on increasing your company’s value. You may end up taking over tasks from departed employees, contrary to the liberation you had hoped for.
Line employees may justifiably fear job loss as production is moved offshore or out of state to the new parent’s facilities, and you may suffer higher attrition of your best people.
Your relationships with your suppliers might suffer, as your suppliers fear losing your account. In my own practice, I love to help clients grow, prosper, and achieve their owners’ dreams. But it’s bittersweet when the dream comes true, because as one of those suppliers I might not be able to keep the client any more. Sometimes, I end up with a great new relationship with the acquiring company where my expertise is valued. Other times, like when my clients Thompson Center Arms and Crimson Trace each sold to Smith and Wesson a few years back for over $100 million, I have to say a fond farewell as the buyout company uses their in-house patent and trademark lawyers.
Your other suppliers probably also worry that if someone buys you out, it may be because they think that they can make your business more profitable with their suppliers, or by producing in house from one of their companies what your supplier currently supplies. If your suppliers get wind of your plans, it will be unsettling, and you may not get the priority and pricing you need when they think of you as a short-term relationship instead of a long-term one. (That’s not applicable with me, but I may ask your permission to brag how I helped you get things set to sell for top dollar and make your dreams come true!)
It’s like the time I was in a rental house waiting for a new home to be built. The new home was nearing completion, and I got word that it would be ready for occupancy in about a month. I was kind enough to tell the rental manager that the time was getting close (but not my official 30 days’ notice). In response to my kind projection to help them get ready to remarket the property, BAM!, they gave me 30 days’ notice, and advertised for new renters. I ended up moving into the unfinished new home with a garage full of boxes, a driveway of mud, and living in the guest bedroom for a few months.
The client I had the private conversation with at SHOT knew all this, but he needed my advice about how to maximize the future value of his company.
There are three types of businesses:
I spend much of my efforts educating Type 1 clients to become Type 2 clients. I want them to be able to minimize future lawsuit risks and costs, and to maximize profits by keeping competitors and knock-offs away.
But for someone planning to sell the company in five years, profit maximization won’t necessarily maximize value. Basically, the solution may be to spend too much on legal fees to fatten your intellectual property portfolio.
As I have written in my book, when a company is sold, the bean-counters for the buyer are charged with valuing it. The bean-counters know that machinery and buildings can be acquired anywhere, key employees can leave, and management can be replaced (usually, they assume, by managers that can run things even more profitably than you can!)
What impresses the bean-counters are the things that the buyer can’t get anywhere else. First, you have a valuable reputation with your customers. This is primarily carried by your trademarks, including your company name, and your product trademarks. It’s not just your mailing list, but the fact that those on your list trust you, respect your products, and look forward to buying more.
Second, you may have some patented products. Those patents mean monopoly pricing power to set prices based on how much customers value your innovations, and based on how cheaply the competition can undercut you on price. A core technology utility patent that helps you “own” a market segment is ideal, and is easy for the bean-counters to value. Design patents aren’t as powerful, but still protect against knock-offs and look-alikes.
The key question you will face in the valuation process may be: “What percentage of your profits/revenues are protected by your intellectual property?”
Your answer should be an unhesitating “100%!” Which is kind of a trick answer to a sneaky question. That’s because everything you ship out the door should have at least one of your trademarks applied to it. Every product should be marked with your main trademark. If the products aren’t marked, it’s time to fix it – and the application process ensures that we vet your use. (This is also good advice even if you aren’t going to sell, because trademark usage strengthens your relationship with each customer).
If the key question is reworded to ask what percentage of profits come from patented products, it’s likely that this number will be much less than 100%. A patent-oriented company like Crimson Trace with its core Lasergrips patent (now-expired) might have much of its sales under a patent, and a small company (like my own Trigger Tamer drop-in part for the AUG) may reach 100% if all it sells is one patented product. But companies with broader product ranges will likely have much lower percentages.
The greater percentage of your profits that come from protected products, the more your company will be worth to a buyer.
The obvious answer is to increase the height of those stacks of patents and trademarks on the bean-counter’s desk. It’s superficial, but there is some real psychology to the fact that a company with more patents and trademark is perceived as more valuable than one with fewer, even if otherwise identical on paper.
The percentage of profits protected by patents is probably more powerful, so we’ll start with that. First, utility patents. It’s hard to push your people to become even smarter inventors, but at least be aware that some patentable inventions never get reported to the boss. To minimize this loss, be sure to reward invention disclosures and patents by your employees. If there is something patentable about one of your new products (remember that patents can be filed only on inventions that haven’t been on the market more than a year) then consider protecting it. Even a patent on a minor feature can prevent knock-offs, and enables you to report an increased percentage of your sales as patented.
Basically, consult your patent attorney for every new product released, to determine if there might be something patentable.
It’s hard to vastly increase utility patents, but design patents are an outstanding way to improve your “percent patented” numbers. They aren’t as broad as utility patents, because they protect only the non-functional aspects of the look and feel of the product. But they do prevent knock-offs, and force competitors to steer away when designing products to compete with yours.
Provisional applications are good short-term low-cost ways to preserve potential rights for an imminent buyer without spending much your cash to eventually put value in the buyer’s pocket. You reserve the rights, and they invest in securing them.
Design patents cost a fraction of utility patents, and don’t have maintenance fees. But they go right into that stack of “patents” that the bean-counter will be weighing. My advice to any company making goods that incorporate some sense of style where an aesthetic design choice was made (pistols, stocks, knives, flashlights, and just about anything that isn’t purely utilitarian) is to get a design patent on each new product that has a new look. For the company focusing on profits and not buyout value, that may mean focusing only on the most important products, and using strategies to protect design elements that might appear on multiple products, but for a company looking to fatten up the portfolio like a prize steer there is an opportunity to do much more.
If you simply want to get a good bang for your buck on your patent and trademark investments, and don’t plan to sell your company, stop here. If you’re willing to consider going a little crazy on legal investments to get a much greater return when selling your company, read on.
The big challenge is: “How can I get MORE intellectual property?”
For trademarks, your start with registering everything you have, including all the variations (If “X75” is the brand for your rifle line, then you may wish to register all the variations you sell (X75-A1, X75-SBR, X75-B, etc.) That way, you multiply the number of your trademark registrations.
Once you have mined your existing catalog for opportunities, you can create more brands. You may have unnamed features of your products that you simply describe (the shape, coatings, materials, etc.) Each of these is a potential brand: “The X75-SBR® rifle with the Manatee® handguard, featuring our Realswamp® camo pattern and Snotslik® low friction coating.” There’s no reason a product can’t go out the door with 4-10 trademarks on it. There’s no reason that some ordinary part, process, feature or characteristic can’t have its own brand name.
Basically, you can create trademarks out of thin air, and register them after you use them. Simply go through your catalog and marketing material for each product, and where any feature is mentioned, ask yourself why you don’t have a brand name for it. Remember, the feature doesn’t have to be unique. It just has to be yours. Every scope mount maker may claim a return to zero capability. But why not give yours a brand name? (If you saw season one of Mad Men, you’ll recall the ad men coming up with the slogan “It’s Toasted” for their tobacco client, even though toasting is part of the production process for every cigarette maker).
You can even create trademark rights by anticipating future needs. If your brands are in a family (suppose you name each of your rifles after a species of tree) we can file an intent-to-use for the trees you haven’t yet used, to put some brands on the shelf for future use (Ponderosa, Jack Pine, Cedar, Sequoia, etc.)
I know I’ll get teasing from my clients about this shameless pitch to buy way too much of my legal services. It’s way too much for most sensible profit-oriented companies that aren’t planning to sell in five years.
But if you’re planning to sell out and maybe buy yourself a yacht, it might make sense to buy me a motor boat with your investment in legal work that creates and secures intellectual property to make your company more attractive and more valuable to buyers.
The rules for going overboard:
Even if you aren’t going to sell, you may find that thinking of some of these strategies helps you to keep your options open for the every-day business of keeping your competitors at bay, and keeping out of lawsuits.