The Role of Intellectual Property and Human Capital in Succession Planning

by Nicole O'Hara

Succession planning refers to the sale or other transfer of a privately-owned business to the next generation of a family business, an employee manager or management team, or an outside purchaser. A good succession plan facilitates the successful transition of the business and ensures its continued viability, in addition to providing a return on the investment of the current owner. However, studies by the Small Business Administration show that less than 30% of the small businesses who are likely to experience a change in ownership over the next ten years have written succession plans and contingencies. One key element to any good succession plan is determining and monitoring the value of the business. Accounting professionals and valuation experts can help you establish this value, based on cash flow and liquid assets, profits, taxes, liabilities, fixed assets, such as real estate and equipment, and intangible assets. While EBITDA gets a lot of play in the business world, human capital, or the value of knowledge and experience in your employees, and intellectual property (“IP”) are just as important. If not expertly cultivated, both classes of assets can depreciate, and your business succession plan can fail before it gets off the ground.

Almost every business, no matter how small, has valuable IP upon which it relies, and most businesses will have IP in each category, determinable through an IP audit. Copyright law protects Web sites, catalogs, software, textual and digital content. Typically, copyrightable materials are protected from use by third-parties for the life of the creator plus another 70 years. For content created by the employees of a business, AKA “works-for-hire,” the owner of the content (hopefully, the owner of the business and her/his successor-owners) can exclude others from using the content for 120 years from the date it was created or 95 years from the date it is published, posted, or distributed (whichever comes first).  Trademark law covers business names, logos, and product packaging. Service and trademarks registered with the U.S. Patent & Trademark Office (the “USPTO”) will live forever, as long as they are continuously used in commerce, maintained with the USPTO via periodic confirmations of use and payment of fees, and protected against infringement. Inventions, processes, improvements, and formulations fall under the patent law which protects the innovation developed by you or your employees. Patents in the U.S. are granted by the USPTO and last 20 years if maintained through periodic payments to the USPTO. Design patents, which protect ornamental elements of functional items, are also issued by the USPTO and last 15 years from the date they are granted. Federal and state trade secret laws have evolved to give business owners a perpetual and powerful option to protect proprietary information and trade secrets, such as detailed processes that cannot be reverse engineered, valuable research results and data, business plans, and databases of information regarding products, services, customers, and/or prospects. Trade secrets can be maintained and enforced forever as long as the information has demonstrable commercial value, derives value from being maintained as a secret, and maintains its secret status by virtue of reasonable measures taken by the owner of the information.

Similarly, key executives and employees can represent immense value to an on-going business, through their exceptional performance, leadership or importance to the culture of the company. Business owners looking to identify the future leaders of their company and the foundation for its future success should identify these key individuals, as well as the most critical roles and positions. Determine ways to keep talented individuals on board, as well as potential successors for the various positions and systems in place to ensure success for those roles and departments. As noted above, despite the fact that many business owners lack the time and/or courage to face the prospect of retirement or an unexpected need to hand over the reins to their business, a succession plan can be the best chance of success and survival for small businesses. Family businesses (and the families themselves) run the risk of disruption and self-destruction without a clear-cut succession plan, in addition to potentially deleterious effects of poor estate and income tax planning. Finally, succession plans guarantee a secure retirement for the current owner(s)/leader(s) of the company while providing a level of control over the process. The thrill of creation, creativity, and control is likely what led you to take the risk of starting your own business; don’t cede this power now for fear of facing the future.

By: Nicole J. O’Hara, Esq
Saul Ewing Arnstein & Lehr, LLP

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