Not one to mince words, KPS Capital's Michael Psaros offers a ...

06-08,78-85_ACG.qxd 4/6/09 5:11 PM Page 80COMMUNITY COMMENTARYMaximizing Value through IPFailure to register a company’s trademarks or intellectual property cancost a business in the event of a sale.By Denise Walsh and Robert ShepherdWhen starting a business, most entrepreneursthink about financingthe company, hiring employees andmarketing the business to potential customersand clients. The last thing executives may thinkabout is the sale of the business. However, mostinvestment bankers advise owners to startpreparing for a sale from day one. This meansthat, from the date of its formation, the ventureshould be organized so that a future buyer couldstep in at anytime and seamlessly take over operations.One fairly inexpensive method of preparingfor sale at the outset of a business is toregister the company’s intellectual propertywith the United States Patent and TrademarkOffice (“USPTO”). Registration with the USPTOhelps ensure that the purchase price a businessowner receives upon sale includes thevalue of the company’s goodwill. Some key elementsof goodwill are the company’s name,trademark and/or service mark. For example,the name and symbol of a fast-food chain, aswell as the name of its signature hamburger,may be some of the most valuable assets ofthe business.Failure to register an entity’smark may result in aholdback or even a reductionof the purchase price.We recently represented abusiness owner who sold his company aftertwenty years of operation. The seller failed toregister the company’s mark with the USPTO.Due to the premium being paid for the goodwillof the business, the buyer ran a trademarksearch. The results of the trademark search revealedthat, unbeknownst to the seller, a thirdparty had filed a trademark application with theUSPTO for a very similar mark. Although thecompany attained certain common law rights tothe mark as a result of its use and likely wouldprevail in litigation against the third party, thebuyer was understandably apprehensive. Atclosing, the buyer required that a portion of thepurchase price be placed in escrow pendingresolution of the matter. Any legal fees incurredby the buyer in connectionwith such resolution wereto be reimbursed out ofthe escrowed funds andthe remaining funds, ifany, were to be paid to theseller.In another recent example,a business ownersold her business to a foreignbuyer. Once again,the seller failed to registerthe company’s mark.The company had used themark since inception and,therefore, attained certaincommon law rights to the Denise Walsh“Failure to register an entity’s mark mayresult in a holdback or even a reduction ofthe purchase price.“mark. The seller knew of no third-party claims tothe contrary. Notwithstanding, the buyer requireda reduction in the purchase price due tothe seller’s failure to register the company’smark. In many foreign countries, a person doesnot have any rights in a mark unless he or sheregisters the mark with the appropriate authorities.The buyer was unfamiliar with the protectionsafforded by the common law and was,therefore, uncomfortable with the fact that thebusiness it was buying had not registered itsmark. The buyer also wanted to register the markin its own country and non-registration in theUnited States presented an obstacle to such foreignregistration. From the buyer’s perspective,the company was worth less absent federal registration.The two scenarios describedabove could havebeen avoided if the businessowners registeredthe marks of their respectivecompanies from theoutset of the business.Once a company registersits mark as a federaltrademark, the companyhas nationwide rights inthat mark as relates tothe particular goods orservices for which themark is used. From thedate of registration, thirdparties are placed on constructivenotice of the registrant’s claim of ownershipof the mark. The registering entity cankeep others from using the same mark, as wellas any “confusingly similar” mark, throughoutthe United States. In other words, an entity onthe East Coast of the United States can stopan entity on the West Coast from using an identicalor similar mark. This represents a significantexpansion of a company’s common lawrights, which extend only to the geographicarea in which the entity sells its products orservices.Some additional benefits that flow from fed-80 ACG > MERGERS & ACQUISITIONS February 2009