I'm working on getting to close on a business that licenses logos etc from a few dozen organizations. The related products comprise about 35% of overall revenues. Some of the licenses are handled by one licensing organization, which has a process for the transfer that takes a a few weeks to 2 months. Then there are at least a couple dozen licensing organizations that have to be approached individually for the transfer and this process could stretch for 2-3 months. All licensing agreements have a change-of-control clause and are explicitly non-transferable.
How would you handle this at closing? There are 2 aspects I'm worried about: (1) How to protect myself against the risk that some of these don't transfer and (2) How to run the business while the licenses transfer.
1. A holdback amount commensurate to the share of revenues, to be released as licenses are transferred.
2a. In the meantime, run the business under the seller's license and indemnify the seller for any fallout
OR
2b. Seller continues to run the licensed part of the business and conveys all revenues to buyer
This cannot be an uncommon scenario so I am wondering how others have handled it.
Thank you,
Navjot
How to handle license transfers at closing?
by a searcher
More on Searchfunder
Searchfunder is an online community and toolkit for searchfunds. Over 80% of those involved in searchfunds maintain a Searchfunder.com account to help them network, problem solve challenges, and keep up with the industry.
We maintain partnerships with database providers that make searching more effective, efficient and affordable along with features that help searchers find deals and investors and vice versa.
We maintain partnerships with database providers that make searching more effective, efficient and affordable along with features that help searchers find deals and investors and vice versa.
1. Diligence should have uncovered the licensing restrictions
2. A stock sale is the most logical option for 'non-transferable' assets
If the Seller is a C or S Corp, the 338(h)(10) election may be an available option. It allows a transaction to be considered a stock sale for legal purposes, but is treated as an asset sale for tax purposes (gives the Buyer asset basis step-up). Your legal bill will be higher and there is a reporting requirement from BOTH the Buyer and the Seller regarding asset valuation that must agree.
Separately, there is greater risk associated with a stock sale than an asset sale primarily due to un/known potential liabilities. Your attorney can advise on mitigation language in the SPA but no transaction will be risk-free. As a Buyer, you also lose the step-up basis for the assets in a stock sale without an election such as described above.
Splitting operations between the Buyer and the Seller can be done but generally is too cumbersome and risky an option when simpler solutions are available.