Patent Strategy Could Be Essential to Your Private Equity Business Plan

A good patent strategy increases the external value of a business

A good patent strategy increases the external value of a business

A friend of mine recently joined a small, privately-held consumer product company as its innovation manager. The company, which I will call “Cool Stuff,” is owned by a private equity firm. The private equity firm purchased Cool Stuff about a year ago. Cool Stuff was essentially an established “mom and pop” company with a core product line. Cool Stuff has a couple of manufacturing facilities, but the primary value of the company is its relationships with existing customers (such as department and grocery stores) that will make it possible for new products to gain shelf space in department stores.

The private equity company’s payback model centers on growing the sales of Cool Stuff by introduction of several innovative and differentiated new products (hence, the reason for hiring my friend). After these products are shown to provide sustainable profits for Cool Stuff, the private equity firm plans to sell Cool Stuff and earn several multiples of its investment within about 3-5 years of its initial investment. Of course, this short timeframe does not allow for misfires: execution of the private equity company’s business plan must be virtually flawless to be successful.

The private equity firm’s plan is based on a tried and true business model—grow a previously somewhat moribund company to make it an attractive target of a larger company seeking to quickly grow its product line by acquisition. However, as an IP Strategist owner of an IP Strategy and Consulting services, I see a critical flaw in this business plan as it applies to Cool Stuff. Namely, the private equity firm does not understand the importance of patent strategy to realizing the desired payback from its investment in Cool Stuff.

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