Although innovative and differentiated, Cool Stuff’s products will be easy for a competitor to knock-off. For example, Cool Stuff is introducing a line of home products into a major department store chain in the next few months. These cleaning products are innovative and differentiated because they are made from recycled plastic and sustainable components. The products are also likely patentable because no one has ever put these components together before to obtain the unique properties exhibited by these products in use. Nonetheless, Cool Stuff’s products are effectively plastic and wood. If these products are successful in the marketplace, any competitor will be able to copy them. Cool Stuff will have developed the market for these innovative and differentiated home products, but will see this market deteriorate or disappear due to competition.
So, however innovative and different Cool Stuff’s products are, why would a company pay several multiples of Cool Stuff’s earnings to acquire this company if Cool Stuff’s products can be copied by anyone? In other words, “why buy the cow when you can get the milk for free”?
Why some might say that it is not fair to “steal” the products of another company, without a patent or other type of intellectual property protection, this is the basis of competition. Therefore, for the private equity firm to obtain its desired payback, its management needs to ensure that Cool Stuff’s innovations are associated with a strong patent strategy so that they can remain differentiated and solely owned by Cool Stuff. Moreover, if at least some of the company’s innovations are not patentable, Cool Stuff should re-evaluate whether these products should be introduced at all. It is not necessary for all of Cool Stuff’s products to be patented, but the core innovations must be protectable and protected in order for Cool Stuff to constitute a viable acquisition target within its owner’s timeframe for sale of the company.
Of course, if Cool Stuff was valuable for reasons other than its product lines (such as in manufacturing facilities or the like), patent strategy might not be so critical to its owner’s ability to recoup its investment in the desired timeframe. But, this is not the case. Because innovative and differentiated products are the core of the payback strategy for Cool Stuff’s private equity owners, a strong patent strategy is a must.