All investors have a keen eye for an investment opportunity and the finer details of a deal. However, experience has taught us that when you are being pitched a new food or drink product, the intangible assets probably won’t be adequately disclosed in the company’s slide deck or accompanying business plan.
An intangible asset is anything a company owns that isn’t physical or, more formally, ‘an identifiable non-monetary asset without physical substance’. Typically, this includes goodwill, brand, and intellectual property (IP).
IP is arguably the most important of their intangible assets.
The success of any new food or drink is inextricably linked to their ability to stand out from their competitors so they can win their desired market share. This means their brand must be strong. Their packaging must be eye-catching and attractive. Their manufacturing process must be profitable and scalable.
All these elements must be fully protected so they can contribute toward helping the company and their products maximise their commercial value.
Moreover, you need to be sure all the required protection is in place (or achievable) before you can make a final investment decision because if 90% of the value is in the intangible assets, 90% of the risk will be in the intangible assets.
This means your due diligence should be focussed on the intangible assets.
For us, the traditional approach to IP due diligence tends to be a predictable exercise with very narrow parameters. It is also an exercise that can quickly become far too detailed and far too expensive. More irritatingly (and despite the effort and expense), it is also an exercise that often delivers little more than a long list of IP rights and little if any insight as to the value those rights contribute to the business.
WHAT WILL WE FIND OUT ABOUT A FOOD & DRINK BUSINESS DURING IP DUE DILIGENCE?
When we work with investors, our starting point for IP due diligence is that an investor is never investing in the IP alone. You are investing in the company as a whole, its ideas, products, people and plans.
This means your IP due diligence must be wide-ranging, all-inclusive, and conducted with a strict commercial focus so you can make your final decision on whether to invest in a new food or drink safe in the knowledge the company you are interested in has everything it needs to deliver both its business plan and your desired exit.
It will need strong trade marks to protect its brand. Its brand will be pivotal to the products achieving the necessary market recognition. You also need to be aware of how high the risk is that the brand could be drawn into an infringement action.
It could need patents to protect certain aspects of its formulation or production. Likewise, existing patents could hamper the business’ freedom to operate (FTO) which would massively damage your investment.
It may need to use copyright to protect packaging designs, marketing materials, or product literature.
They may need to record trade secrets to protect confidential information relating to their recipes or formulations. This is particularly applicable to the food & drink industry as some of the world’s most valuable trade secrets sit within the sectors, the coca cola recipe, KFC’s blend of herbs and spices and the recipe for McDonald’s special sauce.
It could need license agreements if their business model is based on licensing their products for use by third parties.
Similarly, the business may need very specific contracts to protect its interactions with suppliers, distributors, and other partners to identify any IP-related obligations.
As functional and health foods become more prominent, you may also want to make sure their labelling and packaging are compliant, and any health or environmental claims can be substantiated.
You may also want to confirm the business owns the required domain names if it is planning to trade online.
Finally, you may also want to check the business’ litigation history. Are they currently or have they been involved in either defensive or offensive actions or are there any pending disputes related to IP.
HOW IN DEPTH DOES IP DUE DILIGENCE NEED TO BE AT EACH STAGE OF A COMPANY'S GROWTH?
As our team has worked with multiple investors and funds, we know what level of IP strategy and protection a company should have at their particular stage of growth:
Pre-Seed
- They can demonstrate a good understanding of the IP landscape.
- They have an outline IP strategy that is part of and aligned with their business plan.
Seed
- They have their initial IP protection in place.
- They have conducted a formal review of key elements of their FTO position.
- They have implemented and are following their IP strategy.
Series A+
- They have robust IP protection in place.
- They are not only executing but regularly reviewing and updating their IP strategy.
- They are always investor-ready.
Exit
- All the above... but in much greater depth!
If you are planning to invest in a food & drink business and would like to find out more about how IP due diligence will help you make more informed investment decisions, please get in touch with our dedicated food and drink team today.
