Is the B2B market ready for digitalization?

Take over or set up an innovative business in Poland? What is more convenient for the investor?

It appears that the easiest way to get a successful innovative business is to acquire an existing business operation. There are a couple of arguments speaking in favour of acquiring an existing business rather than starting one from scratch. In particular, it is easier to evaluate the prospects of an existing business as compared to a business idea which has not been tested in practice in the form of a business operating under the pressure of competition. An existing business also has most likely already overcome any initial turbulence which is an inherent element of various IP/IT start-ups or any other business in the initial phase. Obviously, the financial and commercial risks related to setting up a new business are far more unpredictable as opposed to those risks involved in an existing business. Moreover, the longer a given business has been operating on the market, the greater its market recognition and reputation, client base, staff (including innovative personnel), and market sector know-how. This may even be more important in view of the global nature of the activities of modern innovative businesses.

The downside of the acquisition scenario is the purchase price which a prospective purchaser has to pay to a seller of a successful innovative business. The seller will want to earn a significant margin which reflects its efforts and risks related to setting up and growing the innovative business. In addition, it will never be possible to unearth and evaluate all risks (legal, commercial, tax, or other) within the due diligence examination of an existing business and, as a result, the purchaser will have to accept a certain level of uncertainty regarding the acquired business. Our transactional experience shows that, in many cases, the aspects related to, e.g. the effective acquisition of key IP rights from creative personnel, confidentiality, or non-compete arrangements, still leave much to be desired.

What to look for when buying an innovative business?

The acquisition process pertaining to an innovative business should be well prepared and organized in advance to address all important aspects of the prospective transaction. In this context, first of all, it should be determined what the structure of the transaction is, i.e. a share deal or an asset deal.

The purchaser should insist on a full and thorough due diligence examination pertaining to the target. Obviously, the dd examination may be split into two phases (an initial and a final phase after the final offer has been accepted) but, in any case, there shouldn’t be any aspects of the business’ operations which are not covered by the dd. The most critical aspects are, of course, all the IP matters, e.g. clear contractual arrangements with creative staff regarding the acquisition of rights to inventions and new technologies, issues regarding the effective protection of business know-how and other confidential information, the applied policy and strategy of IP protection in the relevant global markets - just to name a few. The other aspects which frequently pop up in innovative businesses in Poland (in particular, those which are in their initial phases) are various state aid programs (very often, in the form of grants). The purchaser will want that the target keeps benefiting from those grants also after the transaction has been completed, i.e. the change of control has taken place. In most cases, it will be necessary to notify the financing entity about the prospective transaction to mitigate the risk that such entity  terminates the respective grant agreement and requests the target to return the subsidy (e.g. because the target no longer enjoys the status of an SME).

Once the dd has been completed and the relevant risks identified, the purchaser should agree with the seller on the representations and warranties catalogue and, in addition, on the list of the specific indemnities which cover the unearthed risks. The agreement based on which the business is being acquired (a share purchase agreement for a share deal or an asset purchase agreement for an asset deal) should allocate the risks between the seller and purchaser. In this context, the parties have to agree on the seller’s liability limitations (e.g. caps, baskets, de-minimis mechanism) and the mechanism how to secure the seller’s liability (e.g. escrow accounts or holdback amounts).

How to protect a company's intellectual property in the age of technology and innovation?

Innovations, new technologies, and the intellectual property that protects them are more and more often the most valuable aspect of a company, determining its competitive advantage on the market. The practical importance of this phenomenon is particularly evident in the processes of acquiring innovative companies and businesses in Poland. Legal and organizational measures aimed at protecting a company’s intellectual capital should, first and foremost, take into account the specificity of the sector in which such business operates. A different IP-strategy should be applied to different sectors and industries, e.g. medical diagnostics, IT, chemical, machine, financial services, or automotive industries, where different types of IP rights are critical. In any case, regardless of the market sector in which a business operates, special attention should be given to:

• the conscious structuring of contractual relations with creative personnel and third-party providers in a way that ensures a full bundle of IP rights to an innovative product or process;
• verifying whether a given form of developing an innovative product or process will not result in depriving us of the exclusivity of IP rights protecting such innovations (e.g. with external financing or the use of certain types of open source licenses);
• protecting IP rights in cross-border relations, in particular, in agreements on technology transfer (licenses, acquisitions, etc.); or
• properly securing the acquisition and protection of confidential know-how.

How to secure the rights to new technologies?

As mentioned, different protection strategies need to be applied to different types of innovative activities. Copyrights to software developed (or, more precisely, to source code and object code) are critical in the IT sector but patents for computer-implemented inventions are also within reach here. Currently, special attention is also paid to the issue of intellectual property rights and to the results of the work of AI algorithms, e.g. inventions or copyrightable works. Therefore, awareness of market practice and case law in this field becomes particularly important. Disclosing the essence of our innovative solution to the market and protecting it as a patent or rather concealing and protecting it as a trade secret, forms one of the key aspects of an effective IP protection policy of many innovative businesses. Finally, awareness of the non-infringement of third-party rights in the relevant markets and the effective support of a lawyer and patent attorney – both before and during a court dispute – are also critical here. All these aspects are, of course, key at the stage of setting up and running an innovative business but are also very visible at the stage of its sale to a new, domestic, or foreign investor.

Innovative business and taxes. Is it complicated?

There are several tax driven issues which should be typically tackled when setting up or acquiring an invocative business. Among them are:

• how you employ creative individuals (in Poland, it is fairly common to apply the B2B employment model which, in many sectors, reflects the expectations of qualified staff);
• the model of acquisition (i.e. share deal vs. asset deal) which may imply the acquiring entity’s liability or lack of liability for the tax obligations of the existing or newly-created business; and finally
• the tax allowances and public support (e.g. IP Box, R&D relief, holding company relief, etc.) which are available for particular types of business dependent on their legal structure, model, and scope of operations.

From a business expansion perspective, it is also crucial to understand the restrictions and possibilities related to the model of financing a business’ growth, in particular, limitations in debt financing as well as tax leakages related to the distribution of profits. Some of these issues are typical to all types of investments whereas others are closely associated with innovative businesses.

Thank you for the interview!