A Business Dilemma

When we bought our business a little over 13 years ago we negotiated for the exclusive right to manufacture and sell two products that were invented, patented and trademarked by the original owner. This agreement would last 20 years (until 2021) and then the tooling would revert back to the family, either to his daughter or grandchildren. My husband first came on board as part of the sales team about 35 years ago right after this product was introduced. It was the launching pad for the business and “the” main product we’re known for. The last two years it was the Number One seller in Tennis Accessories on Amazon over the holiday season.  Over the years we have added numerous other products but this one still generates about 10%-15% of our sales and has actually had a bit of a resurgence in the tennis market since internet sales in general have been increasing every year and we’re able to reach the public more easily.  Funny, there is even a little nostalgia involved.  The product was copied when the patent ran out but both copies never worked the way they were designed to because a couple of steps (trade secrets) were not part of the patent and they missed them.

The tooling is getting old and outdated and part of our agreement was that the original designer/owner of the tooling would pay for repair costs and we would pay him 5% of cost at manufacturing as a royalty. This system worked for about 10 years when the owner decided he no longer wanted to pay the tooling repair costs and so we worked out a new agreement that he would forgo his royalty checks and we would be responsible for the tooling until it reverted back to the family. He is now in his nineties and in a convalescent home at death’s door.

It’s doubtful anyone in the family is interested in really having the tooling back but I’m a little afraid to ask. We are considering if the next hurdle in repairs is worth the expense unless the tooling were to become ours permanently. It apparently needs to be converted to a manifold system which will cost somewhere between 20K and 30K and that is only one of four parts which are also old and having more problems as time goes by.

It’s a great product and makes us decent money every year but we’re just not sure it’s worth the investment. The original owner’s daughter is very unpredictable when it comes to the business.  She hated it when she worked for her Dad but enjoyed the income and while anxious to let it go, tried to screw us over several times with her lawyer’s help during the purchase process. Luckily we weren’t born yesterday so we were able to protect our interests well. I don’t trust her though.

I guess what I want to know is if it seems like it would be worth the investment if we ultimately have to return the tooling anyway or should we just return it early and let them deal with it? I believe that would be the end of a great product though.

My other concern is that I really don’t know how much longer we want to work ourselves and I don’t particularly trust Walter’s health to stick it out long enough for us to recoup the expense. I really don’t want to get stuck doing all the work myself. Our son helped occasionally with putting the parts together for large orders but he’s in CO now and the work is too strenuous for our oldest daughter although she does help out here in other ways occasionally.

I’m also trying to figure out an angle where if we made the repairs how could we end up owning the tooling as I think there is a marketable value to it and we might be able to sell it, even considering the condition it’s in.

Any suggestions?

 

19 Responses

  1. I just wanted to clarify that every other aspect of the business, including the name, is ours free and clear. And another point is that as a home based business now our community will not allow us to have employees unless they are live in. We’ve been able to cheat a little with our own kids but I wouldn’t be brave enough to pay someone else under the table to put the parts together.

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  2. First, I categorized your post as “small business”, because it actually hits on at least four problems lawyers for small businesses hear all the time.

    1] Old age or death of a key contractor.
    2] Reversionary interest in intellectual property or termination of a lease.
    3] Retirement plans of the small business owners.
    4] City zoning [as raised by your comment].

    As you describe it, retooling maxes the equipment life to 7 years for you and Walter. Retooled, the equipment can make money for willing workers. Think about these 5 questions.

    First, could you and Walter see the ROI in 7 years, and if so, are you willing to be the worker bees that long?

    Second, whether or not you answer “yes” to the first, does the family of the inventor KNOW your views?

    Third, is the license you hold assignable?

    Fourth, do you know the entities that would be able to make a go of it with your equipment?

    Fifth, are you emotionally willing to walk away from this?

    The answer to 5 should be “yes.”

    How you answer these questions should determine the choices that are available to you.

    For example, if the ROI is there and you are willing to make the commitment of time, do it. If the ROI is there and you are not willing to make the time commitment but the inventor’s family doesn’t know that , you should probably still do it, to salvage the potential value. If the inventor’s family knows you want to hang it up, or if the ROI is not there, you should probably walk away…unless you have the ability to sublicense to a willing buyer.

    And so forth.

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  3. Thank-you so much Mark, that really helps clarify our options for me. Now I can put the numbers together for Walter and we can make a decision. We have a little time as they were somehow able to eek out another 5,000 pieces for us this week but it was really touch and go for a month about the potential for success.

    We actually already owe them for repairs but for some reason they haven’t billed us this time. Not sure what’s going on with that but I do know they sometimes absorb the cost of those repairs. I won’t be begging them for a bill. Regarding #5, I’m certainly willing but not sure about the big guy!

    Anyway, thanks, and I feel as though I just got some legal advice for free…………..LOL

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    • LMS – one more thought – how much would you be willing to pay for outright ownership? There is always the possibility that if you offer $5K for it they will counter with a number that is not ridiculous and a real negotiation could start.

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  4. Not a bad idea Mark and one I actually hadn’t considered. I don’t think I’ll mention that to Walter though until I play with some numbers. We have potential buyers right now even with the problems so that could actually be an ideal solution. Seems a little shady though.

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  5. No, it seems like the thing to do since you guys are the ones who put all the work in. I was going to suggest trying to gain full ownership and then selling out to say Wilson or another large company.

    #welcometotheonepercent

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  6. Lol jnc. We would never sell to one of the big boys, but there are about 3 or 4 medium sized online retailers that would give their eye teeth.

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  7. What’s wrong with the big boys?

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  8. Two of them created copies and would want to bury our product. Several others have been unsuccessfully trying to put us out of business for years.

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  9. Btw, none of these competitors or customers know that we don’t actually own the tooling.

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  10. I just read over this quickly. What a classic business/legal scenario. I will have to examine it a little more carefully, although I am confident I am 1/10th the business attorney that Mark is.

    Have to go to a concert tonight but will try to look at it in the morning again.

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  11. Two of them created copies and would want to bury our product. Several others have been unsuccessfully trying to put us out of business for years.

    I was wondering what jnc was as well. If they created copies that aren’t as good, wouldn’t they want this technology to be able to market “the real thing”? I’m guessing that the value is associated with the brand, and the quality associated with the brand, which none of the competitors would pick up to replace their own?

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  12. Yes, I can see how you would assume that, but they want their brand to become more marketable which they would once ours is off the market. They have both already invested quite a bit in their own tooling which is much more modern that ours and being produced in Taiwan.

    One of the companies in particular has been telling customers for years that we are out of business. I do think they would apply to the trademark office to use our NAME (of the product not the business) though. That’s what they really want and have been using it overseas for years, even our photography, we also have a trademarked color associated with the name, but we don’t have enough clout or money to chase them down on it. They know we’re nothing but idle threats to them internationally. We have been able to stop them here in the US though.

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  13. Could you clarify something? You you mentioned trade secrets that, unknown to competitors, make your product superior to theirs. Are the trade secrets an aspect of the tooling? Or are they a method or technique that is in addition to the tooling itself? What I am trying to understand is who actually owns the trade secrets. Is it possible that you own–or at least that the inventor doesn’t exclusively own–the knowledge? In real life, lawyers obviously would carefully examine the agreements and facts. IP licensing agreements can be notoriously complex.

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  14. Ah, the old acquire-the-brand-and-slap-it-on-our-own-crappy-product business strategy. A favorite of many.

    If I understand the facts correctly, the inventor actually is in a bit of a pickle, because he only owns the tooling, while you own the brand. If you sold it, his family or whoever wanted to use the reverted tooling to continue in business wiould have to do it under a new brand. That kind of thing happens from time to time, but you do have a pretty strong position.

    It’s sad to hear that they are using your trademark overseas. Telling customers you are out of business is a pretty open-and-shut unfair and deceptive business practice. I hope you have at least consulted with a good attorney about these issues. The worst that can happen is being advised it isn’t worth the fight.

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  15. Last thought for the night. I am curious about Mark’s approach to the psychology of the tooling owners. Like him, I am thinking along the lines that, if the ROI is there through continued operation or sale, the smart play would seem to be to acquire ownership of the tooling so that you own everything outright.

    In that negotiation, though, its seems to me that the key is how they evaluate the value of the enterprise, and that the lower they value it the easier you might acquire the part you don’t already own.

    I don’t see anything shady about trying to get the best deal you can honestly get.

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  16. qb, we call them trade secrets but really they’re small details that were worked out over a couple of years in the early days that made the product more consistently regulated and another one was a safety issue. I don’t think they were ever part of the ownership issue, just part of the process of getting the product out the door to our customers. It’s basically a quality control issue I think. The original owner owns the trademark , including name and color, and the tooling, we own the business name which is also associated with the product name after 35 years. The business name is on the product (embedded in the plastic) along with the product name.

    We were able to hire a lawyer who put a stop to many of the issues we had when we bought the business and a lot of our larger competitors were trying to undermine our position in the market. Overseas we have never had any luck, it’s like chasing a chimera.

    And yes, they would like to take the product name and color and slap it on their product in a heart beat but I don’t think my husband would allow that even if we end up owning all of it lock stock and barrel and could sell it to them. I’m thinking now it might be a possibility to purchase the entire entity first and then make the tooling repairs. I could possibly work with the daughter, she’s in her seventies now, and probably wouldn’t be interested in repairing it if it was returned to them. I need to think about that a little. She truly is a little bit psycho so I need to take that into consideration.

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  17. Ah, I misunderstood the ownership of the IP. That makes things different.

    It all depends on the concrete details of the finances and where/when the ROI kicks in. But my impression is like yours and, I think, Mark’s, that I would evaluate acquisition of the whole thing, allowing you to pass it on or sell to the competition. It sounds like your husband has an attachment that is either sentimental or noble, depending on how you look at it, that would make selling the whole thing to the highest bidder hard to swallow, but that is another side of the emotional detachment issue Mark raised that it would be wise to accept.

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  18. Thanks for all the advice guys. It was much more than I expected and has given me a lot to think about and for Walter and I to talk about.

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