Trademark in the context of a company sale

Why the buyer asks about the brand and what they look for

For a company selling under its own name, the brand is often its most valuable intangible asset. The buyer pays for it, but must be sure they will actually acquire it. During due diligence, they will therefore ascertain three things: who owns the trademark according to the registry, how long and how the company has been using it, and whether it is encumbered by third-party rights, such as a license or a pledge.

The buyer is mainly interested in the difference between the company using the brand and the company owning it. A company can use a brand for years without owning it because the application was filed in the name of the founder, a shareholder, or a former managing director. The buyer sees this situation in the registry of the Industrial Property Office and immediately asks how the brand will be transferred to the company. The answer affects both the price and the transaction timeline.

The impact on the price is usually direct. The buyer may demand a lower price, a specific indemnity, or that the seller transfer the trademark to the company before signing. All three options cost the seller time and money. The reverse also holds: a buyer who finds no issues does not demand specific guarantees, and the sale proceeds smoothly. Having your brands in order is therefore an investment, not an expense.

The entire process of selling a company, from the initial intent through to settlement, is discussed in the article on how to sell a company step by step. It shows that reviewing intellectual property belongs in the preparation phase of the sale, not when the buyer starts due diligence.

Trademark transfer: form, effects, and registration

The owner may transfer a trademark even without the business enterprise, for all or only some of the goods or services for which it is registered. The transfer must take the form of a written agreement (Section 15 of the Trademark Act under Czech legislation). In a partial transfer, the same sign may then belong to different owners, each for different goods or services.

A contractual transfer only takes effect upon registration in the registry. Until the registration is completed, the current owner remains the owner of the trademark, even if the agreement is signed. Either party to the agreement may apply for registration (Section 15(3)). The Office will carry it out within one month from the date it receives all documents necessary for the transaction (Section 15(5)), so any defects in the application will extend this period. The buyer therefore wants the registration completed, or at least a contractual undertaking from the seller to arrange it.

The application for registration of the transfer states the current owner, the transferee, and the scope of the transfer, i.e., whether it covers all or only some of the goods or services, with the class numbers. The transfer document or an extract thereof is attached to the application. Good preparation for the sale therefore includes preparing this document so that it can be submitted immediately after signing. The timing of the transfer and registration depends on the structure of the sale and the state of the registry, which is why the lawyers at ARROWS law firm plan them separately for each transaction.

A company sale can take one of three forms. In a share transfer, the trademark remains with the company and the buyer acquires it indirectly; however, it must be registered in the name of that very company. In an asset sale, the trademark is transferred by a separate written agreement with registration. By purchasing the business enterprise, the buyer acquires everything that belongs to the enterprise as a whole, so the trademark transfers with the enterprise unless the parties exclude it (Section 2175 of the Civil Code under Czech legislation). Even so, the change of owner must be registered in the registry.

What the buyer finds: four typical findings

The first and most common finding is a trademark registered in the name of a managing director or shareholder instead of the company. The founder filed the application in their own name because the company did not exist at the time or no one addressed it. Today, the company uses the brand, but the owner is an individual. This may not be an error in itself. The problem arises when ownership does not correspond to the intended structure and the relationship between the owner and the company is not governed by a contract. Rectification requires the cooperation of this individual. If the company parted ways with them on bad terms, it can be difficult.

The second finding is a missing transfer after registration. The company bought the trademark from a previous owner, but the transfer was not registered in the registry, so under the law, it did not take effect. It is different in the case of a transition of rights, typically during a merger, where the assets of the dissolving company pass to the successor. The trademark transfers, but the transfer is only effective against third parties upon registration (Section 15(4)). In both cases, the buyer therefore usually requires registration before signing, or a specific commitment from the seller.

The third finding is an uncovered scope of goods, services, or territory. The company sells software and consulting, but the trademark is registered only for software, or only in the Czech Republic, while the company also operates abroad. The list of specific goods and services in the registration is decisive; classes serve only for administrative classification. The buyer will only value what is protected. For the uncovered part, they want the seller to file an application for it, or for it to be reflected in the price. It is therefore advisable to check the coverage in time.

The fourth finding is an unused trademark. The decisive factor is whether the owner puts the trademark to genuine use for the goods or services for which it is registered (Section 13 of the Trademark Act under Czech legislation). If the owner has not begun using it within five years of registration or has suspended its use for at least five years, they face legal consequences unless they had proper reasons for non-use. A third party can then apply for revocation of the trademark, and to the extent it can be revoked, the owner cannot rely on it in court against third-party use.

The seller can correct most of these findings if they discover them in time. A transfer to the company, registration of the transfer, or a supplementary application takes weeks or months, not years, and costs a fraction of the amount the buyer would want as a discount. If the findings only emerge during due diligence, the seller's negotiating position weakens because the buyer knows that time is working against them.

Licenses and pledges: third-party rights to the trademark

The owner may grant the right to use a trademark under a license agreement, either for all goods or services or only for some of them, and as exclusive or non-exclusive. The license becomes effective against third parties only upon registration in the registry (Section 18 of the Trademark Act under Czech legislation). The buyer therefore examines which licenses exist and whether they are registered. Only a registered license is effective also against a person who later acquires the trademark.

A license without a written agreement is a classic finding in due diligence. The law only requires a written form for an exclusive license and for a license that is to be registered in the registry (Section 2358 of the Civil Code under Czech legislation). A non-exclusive license that is not to be registered can therefore also arise from an oral agreement. However, the buyer is going to ask whether the use can continue, under what conditions, and for how long. Without a written agreement, it is impossible to prove the scope, duration, or quality control. As a result, the seller loses negotiating leverage.

A trademark can also be the subject of a pledge, which arises upon registration in the registry. A trademark may also be encumbered by another right in rem, it may be subject to enforcement of a decision, and it may fall into the bankruptcy estate (Section 17 of the Trademark Act under Czech legislation). If the trademark is pledged to a bank, the buyer usually requires the release of the pledge; otherwise, they would buy a brand encumbered by a third-party right. The consent of the pledgee may also be required for the transfer if the pledge or loan documentation so provides. The Trademark Act itself does not contain such a condition.

In corporate groups, it is common for the trademark to be owned by the parent company or by a company established specifically for that purpose and used by other members under a license. Such a structure is fine as long as the relationship is contractually regulated. To withstand the sale of a part of the group, the license should be in writing and registered. How to divide brand ownership and licensing within a group is discussed in the article on trademarks in a holding structure, including how to avoid errors that buyers find during due diligence.

How to prepare for the sale: seven steps

The first step is to request an extract from the trademark registry for all the company's brands and compare the owner in the registry with the actual state. Discrepancies tend to be more common than one would expect. They arise after a change in the company name, after a merger, after a transfer between group members, or because the application was filed by the founder. Every discrepancy needs to be corrected by registration or transfer.

The second step is to check the coverage. The seller determines for which specific goods and services and for which territories the trademark is registered, and whether this corresponds to what the company does and where it plans to grow. Missing coverage can be supplemented with a new application, but an older filing date cannot be obtained retroactively. It is better to decide on this before the sale than during due diligence.

The third step is to verify use. The company proves that it uses each registered trademark for the goods or services for which it is registered, and that use has not been suspended for more than five years. Use with the consent of the trademark owner is also considered use (Section 13(3)), which helps in cases where the brand is used by a subsidiary. It is advisable to archive proof of use.

The fourth step is to organize licenses: convert oral agreements into written contracts and register the licenses in the registry. The fifth step is to resolve pledges. The sixth step is to prepare the transfer documentation, i.e., the transfer document and the application for registration, so they can be submitted immediately after signing. The seventh step is to incorporate the status of the brands into the purchase agreement: representations and warranties, conditions precedent, and indemnities. Which steps a company actually needs and in what order depends on the number of trademarks and on who is currently registered as the owner; the lawyers at ARROWS law firm therefore draw up the plan only after reviewing the registry extracts.

How to register a brand in the first place, i.e., how to choose the sign and classes and how to file the application, is summarized in the article on how to register a trademark. A company that is just establishing a brand can prevent most of the findings described above right at the registration stage.

What having brands in order looks like and when a buyer becomes alert

For established companies, having brands in order is common: all trademarks are registered in the company's name, each has a record of use, licenses are in writing and registered, and the purchase agreement contains a representation on the status of the trademarks. A seller who has this in order reduces the number of warranties they will have to provide and shortens the due diligence period.

The first warning sign is a company that has its brand only as a logo and no one in it knows what is actually protected. The second sign is an application filed in its own name by an agency or a website provider. The third is rebranding without a new application, after which the old trademark does not cover the new form of the brand. The fourth is a dispute over a similar brand that the parties have not resolved by agreement. Such a dispute is analyzed in the article on trademark protection and unfair competition.

For companies without their brands in order, the buyer often protects itself with stronger contractual instruments. It keeps part of the price in escrow until the seller transfers the trademarks, or it increases the seller's liability for deficiencies. This puts the seller in a weaker position, and every week of delay costs money. Therefore, it pays to put things in order in time, ideally a year before the planned sale.

The value of a brand is also affected by how long and to what extent it has been protected. A trademark that has been registered for a long time and is actually used is a certainty for the buyer. A fresh application on which the office has yet to decide is, by contrast, a risk. The seller should be able to document the history of the trademark: filing date, registration, use, and any disputes.

It also helps to designate one person responsible for brands, whether it is a lawyer or a marketing manager. Such a person monitors deadlines, registrations, and use, and can answer the buyer's questions during the sale without lengthy searches. Companies that do not have such a person often discover a problem only when it is too late for a cheap solution.

Four seller mistakes that the buyer will reward with a discount

The first mistake is postponing the trademark transfer to "after the sale". The seller assumes that the buyer will arrange the transfer themselves. However, the buyer requires that the trademark belongs to the company already at signing, and otherwise may reduce the price or withdraw from the transaction. The result is delay and negotiation that could have been avoided.

The second mistake is relying on the brand being "in the logo". The company uses a logo, but only the word mark is protected, or vice versa. During rebranding, they then find out that the new design is not protected. The buyer asks what exactly is registered, and the company has no answer. Good preparation includes an inventory of registered marks and a comparison with what the company actually uses.

The third mistake is leaving a license oral. A subsidiary or partner uses the brand without an agreement. During the sale, it then turns out that no one knows under what conditions. The fourth mistake is overlooking a pledge: a bank has a pledge on the trademark, and the seller does not tell the buyer about it. The buyer then finds it in the registry themselves. The Prague-based legal team at the ARROWS law firm will therefore review the status of the brands before the sale begins and prepare corrections so that the buyer finds nothing to complain about.

Trademark risks when selling a company

Final summary

A trademark is often the most valuable intangible asset when selling a company, but only if the company actually owns it. The article showed three things. A trademark transfer requires a written agreement and registration in the registry. Licenses and pledges should be documented in writing and registered in the transaction. And the buyer most often comes across a trademark whose owner does not correspond to the intended structure.

For company management, this implies a clear procedure: one year before the sale, request extracts from the registry, correct owners and coverage, organize licenses and pledges, and prepare transfer documentation. Whoever postpones these steps leaves the problem for the buyer to find, and then has to resolve it under pressure and at a higher cost.

The Prague-based legal team at the ARROWS law firm reviews the status of trademarks before a sale, prepares transfers and licenses, conducts negotiations with the buyer, and incorporates the status of the brands into the purchase agreement. Write to us at consultation@arws.cz or explore our service for company sales and transaction advisory.