Wherever a business uses specialist knowledge to serve its customers, its activities will have intellectual property (IP) at their core. This IP might lie in “formal” rights like patents, designs or trademarks; increasingly, in a service-driven economy, it is likely to involve proprietary processes, trade secrets and copyright material.
But IP poses companies with a common problem, wherever it may lie. While a business’s bundle of IP assets often underpins all its income streams, its worth is seldom expressed on a balance sheet. Since the underlying IP is hardly ever identified or valued, it cannot be exploited in the same way as tangible assets like property, plant and machinery – assets whose importance is reducing in an increasingly knowledge-based age.
Understating a business’s value in this way inevitably curtails its ability to borrow and to fund growth, a problem that is widely recognised in industry and Government circles. For example, at its February 2007 seminar on SMEs and their intangible assets, the ACCA summarised the position as follows: “Impetus must be given to developing an accepted valuation methodology and to stimulating intangible asset markets… It is imperative that a methodology is developed that values intangible assets so as to promote innovation within firms and the economy as a whole1” In February 2008, the DCMS paper Creative Britain concluded that: “Since most of the value of the creative sector derives from intangible assets, creative businesses must be able to value them accurately and have confidence that they will be vigorously defended under the law2.”
The way forward
There is no legal impediment to deriving greater shareholder value from IP. As its name suggests, IP is essentially a type of property, which means it can be licensed, bought and sold (or, technically, assigned) in much the same way as any tangible asset. However, to enable this potential value to be realised, two key preconditions need to be met.
Firstly, the IP’s scope and nature need to be clearly understood. This requires there to be an accepted means of describing and “commodifying” it – in other words, to transform the IP into a business asset with a separate identity, capable of being transferred to other parties. Secondly, the IP needs to have a financial value attributed to it.
Inngot’s system has been designed to overcome these two barriers. It provides new processes to explain what a company’s IP is, where its value lies, and how much it might be worth. In doing so Inngot also enables companies to make their IP known to a wide range of prospective customers, partners and investors.
With the help of Inngot’s registration and valuation regime, IP can be sold to a finance house, which then leases or licences the exclusive usage rights back to the originating business, in return for a monthly payment stream.
Inngot’s systems exploit the potential of existing copyright law to create a secure environment where businesses can register and publish their IP. A unique new classification system is used to describe both the business and its IP, making it easy for potential customers, collaborators, acquirers and financiers to search for it. This is the opposite of existing copyright registration schemes, which effectively “lock away” published material.
As well as registering the IP, Inngot records the existence of any finance associated with it, creating a “notice mechanism” needed for a market in IP to prosper.
While IP valuation is conducted regularly, it is usually a “one-off” exercise in the context of a business sale or licensing agreement. Comparatives are rarely available and seldom published.
Inngot’s valuation mechanism has been created with a standardised transaction form in mind – an “arm’s length” sale to a finance house. In this context, the importance of the valuation is that the amount involved must be realistic; the asset must be worth at least the amount being lent (having factored in an appropriate contingency); and the lessee must have the ability to repay on the agreed terms.
For companies, using IP as security provides a means to maximise the value of existing core assets without having to sell shares. All of the exclusive rights of usage remain with the originator, who can continue to develop its IP just as it would previously have done, but with the benefit of significantly more capital.
Asset finance always involves a fixed stream of payments over a given period of time, likely to compare favourably with variable bank charges. At the end of the term, a lease can revert to a “peppercorn” rental, while a licence can provide for full ownership to be returned at the end of the term. In the meantime, the fact that the legal ownership of the IP rests with a major financial institution significantly reduces the risks of deliberate infringement by a competitor.
Entering into a lease agreement does not “fix” the value of the IP, any more than the size of a mortgage determines the value of a property. If the business does well, the value of the IP will increase, opening up opportunities to realise further funding streams. This also suits the lender, as it prevents them from becoming technically “over-collateralised”.
The way forward
There are a growing number of commercial finance precedents where IP has been used to provide security for lending, and the mechanisms involved are familiar and well understood. As the marketplace develops, many of the techniques already developed in a competitive leasing market will start to be introduced, such as extended primary periods, payment holidays, peppercorns for secondary periods, and even (potentially) “balloons”. There are already signs that finance houses and brokers will develop specialisms in one or more sectors or IP types, as they have done for many years with tangible assets.
Inngot registration and valuation address the structural issues which have constrained the use of IP as security for finance to date – chiefly the lack of clear description, valuation and notice mechanisms. With these points addressed, IP-based financing becomes a very attractive option both for innovative companies and for finance companies.
Visit www.inngot.com today to find out more..