As something which is?by nature?subjective and hard to define, intellectual property (IP) rights can be difficult to value accurately, which means they are often overlooked when planning corporate transactions.
The lack of a ready market for?intangible assets means?that rather than being evaluated separately, as a distinct class of asset, they will typically be “swallowed up” while acquirers consider the value of the business as a whole. However, as it gives the owner something unique to take to market, IP can drive significant value within?organisations, allowing them to increase margins and strengthen market share. With IP rights?commonly?attracting a higher value than the more traditional tangible assets in business acquisitions, it is essential that businesses demonstrate IP value effectively prior to and during the deal-making process.
It is important to note that as there are only certain instances where these intangible assets can be?recognised?within financial statements, the value of IP cannot typically be presented within a company’s financial statements. The key exception is on the acquisition of a business, when a purchase price needs to be allocated between tangible and intangible assets within group accounts.
From a deal-making perspective, the significance of intangible assets?in any particular transaction will vary according to the?strategic goals of the parties involved. Nevertheless, in many cases?IP rights will serve as a strong driver of business value in themselves, with sale prices being strongly influenced by the?strength and?type of IP that exists.
Generally, intangible assets can be divided into two main types – let’s call them defensible and embedded IP.?Embedded IP rights can be as simple as know-how or business processes, which are used in the everyday running of the business but nevertheless add value and differentiate one business from another.
Defensible IP rights, such as patents, registered design rights and trademarks, on the other hand, are more easily identified and can be more easily articulated within an Information Memorandum to be presented to potential acquirers. In addition, the defensible IP?rights can in some instances provide a revenue stream for the business in their own right. For example, a licensing agreement with a third party could involve the payment of royalties and profits earned from patented technologies which could qualify for corporation tax relief, adding value to the bottom line.
When businesses are considering a sale therefore, it is important to identify key IP assets that add value to the business. The first step is to assess where IP exists within the organisation and make sure, if at all possible, that it is properly protected. This involves getting the company’s IP portfolio in order as well as ensuring that it is well presented, filing patents or registrations wherever?possible and ensuring that existing registrations have not lapsed. Advisers can also play a role here, helping to unlock value and make sure IP assets are well presented.
Maximising existing IP value
In order to maximize the value of existing IP, a strong?IP asset management?strategy should involve?allowing sufficient time?to?build?up an identifiable portfolio prior to market entry, with a particular focus on any defensible IP.?While embedded IP is undoubtedly valuable, the fact that it?cannot?be as easily defended means it can erode more easily (for example as people leave the business, taking what they have learned elsewhere).
If trademark registrations exist for individual brand names, for example, it is important to take the time to ensure that?all brands and sub brands are as visible as possible in their target market. Continued investment in marketing activity to promote these names and resultant income streams in the run up to any deal would help to optimise value. Rather than considering advertising and marketing activities in a vacuum, these should be regarded as a means of asset value?optimisation.?Taking further steps to extend the remaining useful life of existing assets, perhaps by continued research and development, will further help in pushing up achievable value.
Companies which fail to present their IP assets in the best possible light could make it harder to achieve the expected valuation. To avoid this, businesses should begin meticulous?legal and financial checks two to three years before going to market. By identifying any potential gaps in their own procedures and forming an action list or route plan accordingly, they can secure peace of mind and ensure that everything is in order well in advance of liaising with potential buyers.
The potential court action against retail group Jaeger is a reminder of the significance of IP for many businesses. Since taking the decision to sell the trade mark registration for its brand name before administrators were called in, the group has come under attack from?creditors for allegedly reducing the value of the business, lowering its appeal to potential bidders and leaving it little chance of being sold as a going concern.?Similarly,?another retail heavyweight, Style Group, has recently attracted media attention as?it?scrambles to avoid administration by acquiring new investors. As the owner of fashion labels Jacques Vert, Dash and?Windsmoor, the success or failure of the group’s efforts may rest on the strengths of its IP or brand portfolio.
By striking a balance between conducting long-term planning?and acting quickly to register IP, businesses will enhance their chances of achieving a strong valuation which encapsulates the value of their intangible assets.
Mike Grayer is a corporate finance partner and David Stears is a business valuation director at Menzies LLP.