11 June 2020
In this article for Entrepreneur & Investor, we provide our insights into IP valuation and how this can be used as alternative financing for your business.
Companies, ranging from start-ups to SMEs, are frequently seeking a capital injection to sustain their business, and now even more so because of the significant economic impact currently seen worldwide due to the COVID-19 pandemic. With large numbers of businesses throughout the UK facing loss of income or even insolvency, there is a case to be made for the increased use or monetisation of the intangible / intellectual property (IP) assets held by such companies.
Traditionally, the value of companies has been largely based on their tangible assets – for example: buildings; plant machinery; production equipment; and vehicles, and as such, debt financing has been based on the value of these tangible assets. However, things are changing and the World Intellectual Property Organisation (WIPO) , UK Intellectual Property Office and the British Business Bank all recognise this .
Nowadays, the value of intangible assets / IP assets represents up to 84% of the company’s value  . This shift is further seen at a larger scale as many developed countries, including the UK, have moved from largely production based to being service-based economies. This shift to a ‘knowledge-based economy’ has seen a commensurate rise in the use and importance of intangible assets, including IP, and with this a rapid increase in the UK wide investment in intangible assets – almost doubling between 1995-2015 . This has the secondary effect that many newer companies, especially operating in the software developments space, have few tangible assets on which to base traditional debt financing.
While it is recognised that IP can be monetised by selling or licensing the assets, not all companies recognise the intangible assets they possess and even fewer recognise the potential of these assets as sources of untapped capital. These intangibles including trademarks, designs, trade secrets, know-how, databases, client lists, domain names and associated goods. The process of lending fully or partially against intangible or IP assets is also known as IP securitisation or alternative asset-based financing. This concept is a new arrival in a number of countries, including the UK, and has the basic premise of collateralising debt financing to SMEs and small companies by providing a security interest in the company’s IP assets . With this in mind, and given the current dire situation in which many companies across the UK find themselves due to the COVID-19 crisis, there is a significant opportunity in raising awareness of the value of intangibles in a business and how to unlock this value.
In some cases, this can take the format of the financial institution gaining control of future license royalties for the IP asset in question, while others may effectively involve the purchase and lease-back or licensing of the asset from the financial institution. The IP securitisation or IP backed financing concept has already been trialled in a number of countries, with mixed results, but is still in its infancy in the UK with a relatively low number of financial institutes providing an IP backed financing service.
Those that have recognised this opportunity in the UK include:
Lombard, which is part of RBS, offers an IP backed funding solution based on a business’ internally developed and owned software assets . Under this solution, the software assets are sold to Lombard and the business then licenses the software back from the bank for a fixed term of three – five years, after which time the agreement can be extended and further financing provided or the IP can be transferred back to the SME.
This UK based pension administrator offers two products, the Self-invested Personal Pensions (SIPP) and Small Self-administered schemes (SASS), both of which will consider IP assets for investment . In addition, a subsection of IP backed financing called pension-led funding may also be provided . In this case, the pensions held by the SME are used to provide a capital injection, where the IP is used as collateral in a loan or is purchased by the pension fund and licensed back to the SME.
In all of the above, IP backed financing requires IP assets to be developed, owned by the company and free of any existing encumbrances or liens and not currently subject to any litigation action. In each case, in order for a loan or purchase and lease-back facility to be provided, the IP assets in question need to be valued by a third party, which has expertise in the area of IP valuation. For the most part, many current offerings in IP backed financing focus on software assets and the ability of management and founders to deliver returns based on their own know-how and the software assets.
As the valuation of IP assets requires knowledge of both IP and financial modelling, there are only an estimated 600 practitioners offering IP valuation in the UK . This processes not only identifies the range of values under which the transaction should occur, but also helps businesses open their eyes as to how these contribute to the business and how their contribution can be further enhanced moving forward. In many cases, this takes the form of a review or audit of the IP assets to be valued.
While IP securitisation or IP backed financing is a very attractive offering and is likely to grow further under the current economic difficulties, problems still remain in wider roll out due to the risk involved. Some IP assets may not have easily realisable value outside of the business in which they were created, while there may be differences in the perceived value of the assets based on the methodology being used and the market conditions.
Ultimately, the valuation process is useful for businesses as it highlights where the IP assets add value to the business, and in doing so, ensures they are better prepared for negotiations and more likely to leave with a good deal.
This article was first published by Entrepreneur & Investor in June 2020.
 WIPO, ‘The Securitization of Intellectual Property Assets – A New Trend’, 2020British Business Bank, ‘Using Intellectual Property to access growth funding’, British Business Bank Plc, Sheffield, 2018Raconteur, ‘Intellectual Property 2020’, February 2020J. P. Ogier, ‘Intellectual property, finance and economic development’, WIPO Magazine , February 2016OECD, ‘Enquiries into Intellectual Property’s Economic Impact – IP-Based Financing of Innovative Firms’, OECD, Paris, 2015Lombard, ‘Intellectual Property Funding,’ 2020Morgan Lloyd, ‘Products – SIPPs’Clifton Asset Management, ‘Clifton Asset Management’, 2020
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