Now you see it, now you don’t!
“Don’t overlook the value of intellectual property in insolvent businesses”
says Charterfields Director, Ian Maycock
Technology has made it possible to run a business from any location using only a laptop, companies today no longer always need plant and machinery, or even a property.
For many modern companies, the main assets tend to be intellectual property or intangible assets like brands and ideas. Even where they do have physical assets such as property or vehicles, it is likely that they will have financing arrangement secured upon them and, in the event they become insolvent, often the intellectual property is the only unencumbered asset left.
Choosing an IP Valuation Firm
However, when insolvency practitioners call in Valuers to prepare a schedule of assets or a valuation report, this intellectual property is often overlooked. On many occasions, Charterfields has been able to find additional value from intangibles which other agents have missed.
So how can insolvency practitioners ensure that they make the most of these invisible intellectual property assets? In any report from an agent, you should expect to see at least some comment on intellectual property. While registered designs, trademarks, copyright and patents are the most obvious examples, intellectual property can also include manufacturing jigs and tooling. Then there are domain names, website content, customer lists and possibly supplier agreements. Most companies today would have at least one of these.
Your valuation agent should also have an understanding of intellectual property and most importantly, what such assets different types of company are likely to have. They should be able to provide a schedule of the intellectual property and know where to find this information.
This might not always be as straightforward as it sounds. Often companies do not keep such records on the premises but leave them in the hands of their professional advisors, who may well be a creditor in the insolvency situation and therefore unwilling to assist.
Valuing Intellectual Property
But once you do find the intellectual property, how do you value it? Typically assets are valued using one of three methods – the replacement cost, ‘net present value’ or ‘comparable value’. The first two are all well and good when a business is successful but less useful when a business is failing and ready to enter an insolvency procedure. The ‘comparable value’ approach is also inappropriate as, by its very nature, intellectual property is unique.
Therefore achieving a valuation can only be done by a combination of factors – the cost of creating and maintaining it, its age, the number and value of sales and of course, market demand.
In fact, when it comes to intellectual property, it is often more appropriate to speak of ‘worth’ rather than ‘value’ as it may be worth far more to one particular purchaser than another – for example, if there are synergies with intellectual property that they already own. Therefore rather than giving a definitive value, an agent may be better to provide a range of values, but with recommendations to also offer it to the market so that the market can find its own level and hopefully find that purchaser with a special interest who is willing to pay more.
Where a pre-pack is being considered, time may be limited and marketing may not be an option. At Charterfields we have developed our own strategies to get the best value possible in cases like these, and which have produced some excellent results. Here are three examples of cases where we have managed to achieve value from intellectual property:
Case 1: Timber treatment patent
The company concerned had developed a new water-based treatment for constructional timber, rather than the more usual solvent-based treatment. The patent had been registered but trials had not commenced and the treatment could not be sold until these trials had completed, which was expected to take two years. Using some of the strategies we have developed, Charterfields negotiated a sale through a pre-packaged administration achieved a value of £50,000.
Case 2: Customer database
The second case involved a mail order company which sold easy listening music and whose only assets were the database of customers and suppliers. Charterfields put the value of the intellectual property at between £30,000 and £35,000 and proceeded to market it. We provided a breakdown of the database by customer dynamics, showing what proportion of the customers purchased most and how often and provided assurances that it was regularly cleansed. Five interested parties came forward and, following negotiations, agreed a sale at a price of £40,000.
Case 3: Range Rover conversion designs
Another example was a high profile company specialising in bespoke Range Rover conversions. The intellectual property included registered designs, trademarks and brands, and manufacturing press tools and jigs. The business did not appreciate the intellectual property that it held as the total asset value on the balance sheet was less than £80,000.
Charterfields initially advised that the total value of assets was around £800,000 and we were asked to market them on behalf of the insolvency practitioner. We prepared a sales memoranda with all the intellectual property including some that the company itself had forgotten that it owned.
The sale generated approximately 50 expressions of interest from as far afield as the United States, Germany, Middle East and Asia and including one from a major UK vehicle manufacturer.
We developed a strategy to verify the parties’ true interest and asked all of them to provide us with indicative offers. The two highest offers were for £2.2m and £1.6m but unfortunately, both purchasers were unable to complete.
We finally sold the assets for £1.3m – over £1m more than they had been listed on the balance sheet! The sale was completed in good time and the business continues to trade today.
Ian Maycock is a Director at Charterfields. If you would like to know more about Business Recovery or Asset Disposals you can contact Ian at Our People.