Most of the times during the sale of a company or a distressed asset, the value is arrived at after considering the valuation of the physical assets and revenue being generated by the company. But it would be interesting to know that often there are a lot of intangible assets consisting of legally protected formal Intellectual Property (IP) and informal Intellectual Property such as customer relationships, goodwill, know-how, show-how, licensing agreements etc. which are locked in the company, and can lend a lot of value.
Case A: SWRI Sports
A case in point is the sale of Southwest Recreational Industries, Inc. (SWRI Sports) the company that produced, licensed and marketed AstroTurf technologies and trademarks popularly known by hockey lovers and used for both outdoor and indoor artificial surfacing. AstroTurf was originally developed by Monsanto and SWRI Sports acquired the rights from Monsanto in 1994 and maintained the business until the company went bankrupt in 2004.
When SWRI auctioned its intangibles through the bankruptcy proceeding, they generated less than $1 million but it was estimated by a consulting firm that they could have realized between $2 million to $15 million considering that their licensing agreements alone nearly totaled the value for which the intangibles were sold.
Case B: ThruVision Systems
A stark contrast is the case of ThruVision Systems which developed security products to detect concealed objects under clothing and would capture moving people both indoors and outdoors. An IP consultant, who was appointed to maximize the value for creditors at the time of sale, found that the technology had moved beyond the prototype stage to the deployment stage and significant patents had moved from application to granted status.
By identifying valuable patents apart from other intangible assets such as registered trademarks, client databases, organizational knowledge, unregistered designs, website and domain names, and targeted identification of potential buyers by tapping into the company’s network, a significantly better price was realized from the sale of intangible assets. While interacting with entrepreneurs and businesses in India about IP in their organizations, a common answer I get is that they don’t own any IP or they are not into technology development. It is not surprising given the lack of awareness of what constitutes IP, trademark and copyright.
Leverage your business value
The key is to identify the value the business generates for its customers which can be embedded in understanding a customer’s problems, proprietary software systems, distribution channels, skilled manpower and regulatory approvals. It can also be recognized through market goodwill, long-term lease agreement for real estate apart from the legally protected IP which could be granted in application stage.
Getting a formal third-party valuation done will provide you with a credible basis for negotiation with potential buyers who could be a competitors, outside your industry or even specialized investors. However, it is important for the core team to be involved in the discussion and negotiation process to help the buyer realize the benefits of the intangibles being offered and how they can use it in their business leading to reduced cost or additional revenues.
© Entrepreneur India November 2012