«Research commissioned by the Intellectual Property Office, and carried out by: Martin Brassell, Kelvin King This is an independent report ...»
138 The role of intellectual property and intangible assets in facilitating business finance Because counterfeit toys are generally of inferior quality and therefore potentially unsafe for children, they tend to command a small proportion of the market and retailers only want to deal with IP owners and registered distributors. Nonetheless, this is an on-going risk faced by all toy brand owners, as the following example illustrates.
Trunki designs, distributes and manufactures multifunctional travel products for children, and has been pioneering a new children’s travel products category since launching its flagship rideon suitcase in 2006. The company has focused on building its core UK business across multiple channels but the largest growth opportunity for its products is overseas. Trunki products are currently sold in 97 countries, and the company now has the potential for further growth through in-store merchandising and licensing opportunities across various markets.
Trunki’s main protection to IP risk is through these numerous design registrations and it has previously defended itself where necessary through litigation. In July 2013, Magmatic won a court case against PMS International, with the High Court ruling that PMS International’s Kiddee Case infringed the European protected design of the Trunki. Magmatic started taking legal action against factories, distributors and importers of counterfeited products in March 2013.
Based on feedback from its customers, Exactrak was formed to design a security device called Security Guardian, which could protect data on any laptop. It is based around a modified USB memory stick that has integrated GPS to identify its location, and GSM so that messages can be received from and sent to the device, which could include turning off or deleting the memory.
The product has been featured on the BBC’s ‘Click’ programme as well as in national
newspapers. CEO Norman Shaw explains:
Clearly, our product has got a lot of innovation to it. As we were looking for funding, we had to see what we could offer potential funders. The advice was that we should really get our IP recognised and registered. One of our best investments has been to get a professional patent attorney, in our case Mathys & Squire, to look at the work that we had done. Not only did they agree that it was innovative, but they identified a number of areas that we wouldn’t even have considered that were well worth patenting.
Since the IP was the only assets that the company possessed, Exacttrak obtained an indicative valuation for it, before contracting with Norton Corporate Finance in Reading, who set up a series of meetings with people who met our criteria in terms of adding value to our business.
One of the interesting things about the IP valuation was that when it was presented to the potential shareholders, it almost immediately took away a lot of the haggling and negotiation, because it was from an independent third party who had looked at it from a completely dispassionate viewpoint.
Following the various negotiations we had six interested parties, and we were pleased to be able to raise just over £450,000 of external investment, all from people who are able to bring additional expertise into the company.
IP-backed pension-led funding One of the contexts in which IP can be used directly in support of funding is when one or more assets are transferred into a new pension, liberating their value. The following brief examples of pension-led funding have been provided by Clifton Asset Management and illustrate the diversity of companies which can benefit from releasing varying amounts of capital from their IP in this way.
Dick Cormack left a position as head of UK motorsport operations at Pirelli to set up his own business, DMACK Tyres, in 2007. He worked with Chinese manufacturer Yongtai to develop a new brand of motorsport tyre, but while his bank was supportive, it was not able to lend the £150,000 needed to get to the point of production.
Following an independent assessment of the value of the DMACK tyre design and the potential product range, £75,000 was raised and put into the new business via a SIPP, matched by a further £75,000 from the bank.
The company grew rapidly and within a short time was able to offer 28 tyre sizes and 50 compound and tread combinations. However the biggest turning point came when DMACK 140 The role of intellectual property and intangible assets in facilitating business finance
The process cost around £8,500 in fees, but as a consequence the company has expanded into new territories, increased turnover by 20% to £6m and repaid the pension fund with interest.
Imaginet was originally founded in 1995 in Newport, South Wales. It is a web solutions company which now employs 22 people. Having experienced difficulties in obtaining a bank loan to grow the business, due to the fact that his software company had very few tangible assets on its balance sheet, Nigel Roberts used a SSAS scheme to access funds from his existing pension using intellectual property from his business, and has since accessed them two further times.
Most recently, the funding was used to secure a £60,000 match funded grant from the Welsh Government’s Digital Development Fund, in order to adapt the company’s services for use on mobile devices. Roberts said: ‘This is a way of gaining ownership over your source of finance.’
Chapter 7 Realising IP value: in good times and bad Key points IP can contain a great deal of realisable value where there is market appetite for it IP is important in achieving the best outcome in the event of distress or administration The options and markets for disposal of IP are improving Securitisation of IP (that retains its association with the business) can be a very effective fundraising strategy Business failure is not synonymous with IP failure There is evidence of increasing UK appetite to insure against the risks involved in financing IP
As will be seen from evidence discussed in Chapter 8, having a proper degree of control over a company’s IP and intangibles may prove to be very important under certain circumstances.
These include ensuring that a bank can exercise the desired level of influence at the point where a business runs into difficulties, but where continuing on a going concern basis is agreed to be in the best interests of all interested parties. It is notable that in cases where venture debt techniques are being used (as referenced in Chapter 3), a first charge over all IP is always regarded as a priority.
However, for banks to lend positively and directly against the value of IP and intangibles in isolation (setting aside regulatory considerations), it is necessary for the bank to be confident that it can dispose of these separately from the business if the need should arise, in much the same way as it can expect to do with an item of tangible property.
Such ‘secondary exit routes’ are perceived as being difficult with IP for a number of reasons.
One of these is that much IP is developed within a business for its own use and is particular to that model (which, by implication, has not worked as anticipated; or at least, not at the point when value needs to be realised). This logic is perhaps flawed: unless the failure is based on there being no market for the IP, it would seem merely to prove that this particular business has not been able to exploit it properly.
142 The role of intellectual property and intangible assets in facilitating business finance More fundamentally, IP is perceived as being at the opposite end of the asset spectrum from tangible fixed assets such as commercial property, cars, vans, plant and machinery. Whilst there is always some risk in disposals associated with fixed assets, such as those relating to market appetite and most particularly condition, there are perceived to be a number of characteristics
about which a bank can be reasonably certain:
Interviews for this project have revealed a difference of opinion amongst respondents on the question of marketability. Within patents, for example Nick Goddard sees a distinction between
different types of granted rights which he considers potentially important:
In the experience of Thomas Gardiner of TFF Group, who has a track record of financing various
different types of business asset, it is a question of whether others can use the IP:
There might be a small amount of IP that is specialised and good for one business alone, but most could be used by someone else in a completely different way, and would generate additional income.
I know of a classic example of an app originally developed for the dating market. What the company had really created was a way of operating a closed group with a niche interest in common. This has now been used to power three or four completely different and separate communities that also assist people with niche interests.
Goddard also observes:
Companies have knowledge that is inherently valuable. Some of it is not easily removed from the company, so acquiring the knowledge might involve buying the company, which would attract a premium compared with the value of the knowledge alone. This tends to be the model in software and digital media businesses.
However, you can separate a ‘state of matter’ patent for a drug, which is exactly what biotech companies do with drug discovery – they seek out an acquirer to manufacture in scale, who has the muscle to enforce.
Methods of value realisation Realising value in distress For a lender to place any weight on IP and intangibles, they must first be satisfied that these assets can properly support recovery operations, as the primary purpose of security is to provide a secondary exit route in the event of distress (though, as has been shown, many forms of security such as personal guarantees are taken mainly in order to ensure the bank has influence, rather than any predetermined intention to foreclose).
One insolvency practitioner from a Top 10 accountancy practice, with many years’ experience assisting debt and equity funders with technology business workouts, explains the approach he
If you market a pub for sale, its value is more than just the bricks and mortar. A technology business is similar, but better, because its assets are much more portable.
The business and its IP are marketed anonymously, so in many cases it will not be obvious that the business is in distress. But in any event, the existing indebtedness of the business is completely irrelevant. It’s a question of what the market will pay, and it is a worldwide market – interest can come from the US, from Brazil and increasingly from China.
144 The role of intellectual property and intangible assets in facilitating business finance
Where possible, the objective is then to sell the business as a going concern. Here, a ‘pre-pack’ arrangement may be used to pre-empt IP dilution, including reputational damage. A quick sale or licence by an administrator may be preferable as a means of avoiding the potential for value
dilution in drawn-out administration or insolvency proceedings:
Mercer & Hole (Accountants) insolvency practice provides an illustration of how a technology company rescue process can work. It concerned a company with an exclusive licence to use a software package in the premium finance industry, which over time had received a lot of investment in adaptations and enhancements, and was the only significant asset the business possessed. However, it started to run out of investment funding before the company’s customer base had grown sufficiently.
We negotiated an offer providing an enhanced return to the company’s creditors, and also the prospect of a future return to the company’s existing shareholders. Once we had implemented a mechanism to safeguard their future interests and the shareholders had agreed to sell their individual shares, we were able to present a Company Voluntary Arrangement (CVA) proposal to the creditors, with a view to exiting the administration.
Approval of the CVA resulted in the sale of the company’s shares to the third party investor, a significant one-off contribution into the CVA and the establishment of a trust so that creditors and existing shareholders could benefit from the profitability of the company going forward.
Whilst a large number of the companies using FSE’s Accelerator Fund (referenced in Chapter 3) achieved their plans and repaid their debts (which were typically then reinvested in new applications to a total of £14.7m of loans made), there were inevitably occasions when things
did not go to plan, as Chief Executive Kevan Jones explains:
Under these circumstances, it is very important to understand how to behave in the insolvency process. Speed is important – recognising that there is a problem early on
- but even then, there is always a risk that a secondary lender will end up having little say in what happens and can be marginalised. Ensuring that the IP value is protected and remains in the business is critical, as tangible assets of any value will be for the protection of senior lenders. Limited personal guarantees from the directors can help and other mechanisms such as performance warranties can be used.
It is important to try and encourage the widest possible marketing exercise for the company assets. This is clearly a critical activity which is undertaken by the insolvency practitioner who has been appointed. Hopefully an orderly sale can be achieved. It is frequently the case that a ‘pre-pack’ sale is put in place which, if it genuinely protects and maximises the IP value, may be the best approach.