Intellectual Property Can Help Take Business to Next Level

The search for outside financing demands hard work and patience. You must know how lenders and equity investors think--and what you must offer to get their backing.

You must also seize every advantage you can, paying attention to details and making the most of your assets, including some you may not know you have.

Take, for example, intellectual property.

Lawyers group patents, trademarks, copyrights, brand names, even logos under the term intellectual property and, although much intellectual property is intangible, it grows in importance with every year.

Indeed, intellectual property has value. And these days, lenders and investors show themselves increasingly ready to recognize that value when they decide whether to back a business.

How can intellectual property help you get outside financing for your company?

In plain English, if you can demonstrate that intellectual property forms an important part of the value of your enterprise, you improve your chances of getting the backing you need. You can’t borrow against intellectual property without other collateral, and you probably can’t get equity backing solely on the strength of intellectual property.

But it can help you get your business to the next level, whether you seek outside equity financing from private investors or an ordinary loan from a commercial bank.

Not every business possesses intellectual property of real value, to be sure. But some do, including many small and mid-sized businesses, and their owners may overlook it when they set about rounding up outside financing for a big marketing push, an acquisition campaign, even a sale.

For that matter, even commercial bankers may overlook the value of intellectual property, according to Garry Michael Kann, president of Kann Capital Ltd., a Century City investment banking firm. The firm specializes in emerging and mid-market companies seeking $3 million to $75 million in outside financing, including deals involving issues of intellectual property.

But as banks compete with other sources of capital to finance solid, high-growth businesses, more and more consider intellectual property in judging the risk of a given loan, Kann believes.

In the main, he says, you can put intellectual property to two uses:

* To enhance the value of other collateral--for example inventory or receivables--when arranging debt financing.

* To enhance the value of the business enterprise when arranging equity financing or when selling your company.

“If your focus is to provide your lender with collateral and you can get a valuation showing that something like a patent or trademark has real marketable value, you can use it as a credit enhancement,” Kann says.

“It works when a lender knows that it can liquidate the value of the intellectual property in addition to the other collateral you provide--and it can make the difference in getting 85% or more against your receivables instead of 70%, and 50% or more against your inventory instead of 35%.”

Of course you must give your lender a security interest in your intellectual property and, in the event of default, you may lose your right to it, Kann says.

And if your lender doesn’t see how and where it might sell the intellectual property in a pinch, it won’t lend against it at all, no matter how important it is to your own success. You must show your lender that there is a market for your intellectual property--for example, competitors who might make use of proprietary software that enhances the efficiency of your manufacturing processes.

Perhaps because they take greater risks with their capital, equity investors readily recognize the value of intellectual property when evaluating a deal, Kann says. So do the sophisticated lenders they bring in to participate in deals involving layers of equity and debt financing--including mezzanine deals.

Put another way, Kann says, equity investors and their lenders like the enterprise value of a solid, growing, well-managed company making good use of its intellectual property.

And they know that intellectual property has value in the same way as any other asset--because someone in the marketplace is willing to pay for it, Kann says.

“A patent, for example, can cover a device or even a manufacturing process and, if you own a patent, you own the right to the income you can generate with it,” he says. “You can make similar use of a copyright and even a company logo.”

That creates enterprise value--and that’s why lenders and equity investors recognize it, he says.

“Intellectual property creates the ability to get better margins. It also creates expansion capacity--the ability to grow your business.”

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Freelance writer Juan Hovey can be reached at (805) 492-7909 or via e-mail at [email protected].