Value of Intellectual Property Can Be Key to More Funds
Want to know how important intellectual property can be in the search for outside financing? Listen to the story of Howard Brand.
A turnaround specialist with an intimate knowledge of financing techniques, Brand capitalized on the value of intellectual property to buy a landmark Southland company in late 1997 with $5 million in borrowed capital.
In short order, he borrowed another $8 million to improve the company’s product line, simplify operations and open a new, state-of-the-art maquiladora in Mexicali, Mexico. He sold the company less than 12 months later, and although he does not disclose what he got for it, you can bet that he did well.
The key? His lenders saw value in Brand’s skill as a turnaround chief executive--and in the brand name of his chief product, the widely known Weslock residential door lock.
Put another way, Brand’s lenders understood that intellectual property has value, and it helped them decide to back Brand despite the fact that he wanted to buy a troubled company with a high degree of leverage.
As outlined in this column last week, lenders and investors back ventures such as Brand’s when they see intellectual property--brand names, trade names, patents, trademarks, copyrights and even logos--in the mix of assets supporting a deal. To be sure, they rarely bet on the strength of intellectual property alone, but it can help to open their wallets and even increase the financing they offer.
Brand knew from the beginning that his venture depended on the brand-name value of the Weslock, a cylindrical residential door lock made by Weslock National, a fixture on Main Street in Los Angeles for decades and now headquartered in Compton.
“The company was losing market share when I bought it,” says Brand, now vice president of corporate finance with Kann Capital Ltd., a Century City investment banking firm that arranges financing for high-growth companies seeking $3 million to $75 million.
“But the Weslock name was one of the two or three best-known names in residential door locks in the country--and an asset we could use to support our search for financing. We raised $13 million in financing altogether, and we probably got $4 million or $5 million of the total on the strength of the intellectual property.”
The extra financing allowed Brand to add a new, low-cost line of locks manufactured in China to his product list and to move production to Mexico, cutting costs by 60%. In short, the financing allowed him to buy a company with overlooked value--and to add even more value to it before he sold it.
“The company had strong intangibles, and they were extremely valuable when we went to our lenders,” Brand says. “Without the intellectual property, we probably never would have done the transaction.”
Unlike Howard Brand, many other business owners overlook intellectual property in toting up their assets, probably because it is inherently intangible, according to Davis Blaine, chairman of Mentor Group Inc., a Westlake Village investment banking firm with expertise in valuing business assets, including intellectual property.
Even established companies rarely identify intellectual property on their balance sheets, Blaine says.
“Think of the value of the brand name Coca-Cola,” he says. “Does it appear on the company’s balance sheet? No way. But you can bet that the name makes up a big part of the worth of the enterprise.
“Similarly, a start-up technology company can have value in its software--a lesser value in dollar terms, but just as important relative to its own enterprise. It’s not on the balance sheet, but it does have value.”
And it can give a lender or investor one more reason to offer the financing a company needs, Blaine says. Indeed, lenders and investors back value for the same reason people buy it--because it gives them comfort that they have put their money to good use.
It takes work, however, to assign worth to intellectual property, Blaine adds. Professionals use several methods in determining value, analyzing these aspects:
* The advertising and promotional costs involved in establishing a brand name.
* The licensing fees and purchase prices paid for similar items of intellectual property.
“A professional valuation can be very useful for the entrepreneur seeking start-up capital because it gives the investor an independent estimation of the dollar value of the idea,” Blaine says.
“It’s tough to value an idea with no operating history. Someone gets a patent, and you have to analyze what the market might be for the idea over time with no historical basis for your assumptions. But it can be a good tool in raising venture capital.”
For Howard Brand, the key was the value of the Weslock brand name, and Brand himself recognized its importance going in. Another business might find similar value in its own intellectual property when seeking outside financing, Blaine adds.
“Investors have known the value of intellectual property for a long time--probably because so much of what’s happening in technology is intangible,” he says.
“And now bankers also realize that they can put numbers not just on hard assets but on the value of intangibles like patents and brand names. It makes it easier for them to support the credit they can offer.”
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Freelance writer Juan Hovey can be reached at (805) 492-7909 or via e-mail at jhovey@gte.net.
