We’ve been exploring the topic of intangibles and value the last few weeks. So far, we’ve discovered that:
· Intellectual assets are difficult to value because they are generally developed in a unique environment and designed to meet unique challenges..
· One of the ways to value these intangibles is to “buy out” of thinking that relies on double entry book-keeping, and choose alternative valuation methods that focus on aspects of the asset that favour your market position.
However, it’s not necessary to buy out of the concept of double entry book-keeping. In fact, one school of thought tells us that if transactions drive a market’s understanding of value, then it’s a better approach to swallow transactional thinking hook, line and sinker.
One common technique that we’re seeing more and more of (particularly in the Northern Hemisphere) is the initial transfer of IP assets out of an active business unit into an entirely separate company, trust or other form of entity.
This does two things. First, it adds an extra layer of protection to a business structure, as business-critical IP assets are separated from the front line where they could be exposed to damaging lawsuits. Second, it forces the front line business to start using a transactional approach to its use of IP assets.
Let’s take a trade mark or brand, for instance. When you move a trade mark from your business or enterprise to a seperate IP-holding entity:
· The enterprise will need to continue to use the brand for its ongoing business activity.
· Legally, a license contract between the IP entity and the enterprise is needed for that use to continue.
· The license fee can be structured in a way that starts to take account of the store of value in the brand.
Where business protection is the primary reason for the transfer, there is a tendency to make the license fee a nominal annual amount. However, that approach is somewhat short-sighted, because it won’t recognise the actual value of the brand to the enterprise.
A better method is to require the enterprise to pay per use. This could be a nominated percentage (which is best) or a set fee per use. It forces the enterprise to ascribe a “cost of goods sold” figure to every product or service it provides. This cost component is paid to the IP entity as an expense, and the value starts to accrue.
Calculating the fee payable doesn’t need to be an exact science – some general calculations will be enough to demonstrate the extent to which a brand enhances a product or a service. The most important factor is a tangible recognition of the role the brand plays in the price composition of a product or service. The brand will then generate a tangible income stream that can be monitored, accrued or potentially leveraged for finance, investment or other forms of capitalisation.
This approach can be used with any other type of intangible asset, like a patent, software, method, design or franchise system. It’s a very simple technique.
One of the best examples of this technique in action is Edward Lampert’s masterful restructure of IP ownership at Sears. After acquiring Sears in 2006, Lampert transferred all of Sears’ well-known trade marks (such as Kenmore, Craftsman and DieHard) into a separate entity, set up a licensing structure between the IP holding entity and the Sears retail arm, and then issued bonds against the brands. It is estimated that the transaction valued the brands at $1.8 billion. While most small to medium enterprises won’t be charting these numbers, the structure can certainly be emulated as a way to chart IP value.
Of course, convincing the board of directors to carry out a restructure of this kind might be easier said than done. If that is the issue for you, then you should consider making use of transactional constructs instead. We’ll take a look at this next week.
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