Lending against intangible assets: Examining the hidden value of IP
Wednesday February 9, 2022
Jim Davies, Corporate Finance Partner and Valuations Specialist, explores the hidden value of IP.
In his most recent Budget, chancellor Rishi Sunak outlined the need for a new post-COVID economy, fit for an ‘age of optimism.’ If the UK economy is to truly become fit for the future, at a time when innovation and knowledge increasingly drive growth, there is further need for the funding landscape for some of our most entrepreneurial businesses to change. Indeed, a recent report by the British Business Bank (BBB) pointed out the scarcity of traditional funding options available to UK SMEs whose asset bases are largely intangible, or knowledge based. As such, businesses with limited physical assets but significant growth potential – from R&D-led tech start-ups to those with strong consumer brands or content IP – face a challenging environment in which to excel.
Although, there is significant private capital for these firms to tap into, this often requires them to concede considerable equity or take on greater burden to finance their debt. Fortunately, the next logical step – lobbying traditional lenders to improve their understanding of intellectual property as a security option – is in progress, both via the BBB and Intellectual Property Office. They are being assisted by data that evidences that SMEs with high-quality IP have, on average, lower default rates.
Among the key challenges to overcome is the issue of valuation of IP assets, and the practical realisation of that value. Lenders are naturally reluctant to invest where value is uncertain and there is little in the way of clear and transparent liquidity. However, approaches to valuation are maturing; making a stronger case for lenders to help those firms with intangible assets to accelerate their growth. With increasing deal flow to brand acquisition groups and other IP consolidators, as well as greater sophistication in projecting IP income streams, both market and income-based valuations are becoming more robust. Equally, we are seeing new ways in which lenders can consistently realise value in the event of a business in their portfolio defaulting.
All this points to an increasing need for commercial finance brokers to consider and advise their clients as to how best they can tap into this developing market. Patenting and securing IP, for example, can be expensive. However, if it is likely to support them in developing a relationship with a traditional lender, then now would be an opportune moment to do so. Underpinning this of course, is understanding the value of businesses themselves. Businesses knowing their potential worth based on the quality of their intangible assets could be the key to sourcing finance, unlocking growth, and contributing to a more innovative, knowledge-based economy in the future.
First published in NACFB’s Commercial Broker Magazine in February 2022.
Businesses knowing their potential worth based on the quality of their intangible assets could be the key to sourcing finance, unlocking growth, and contributing to a more innovative, knowledge-based economy in the future.Jim Davies Corporate Finance