Hidden assets Featured

7:00pm EDT February 23, 2009

A mid a national deceleration in the rate of new commercial loans, your company may need to look to innovative options for obtaining capital. Fortunately, you may already have a virtually untapped class of assets in your reserves: IP. High-profile companies like BCBG Max Azria Group and Betsey Johnson have leveraged their IP to raise tens of millions of dollars. With the right strategy, your company could have the opportunity to do the same.

“With real estate values plummeting and advance rates getting tighter on other assets, businesses are looking to find any kind of liquidity,” says William S. Schwartz, partner in the Banking & Finance Service Group at Levenfel Pearlstein, LLC. “If they can leverage an asset that has not been leveraged yet, they are doing it.”

Smart Business learned from Schwartz about how you can successfully leverage IP and how to determine whether this is the right choice for your business.

Why are businesses leveraging their IP to secure financing?

IP has long been considered ‘throw in’ collateral for banks, and specific funds were not lent against it. Now, companies are starting to realize the value of their IP. In today’s market, anything with value that can be liquidated can and should be considered an asset that can be used to borrow funds.

What companies have done this successfully?

The organizations that have the most success at borrowing against these types of assets have products with brand-name recognition, patents useful to a multitude of businesses and income streams relating to their IP from license and royalty fees.

We are starting to see loans against other IP, as well, but the values of these types of IP are easiest to objectively quantify. In the case of Betsey Johnson, Castanea Partners received $50 million in acquisition financing based on the worldwide strength of the Betsey Johnson brand.

What are the different methods of lending against IP?

Businesses usually have two options for structuring loan agreements involving IP. With the first, some lenders will take actual ownership of the IP and license it back to the borrower. This can work for all types of IP as long as the agreement is properly structured. The IP is then transferred back to the borrower when the loan is repaid. Other lenders will take a conventional pledge of the IP. This usually involves a security agreement or a patent/trademark mortgage.

How can a company determine the value of its IP?

There are appraisal companies that do nothing but evaluate the worth of IP. Ocean Tomo (www.oceantomo.com) is the leader in the field. Just like an appraisal of real estate, an IP appraising company will look at the IP from several different perspectives. These include:

  • Comparable examples
  • Cost to re-engineer the IP
  • Standing of the company in its industry
  • Legal protections that are in place with regard to the IP
  • Type of competition Based on this appraisal, bank or nonbank lenders will determine how much financing they are willing to offer.

If a business is interested in evaluating this option, how should it proceed?

As with all major financial deals, starting the process early increases your chances of getting the best results. I would say this process typically takes four to six months. The first step is determining if this method of financing is even worth pursuing. A preliminary discussion with the appraiser can help you evaluate if it is a wise business decision to complete a valuation of your IP. Appraisals are not cheap: A basic appraisal from a respected company will run $30,000 to $50,000. Before you move ahead, you have to figure out how much money you need from an IP loan and consider whether or not your IP is valuable enough to get you the capital you need and justify the costs of an appraisal. Typically, advance rates on IP can run anywhere from 25 to 50 percent of the appraised value.

What kind of arrangements will businesses need to make with bank lenders?

I can foresee lending against IP becoming more commonplace within traditional bank lending in a few years. But for now, if you want to get a specific loan against your IP, it’s likely you will need to seek out non-bank lenders. Whether your bank or an outside entity provides the funds, you will need to work with your lender to lift any restrictions on your IP assets. This includes seeking consent to carve out the IP from the lender who holds a blanket lien against all assets. The IP lender will require that it has a first position against the IP. Also, if you have a primary lender, most prohibit outside borrowing of any kind so you will need to seek the lender’s consent before your complete this transaction.

WILLIAM S. SCHWARTZ is a partner in the Banking & Finance Service Group at Levenfeld Pearlstein, LLC. Reach him at wschwartz@lplegal.com or (312) 476-7887.