Intellectual collateral Featured

11:31am EDT December 27, 2005
A company’s intellectual property is often considered its most valuable asset. This is especially true for high-tech companies. For instance, intellectual property is particularly prized by computer software developers who have patented their software, and by life science firms that design proprietary products.

The value that intellectual property provides shouldn’t be viewed strictly in revenue terms. It can also serve as collateral to secure various types of financing. Of course, lenders require legal documentation to prove that these assets are indeed proprietary.

“If a business is interested in leveraging its intellectual property by offering it up as collateral for a loan,” says Bonnie Kehe, the senior vice president and regional managing director for Comerica Bank’s Technology & Life Sciences Division, “that business owner should ensure that it is properly patented, trademarked, copyrighted, etc.”

Smart Business spoke with Kehe about how value is assigned to a company’s intellectual property, the steps that a business should take if it’s interested in securing a loan with these assets and why an increase in this financing option is a good sign for the tech sector.

What types of businesses tend to use intellectual property as a financing option?
Businesses that have a valuable portfolio of intellectual property. A software company, for example. A medical device company, where the technology is their own, and they’ve actually designed and developed the product. Most companies have some sort of intellectual property such as trademarks. Also, there can be value in a branded name, which is intellectual property.

How do you assign value to a company’s intellectual property?
It’s typically a subjective valuation and it’s based on a variety of factors. For example, if you can project future cash flows based upon the sale of a product that is your own, like software, then you can come up with a value of that intellectual property.

In the situation where a company has institutional investors, like venture capitalists, then the investors have likely assigned a value to the company in connection with a recent financing.

The third way would be independent intellectual property appraisers that institutions hire to value a company’s intellectual property portfolio. Again, the valuations are based on a lot of different matrixes, including discounted cash flow.

How important is it for CEOs or business owners to look after intellectual property not only as a legal asset, but also as a financial asset?
If the company is planning on leveraging the intellectual property portfolio, or if there is intellectual property that is integral to its business, than it’s very important. The CEO or business owner should ensure that it’s legally registered and properly protected.

What are the first steps that a business should take if it’s interested in securing a loan with intellectual property assets?
There has to be some matrix for assigning some sort of valuation, even though it may be a very subjective valuation. If it’s just a brand name that the company is looking to leverage, there are some lenders that will lend against brands. What’s key for other lenders is that the intellectual property is adequately protected — it’s registered, it’s patented.

In the case of software, it needs to be not only copyrighted, but also registered with the Library of Congress. So there is a two-step process with the registration and copyright of software.

Also, the business should work with intellectual property attorneys, because there are a lot of law firms that have special practices specifically related to intellectual property.

How common of a practice is it to lien intellectual property when making a loan?
In middle-market lending it is not terribly common. It is very common if a financial institution is banking a technologically driven company, meaning a company that is deriving a part of its revenues from its intellectual property.

Do you expect to see an increase in using intellectual property for financing options?
We hope so because it’s indicative of a strong technology market. With the dot-com bust, the entire tech sector was in a trough from 2000 to 2003, 2004, and we’re now just beginning to see some activity. The sector is here to stay.

It’s the future, both on the life sciences side as well as the information technology side. We would hope to see continued growth in the financing of tech companies. A lot of it is going to be an economy- and industry-driven phenomenon.

Bonnie Kehe is senior vice president and regional managing director of Comerica Bank’s Technology & Life Sciences Division. Reach her at (714) 433-3266 or bekehe@comerica.com.